United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, ~~2022~~2023



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

For the transition period from __________ to __________

Commission File Number: 001-37661

(Exact name of registrant as specified in its charter)



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

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

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

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



Title of each class	Trading symbol(s)	Name of Exchange on which Registered
Common Stock, par value $1.00	SMBK	The 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 ~~04, 2022,~~03, 2023, there were ~~16,888,305~~16,994,543 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, ~~2022~~2023 and December 31, ~~2021~~2022	3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4546

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6263

Item 4.	Controls and Procedures	6263

PART II – OTHER INFORMATION		6364

Item 1.	Legal Proceedings	6364

Item 1A.	Risk Factors	6364

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6364

Item 3.	Defaults Upon Senior Securities	6365

Item 4.	Mine Safety Disclosures	6465

Item 5.	Other Information	6465

Item 6.	Exhibits	6566

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)				(Unaudited)
	September 30,		December 31,		September 30,		December 31,
	2022		2021*		2023		2022*
ASSETS:
Cash and due from banks	$	46,351	$	110,333	$	62,950	$	44,265
Interest-bearing deposits with banks		428,318		897,244		297,652		206,849
Federal funds sold		68,360		37,500		39,656		15,310
Total cash and cash equivalents		543,029		1,045,077		400,258		266,424
Securities available-for-sale, at fair value		519,723		482,453		385,131		483,893
Securities held-to-maturity, at amortized cost		287,104		76,969		282,313		285,949
Other investments		15,528		16,494		13,805		15,530
Loans held for sale		2,742		5,103		2,734		1,752
Loans and leases		3,099,116		2,693,397		3,378,999		3,253,627
Less: Allowance for loan and lease losses		(22,769)		(19,352)
Less: Allowance for credit losses						(33,687)		(23,334)
Loans and leases, net		3,076,347		2,674,045		3,345,312		3,230,293
Premises and equipment, net		91,944		85,958		92,020		92,511
Other real estate owned		1,226		1,780		1,370		1,436
Goodwill and other intangibles, net		110,460		105,852		107,792		109,772
Bank owned life insurance		81,001		79,619		82,914		81,470
Other assets		67,807		38,229		83,522		68,468
Total assets	$	4,796,911	$	4,611,579	$	4,797,171	$	4,637,498

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	1,186,209	$	1,055,125	$	923,763	$	1,072,449
Interest-bearing demand		962,901		899,158		993,717		965,911
Money market and savings		1,663,355		1,493,007		1,766,409		1,583,481
Time deposits		467,944		574,648		562,620		455,259
Total deposits		4,280,409		4,021,938		4,246,509		4,077,100
Borrowings		18,423		87,585		14,117		41,860
Subordinated debt		41,994		41,930		42,078		42,015
Other liabilities		41,374		30,696		47,815		44,071
Total liabilities		4,382,200		4,182,149		4,350,519		4,205,046
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding		—		—		—		—
Common stock, $1 par value; 40,000,000 shares authorized; 16,887,555 and 16,802,990 shares issued and outstanding, respectively		16,888		16,803
Common stock, $1 par value; 40,000,000 shares authorized; 16,994,543 and 16,900,805 shares issued and outstanding, respectively						16,995		16,901
Additional paid-in capital		293,907		292,937		295,542		294,330
Retained earnings		144,723		118,247		168,271		156,545
Accumulated other comprehensive income (loss)		(40,807)		1,443		(34,156)		(35,324)
Total shareholders' equity		414,711		429,430		446,652		432,452
Total liabilities and shareholders' equity	$	4,796,911	$	4,611,579	$	4,797,171	$	4,637,498

* Derived from audited financial statements.

The accompanying notes are an integral part of the consolidated 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				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Interest income:
Loans and leases, including fees	$	35,127	$	31,674	$	96,300	$	88,015	$	47,539	$	35,127	$	137,712	$	96,300
Securities:
Taxable		3,135		832		8,463		2,472		4,335		3,135		12,322		8,463
Tax-exempt		561		331		1,369		894		356		561		1,066		1,369
Federal funds sold and other earning assets		3,474		474		5,389		1,074		3,045		3,474		9,448		5,389
Total interest income		42,297		33,311		111,521		92,455		55,275		42,297		160,548		111,521
Interest expense:
Deposits		4,866		2,153		9,384		6,733		23,433		4,866		59,333		9,384
Borrowings		97		121		371		360		210		97		775		371
Subordinated debt		626		655		1,877		1,823		626		626		1,877		1,877
Total interest expense		5,589		2,929		11,632		8,916		24,269		5,589		61,985		11,632
Net interest income		36,708		30,382		99,889		83,539		31,006		36,708		98,563		99,889
Provision for loan and lease losses		974		1,149		3,230		1,211
Net interest income after provision for loan and lease losses		35,734		29,233		96,659		82,328
Provision for credit losses										795		974		1,458		3,230
Net interest income after provision for credit losses										30,211		35,734		97,105		96,659
Noninterest income:
Service charges on deposit accounts		1,611		1,220		4,376		3,278		1,736		1,611		4,838		4,376
Gain on sale of securities		—		45		—		45
Loss on sale of securities										(6,801)		—		(6,801)		—
Mortgage banking		170		994		1,475		3,238		309		170		813		1,475
Investment services		1,051		448		3,186		1,546		1,461		1,051		3,766		3,186
Insurance commissions		864		745		2,363		2,768		1,153		864		3,551		2,363
Interchange and debit card transaction fees, net		1,356		1,078		4,107		2,839		1,357		1,356		4,087		4,107
Other		1,198		1,779		5,083		3,429		1,476		1,198		4,492		5,083
Total noninterest income		6,250		6,309		20,590		17,143		691		6,250		14,746		20,590
Noninterest expense:
Salaries and employee benefits		16,317		13,594		47,036		36,666		16,785		16,317		49,474		47,036
Occupancy and equipment		3,167		2,536		9,020		7,170		3,547		3,167		10,073		9,020
FDIC insurance		705		525		2,022		1,266		825		705		2,241		2,022
Other real estate and loan related expense		565		407		1,930		1,514		603		565		1,616		1,930
Advertising and marketing		288		235		985		654		346		288		1,006		985
Data processing and technology		1,872		1,753		5,185		4,642		2,378		1,872		6,777		5,185
Professional services		822		810		2,809		2,300		735		822		2,307		2,809
Amortization of intangibles		650		711		1,919		1,597		647		650		1,981		1,919
Merger related and restructuring expenses		87		464		607		939		110		87		110		607
Other		2,757		2,274		7,361		6,822		2,540		2,757		7,870		7,361
Total noninterest expense		27,230		23,309		78,874		63,570		28,516		27,230		83,455		78,874
Income before income tax expense		14,754		12,233		38,375		35,901		2,386		14,754		28,396		38,375
Income tax expense		3,211		2,633		8,357		7,767		319		3,211		5,993		8,357
Net income	$	11,543	$	9,600	$	30,018	$	28,134	$	2,067	$	11,543	$	22,403	$	30,018
Earnings per common share:
Basic	$	0.69	$	0.62	$	1.79	$	1.85	$	0.12	$	0.69	$	1.33	$	1.79
Diluted	$	0.68	$	0.61	$	1.78	$	1.84	$	0.12	$	0.68	$	1.33	$	1.78
Weighted average common shares outstanding:
Basic		16,749,255		15,557,528		16,734,298		15,192,919		16,807,548		16,749,255		16,801,840		16,734,298
Diluted		16,872,022		15,691,126		16,867,970		15,312,755		16,918,635		16,872,022		16,907,325		16,867,970

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	11,543	$	9,600	$	30,018	$	28,134	$	2,067	$	11,543	$	22,403	$	30,018
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on securities available-for-sale		(20,147)		284		(51,899)		(971)		(5,830)		(20,147)		(5,178)		(51,899)
Tax effect		5,205		(74)		13,406		264		1,505		5,205		1,337		13,406
Reclassification of unrealized loss on securities transferred from available-for-sale to held-to-maturity		—		—		(2,009)		—
Reclassification of unrealized gains (losses) on securities transferred from available-for-sale to held-to-maturity										—		—		—		(2,009)
Tax effect		—		—		519		—		—		—		—		519
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity		43		—		70		—
Amortization of unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity										37		43		115		70
Tax effect		(12)		—		(18)		—		(10)		(12)		(30)		(18)
Reclassification adjustment for realized gains included in net income		—		(45)		—		(45)
Reclassification adjustment for realized losses (gains) included in net income										6,801		—		6,801		—
Tax effect		—		12		—		12		(1,757)		—		(1,757)		—
Unrealized gains (losses) on securities available-for-sale, net of tax		(14,911)		177		(39,931)		(740)		746		(14,911)		1,288		(39,931)
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges		92		59		(1,351)		1,510		—		92		—		(1,351)
Tax effect		(23)		(15)		349		(394)		—		(23)		—		349
Unrealized gains (losses) on fair value municipal security hedge instruments arising during the period, net of tax		69		44		(1,002)		1,116		—		69		—		(1,002)
Cash flow hedging activities:
Unrealized gains (losses) on cash flow hedges		(1,775)		—		(1,775)		—		154		(1,775)		(163)		(1,775)
Tax effect		458		—		458		—		(39)		458		43		458
Unrealized gains (losses) on cash flow hedge instruments arising during the period, net of tax		(1,317)		—		(1,317)		—		115		(1,317)		(120)		(1,317)

Total other comprehensive income (loss)		(16,159)		221		(42,250)		376		861		(16,159)		1,168		(42,250)
Comprehensive income (loss)	$	(4,616)	$	9,821	$	(12,232)	$	28,510	$	2,928	$	(4,616)	$	23,571	$	(12,232)

The accompanying notes are an integral part of the consolidated 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, ~~2022~~2023 and ~~2021~~2022

(Dollars in thousands, except for share data)

Accumulated


Other

Common Stock

Additional

Retained

Comprehensive

Shares

Amount

Paid-in Capital

Earnings

Income (Loss)

Total
Balance, December 31, 2020

15,107,214

$
15,107

$
252,693

$
87,185

$
2,183

$
357,168
Net income

—

—

—

28,134

—

28,134
Other comprehensive income

—

—

—

—

376

376
Common stock issued pursuant to:









Stock options exercised

19,165

19

175

—

—

194
Restricted stock

43,143

43

(43)

—

—

—
Shareholders' of Sevier County Bancshares, Inc.

1,691,535

1,691

40,563

—

—

42,254
Stock compensation expense

—

—

521

—

—

521
Common stock dividend ($0.18 per share)

—

—

—

(2,719)

—

(2,719)
Repurchases of common stock

(59,610)

(59)

(1,149)

—

—

(1,208)
Balance, September 30, 2021

16,801,447

$
16,801

$
292,760

$
112,600

$
2,559

$
424,720

Balance, December 31, 2021

16,802,990

$
16,803

$
292,937

$
118,247

$
1,443

$
429,430
Net income

—

—

—

30,018

—

30,018
Other comprehensive (loss)

—

—

—

—

(42,250)

(42,250)
Common stock issued pursuant to:











Stock options exercised

32,003

32

238

—

—

270
Restricted stock, net of forfeitures

60,515

61

(61)

—

—

—
Shares withheld for payment of taxes

(7,953)

(8)

(198)

—

—

(206)
Stock compensation expense

—

—

991

—

—

991
Common stock dividend ($0.21 per share)

—

—

—

(3,542)

—

(3,542)
Balance, September 30, 2022

16,887,555

$
16,888

$
293,907

$
144,723

$
(40,807)

$
414,711

Balance, June 30, 2021

15,109,736

$
15,110

$
252,039

$
103,906

$
2,338

$
373,393
Net income

—

—

—

9,600

—

9,600
Other comprehensive income

—

—

—

—

221

221
Common stock issued pursuant to:












Restricted stock

176

—

—

—

—

—
Shareholders' of Sevier County Bancshares, Inc.

1,691,535

1,691

40,563

—

—

42,254
Stock compensation expense

—

—

158

—

—

158
Common stock dividend ($0.06 per share)

—

—

—

(906)

—

(906)
Balance, September 30, 2021

16,801,447

$
16,801

$
292,760

$
112,600

$
2,559

$
424,720

Balance, June 30, 2022

16,898,405

$
16,898

$
293,815

$
134,362

$
(24,648)

$
420,427
Net income

—

—

—

11,543

—

11,543
Other comprehensive (loss)

—

—

—

—

(16,159)

(16,159)
Common stock issued pursuant to:












Stock options exercised

603

1

6

—

—

7
Restricted stock, net of forfeitures

(3,500)

(3)

3

—

—

—
Restricted stock withheld for taxes

(7,953)

(8)

(198)

—

—

(206)
Stock compensation expense

—

—

281

—

—

281
Common stock dividends ($0.07 per share)

—

—

—

(1,182)

—

(1,182)
Balance, September 30, 2022

16,887,555

$
16,888

$
293,907

$
144,723

$
(40,807)

$
414,711


								Accumulated
								Other
	Common Stock			Additional		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Earnings		Income (Loss)		Total
Balance, December 31, 2021	16,802,990	$	16,803	$	292,937	$	118,247	$	1,443	$	429,430
Net income	—		—		—		30,018		—		30,018
Other comprehensive loss	—		—		—		—		(42,250)		(42,250)
Common stock issued pursuant to:
Stock options exercised	32,003		32		238		—		—		270
Restricted stock, net of forfeitures	60,515		61		(61)		—		—		—
Shares withheld for payment of taxes	(7,953)		(8)		(198)		—		—		(206)
Stock compensation expense	—		—		991		—		—		991
Common stock dividend ($0.21 per share)	—		—		—		(3,542)		—		(3,542)
Balance, September 30, 2022	16,887,555	$	16,888	$	293,907	$	144,723	$	(40,807)	$	414,711

Balance, December 31, 2022	16,900,805	$	16,901	$	294,330	$	156,545	$	(35,324)	$	432,452
Cumulative effect adjustment for adoption of ASU 2016-13, net of tax	—		—		—		(6,606)		—		(6,606)
Balance, January 1, 2023, adjusted	16,900,805		16,901		294,330		149,939		(35,324)		425,846
Net income	—		—		—		22,403		—		22,403
Other comprehensive income	—		—		—		—		1,168		1,168
Common stock issued pursuant to:
Stock options exercised	15,705		16		149		—		—		165
Restricted stock, net of forfeitures	79,670		80		(80)		—		—		—
Restricted stock withheld for taxes	(1,637)		(2)		(33)		—		—		(35)
Stock compensation expense	—		—		1,176		—		—		1,176
Common stock dividend ($0.24 per share)	—		—		—		(4,071)		—		(4,071)
Balance, September 30, 2023	16,994,543	$	16,995	$	295,542	$	168,271	$	(34,156)	$	446,652

Balance, June 30, 2022	16,898,405	$	16,898	$	293,815	$	134,362	$	(24,648)	$	420,427
Net income	—		—		—		11,543		—		11,543
Other comprehensive loss	—		—		—		—		(16,159)		(16,159)
Common stock issued pursuant to:
Stock options exercised	603		1		6		—		—		7
Restricted stock, net of forfeitures	(3,500)		(3)		3		—		—		—
Restricted stock withheld for taxes	(7,953)		(8)		(198)		—		—		(206)
Stock compensation expense	—		—		281		—		—		281
Common stock dividend ($0.07 per share)	—		—		—		(1,182)		—		(1,182)
Balance, September 30, 2022	16,887,555	$	16,888	$	293,907	$	144,723	$	(40,807)	$	414,711

Balance, June 30, 2023	17,004,092	$	17,004	$	295,296	$	167,564	$	(35,017)	$	444,847
Net income	—		—		—		2,067		—		2,067
Other comprehensive income	—		—		—		—		861		861
Common stock issued pursuant to:
Restricted stock, net of forfeitures	(7,912)		(7)		7		—		—		—
Restricted stock withheld for taxes	(1,637)		(2)		(33)		—		—		(35)
Stock compensation expense	—		—		272		—		—		272
Common stock dividends ($0.08 per share)	—		—		—		(1,360)		—		(1,360)
Balance, September 30, 2023	16,994,543	$	16,995	$	295,542	$	168,271	$	(34,156)	$	446,652

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2023		2022
Cash flows from operating activities:
Net income	$	30,018	$	28,134	$	22,403	$	30,018
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,474		4,739		8,372		7,474
Accretion of fair value purchase accounting adjustments, net		(762)		(4,086)		—		(762)
Provision for loan and lease losses		3,230		1,211
Amortization of intangible assets						1,981		1,919
Provision for credit losses						1,458		3,230
Stock compensation expense		991		521		1,176		991
Gain from redemption and sale of securities available-for-sale		—		(45)
Loss on sale of securities available-for-sale						6,801		—
Deferred income tax expense (benefit)		(500)		731		1,801		(500)
Increase in cash surrender value of bank owned life insurance		(1,382)		(1,240)		(1,445)		(1,382)
Net losses from sale and write downs of other real estate owned		66		176
Net losses from sale and write-downs of other real estate owned						12		66
Net gains from mortgage banking		(1,475)		(3,238)		(813)		(1,475)
Origination of loans held for sale		(47,840)		(97,360)		(28,585)		(47,840)
Proceeds from sales of loans held for sale		51,676		108,901		28,416		51,676
Net gain from sale of loans		—		(137)
Net gain from sale of fixed assets		(261)		—
Net (gain) loss from sale/disposal of fixed assets						56		(261)
Net change in:
Accrued interest receivable		(2,062)		2,074		(919)		(2,062)
Accrued interest payable		(993)		(125)		1,458		(993)
Other assets		(25,079)		(414)		(11,885)		(26,998)
Other liabilities		28,480		5,709		(2,278)		28,480
Net cash provided by operating activities		41,581		45,551		28,009		41,581
Cash flows from investing activities:
Available-for-sale:
Proceeds from sales		—		16,771		152,775		—
Proceeds from maturities, calls and paydowns		32,143		65,101		32,404		32,143
Purchases		(295,347)		(145,316)		(94,424)		(295,347)
Held-to-maturity:
Proceeds from maturities, calls and paydowns		1,345		—		1,986		1,345
Purchases		(50,575)		—		—		(50,575)
Proceeds from sales of other investments		1,054		436		2,669		1,054
Purchases of other investments		(88)		(80)		(944)		(88)
Purchases of bank owned life insurance		—		(40,000)
Proceeds from bank owned life insurance benefits		—		427
Net (increase) decrease in loans and leases		(404,770)		4,444
Net increase in loans and leases						(148,006)		(404,770)
Proceeds from sale of fixed assets		1,460		—		633		1,460
Purchases of premises and equipment		(10,690)		(603)		(4,016)		(10,690)
Proceeds from sale of other real estate owned		488		2,171		326		488
Proceeds received from sale of loans		—		83,745
Net cash (paid) received from business combinations		(4,881)		15,364		—		(4,881)
Net cash (used in) provided by investing activities		(729,861)		2,460
Net cash used by investing activities						(56,597)		(729,861)
Cash flows from financing activities:
Net increase in deposits		258,872		558,410		169,521		258,872
Net increase (decrease) in securities sold under agreements to repurchase		838		(351)		1,342		838
Proceeds from borrowings		5,000		7,500		26,000		5,000
Repayment borrowings		(75,000)		(396)
Repayment of borrowings						(30,500)		(75,000)
Cash dividends paid		(3,542)		(2,719)		(4,071)		(3,542)
Issuance of common stock, net of restricted shares withheld for taxes		64		194		130		64
Repurchases of common stock		—		(1,208)
Net cash provided by financing activities		186,232		561,430		162,422		186,232
Net change in cash and cash equivalents		(502,048)		609,441		133,834		(502,048)
Cash and cash equivalents, beginning of period		1,045,077		481,719		266,424		1,045,077
Cash and cash equivalents, end of period	$	543,029	$	1,091,160	$	400,258	$	543,029
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	12,624	$	8,745	$	60,437	$	12,624
Net cash paid/received during the period for income taxes		8,255		8,223
Net cash paid during the period for income taxes						9,406		8,255
Noncash investing and financing activities:
Recognition of operating lease assets in exchange for lease liabilities						1,751		53
Acquisition of real estate through foreclosure		—		580		272		—
Transfer of securities from available-for-sale to held-to-maturity		162,378		—		—		162,378
Change in goodwill due to acquisitions and sale of a portfolio of loans		4,580		15,849
Change in goodwill due to acquisition						—		4,580

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

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

Basis of Presentation and Accounting Estimates:

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

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for ~~loan and lease~~credit 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, ~~2021.~~2022.

Allowance for Credit Losses (“ACL”):

As described below under Recently Issued and Adopted Accounting ~~Pronouncements:~~Pronouncements

~~In March 2020,~~, the ~~FASB issued~~Company adopted ASU ~~2020-04~~~~, Reference Rate Reform (Topic 848):~~ ~~Facilitation~~2016-13 effective January 1, 2023, which requires the estimation of an allowance for credit losses in accordance with the ~~Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance~~Current Expected Credit Losses (“CECL”) methodology. This standard applies to ~~ease~~all financial assets measured at amortized cost and off-balance sheet credit exposures, including loans, investment securities and unfunded commitments. We applied the ~~potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles~~standard’s provisions using the modified retrospective method as a cumulative-effect adjustment 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 entitiesretained earnings as of ~~March 12, 2020, through December 31, 2022. The Company implemented a~~January 1, 2023. With this 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. As of December 31, 2021, the Company ceased issuance of new LIBOR loans. Alternative reference rates at this time are predominantly Secured Overnight Funding Rate (“SOFR”) based. Remaining LIBOR transition project activities include remediation of remaining LIBOR products by June of 2023. ASU 2020-04method, we did not have to restate comparative prior periods presented in the financial statements related to Topic 326, but will present comparative prior periods disclosures using the previous accounting guidance for the allowance for loan losses. This adoption method is considered a ~~material impact~~change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

In connection with the adoption of ASU 2016-13, the Company revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below:

ACL - Held-to-Maturity (“HTM”) Securities - The Company measures expected credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. See Note 4 - Securities, for additional information related to the Company’s ~~consolidated financial statements.~~

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

~~During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements~~allowance for ~~the year ended December 31, 2021, as filed in its Annual Report~~credit losses 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 Financial Accounting Standards Board decided that the Current~~HTM securities.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Expected Credit Loss~~ACL - Available-for-Sale (“~~CECL”~~AFS”) model would be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as then defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.Securities - For ~~calendar-year-end companies that were not SRCs, this was January 1, 2020. The determination of whether~~AFS securities in an ~~entity is an SRC was based on an entity’s most recent assessment as of November 2019, in accordance with SEC regulations and~~unrealized loss position, the Company ~~met the regulations as an SRC at~~first evaluates whether it intends to sell, or whether it is more likely than not that time. For SRCs and 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 was 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 was an SRC at the applicable time, adoption is required for fiscal years beginning after December 15, 2022.

~~Under the CECL model, we~~it will be required to ~~present certain financial assets carried at~~sell, the security before recovery of its amortized cost ~~such~~basis. If either of these criteria regarding intent or requirement to sell is met, the AFS security amortized cost basis is written down to fair value through income. If the criteria is not met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. If the assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on AFS securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 4 - Securities, for additional information related to the Company’s allowance for credit losses on AFS securities.

ACL – Loans and Leases – The ACL reflects management’s estimate of expected losses that will result from the inability of our clients to make required loan and lease payments. Loans and leases deemed to be uncollectible are charged against the ACL, while recoveries of previously charged-off amounts are credited to the ACL. Management uses systematic methodologies to determine its ACL for loans and leases held for investment and ~~held-to-maturity debt securities, at~~certain off-balance-sheet exposures. The ACL is a valuation account that is subtracted from the amortized cost basis to present the net amount expected to be ~~collected.~~collected on the loan and lease portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan and lease portfolio. The ~~measurement~~ACL recorded on the balance sheet reflects management’s best estimate of expected credit losses. The Company’s ACL is calculated using collectively assessed and individually assessed loans and leases.

The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments. The Company segmented the loan and lease portfolio by call code and risk rating. The loan portfolio reserve estimate is calculated using a non-discounted cash flow method for probability of default and loss given default values. This method utilizes the Company’s data along with peer data that is regressed against the national unemployment rate. The lease portfolio’s reserve estimate is based on the open pool methodology which is a simplified process of capturing losses by quarter over the life of a lease divided by the balance of all leases originated.

Management considers forward-looking information in estimating expected credit losses. The Company uses an average of Fannie Mae and Federal Open Market Committee projections of the national unemployment rate to determine the best estimate of expected credit losses. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors using a straight-line approach. The Company uses an eight-quarter forecast and a four-quarter reversion period.

Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation. The qualitative factors considered by management include: (1) effectiveness of the Company’s loan and lease policies and procedures; (2) the experience, ability and depth of lending management and other relevant staff; and (3) the quality of external and internal loan review and internal controls.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company maintains a net book balance threshold of $500,000 for individually evaluated loans unless further analysis in the future suggests a change is needed to this threshold based on the credit environment at that time. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on ~~information about past events,~~the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral,

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.

Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a loan modification (“LM”) with a borrower. In the event of a reasonably expected LM, the Company factors the reasonably-expected LM into the current expected credit losses estimate.

Purchased credit-deteriorated, otherwise referred to herein as (“PCD”), assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition day, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the unpaid principal balance and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s purchased credit-impaired loans (“PCI”) were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of September 30, 2023, and December 31, 2022, the accrued interest receivables for loans recorded in other assets were $11.5 million and $9.8 million, respectively.

ACL – Off Balance Sheet Credit Exposures – The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the expected credit loss will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that all of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of September 30, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $2.3 million. The current adjustment to the ACL for unfunded commitments is recognized through the provision for credit losses in the Consolidated Statement of Income.

Recently Issued and Adopted Accounting Pronouncements:

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) (“ASU 2016-13”), and has issued subsequent amendments thereto, which introduces the current expected credit losses (“CECL”) methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets, including loans and held-to-maturity debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ~~This measurement will take place at the time~~The new model requires institutions to calculate and estimate losses that are expected to be incurred through the financial ~~asset~~asset's contractual life through a provision for credit losses, including loans obtained as a result of any acquisition not deemed to be PCD. ASU 2016-13 also requires the allowance for credit losses for PCD loans to be determined in a manner similar to that of other financial assets measured

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

at amortized cost; however, the initial allowance determined at acquisition is ~~first~~ added to the purchase price rather than recorded as provision expense. In accordance with ASU 2016-13, the disclosure of credit quality indicators related to the amortized cost of financing receivables is further disaggregated by year of origination (or vintage). The Company adopted ASU 2016-13 and all subsequent amendments thereto effective January 1, 2023, using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Amounts for periods beginning on or after January 1, 2023, are presented under ASU 2016-13 and ~~periodically thereafter. This differs significantly from the “incurred loss” model currently required under GAAP, which delays recognition until it~~all prior period information is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatilitypresented in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

A cross-functional working group comprised of individuals from credit administration, risk management and accounting and finance are in place implementing and developing the data, forecast, processes, and portfolio segmentation that will be used in the models that will estimate the expected credit loss for each loan segment. The Company has contractedaccordance with ~~a third party vendor solution to assist us in the application, analysis, and model development required with implementation of ASU 2016-13.~~

~~During the third quarter of 2022,~~previously applicable GAAP. At January 1, 2023, the Company ~~analyzed the results~~recognized a cumulative adjustment to retained earnings of ~~ongoing parallel runs and continue~~$6.6 million, net of tax, attributable to monitor the impact of various model assumptions. The model has been validated and our CECL Steering Committee remains focused on developing the CECL policy, procedures, and internal control structure in preparation for adoption. SmartFinancial has concluded that an increase in the allowance for ~~loan~~credit losses (“ACL”) of $8.7 million, an increase in the allowance for off balance sheet credit exposures of $3.0 million, and an increase in deferred tax assets of $2.3 million. Included in the $8.7 million increase in the allowance for credit losses is ~~likely upon adoption~~$2.9 million that was recognized on PCD loans previously classified as purchased credit impaired (“PCI”) with a corresponding adjustment to the gross carrying amount of ~~CECL.~~ the loans. The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans, which did not require re-evaluation of whether loans previously classified as PCI loans met the criteria of PCD assets at the date of adoption. The remaining noncredit discount will be accreted into interest income over the life of the individual loans beginning January 1, 2023.

~~In March 2022,~~The following table illustrates the ~~FASB issued~~impact of ASU ~~2022-01,~~2016-13 (in thousands):

~~Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method~~


		December 31, 2022		Adoption impact of ASU 2016-13		Impact of PCD Gross Up		January 1, 2023
Allowance for credit losses:
Commercial real estate	$	10,821	$	879		2,652	$	14,352
Consumer real estate		4,028		1,952		166		6,146
Construction and land development		3,059		2,145		25		5,229
Commercial and industrial		3,997		1,451		27		5,475
Leases		1,293		(683)		28		638
Consumer and other		136		13		-		149
Total allowance for credit losses	$	23,334	$	5,757	$	2,898	$	31,989

Unfunded lending commitments⁽¹⁾	$	-	$	3,029	$	-	$	3,029

~~, which allows multiple hedged layers to be designated~~

⁽¹⁾ The unfunded lending commitments is recorded within other liabilities on the Consolidated Statements of Financial Condition. The related expense for ~~a single closed portfolio~~unfunded lending commitments is recorded within provision for credit losses on the Consolidated Statements of financial assets resulting in a greater portion of the interest rate risk in the closed portfolio being eligible to be hedged. The amendments allow the flexibility to use different types of derivatives or combinations of derivatives to better align with risk management strategies. Furthermore, among other things, the amendments clarify that basis adjustments of hedged items in the closed portfolio should be allocated at the portfolio level and not the individual assets within the portfolio. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-01 prospectively. If an entity elects to early adopt ASU 2022-01 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company is assessing ASU 2022-01 and its impact on its accounting and disclosures.Income.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower ~~results~~result in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-02 prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company ~~will adopt~~adopted ASU 2022-02 when ~~adopting~~it adopted ASU 2016-13 in January ~~2023 and is assessing~~ ~~its~~2023. The adoption did not have a material impact on ~~its accounting and disclosures~~the Company’s Consolidated Financial Statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2022, as filed in its Annual Report on Form 10-K with the Securities and Exchange

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance is effective for public companies for fiscal years beginning after December 15, 2023. All other entities have an extra year to adopt; early adoption is permitted. The Company is assessing ASU 2022-03 and its impact on its accounting and disclosures.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is assessing ASU 2023-02 and its impact on its accounting and disclosures.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Business Combinations

Sunbelt Group, LLC

On September 1, 2022, Rains Agency Inc. (“Rains Agency”), an indirect wholly-owned subsidiary of SmartFinancial, Inc., completed the acquisition of substantially all the assets of Sunbelt Group, LLC (“Sunbelt”), a Tennessee limited liability company, pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated September 1, 2022, by and among Rains Agency, Sunbelt, and A. Mark Slater, the sole member of Sunbelt.

In connection with the acquisition, Rains Agency acquired $349 thousand of assets and assumed $364 thousand of liabilities from Sunbelt. Pursuant to the Purchase Agreement, Rains Agency paid an aggregate amount of consideration to Sunbelt of $6.5 million, of which $5.2 million was paid in cash at the closing and the remainder of which will be payable in equal cash installments on September 1, 2023, and September 1, 2024 (the “Deferred Payments”). The Deferred Payments are subject to acceleration in certain circumstances involving a change in control of Rains Agency and are subject to set-off for any indemnification or other obligations of the Sunbelt and its sole member to Rains Agency under the terms of the Purchase Agreement. During 2023, Rains Agency changed its name to SBK Insurance, Inc.

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 $4.6 million, representing the intangible value of Sunbelt’s business and reputation within the markets it served. The goodwill recognized is expected to be deductible for income tax purposes. The Company established an intangible asset related to customer relationships of $1.9 million, amortizing sum-of-the-years digits over 168 months (14 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).~~

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Initial


As recorded

Fair value

Subsequent

As recorded

by Sunbelt

adjustments

Adjustments

by the Company
Assets:






Cash & cash equivalents

$
319

$
—

$
—

$
319
Customer list intangible

—

1,948

—

1,948
Equipment, net

13

(13)

—

—
Other assets

17

—

—

17
Total assets acquired

$
349

$
1,935

$
—

$
2,284

Liabilities:






Payables and other liabilities

$
364

$
—

$
—

$
364
Total liabilities assumed

364

—

—

364
Excess of liabilities acquired over assets assumed

$
(15)




Aggregate fair value adjustments



$
1,935

$
—


Total identifiable net assets





1,920
Consideration transferred:






Purchase price





6,500
Total fair value of consideration transferred





6,500

Goodwill





$
4,580

⁽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.~~

The following table discloses the impact of the purchase of Sunbelt since the acquisition date through the three and nine months ended September 30, 2022. The table also presents certain pro-forma information (net interest income plus total noninterest income (“Revenue”) and net income) as if the Sunbelt purchase had occurred on January 1, 2021. 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 for the three and nine months ended September 30, 2022, were $20 thousand, respectively, and 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

2022:









Actual Sunbelt results included in statement of income since acquisition date

$
168

$
1

$
168

$
1

Supplemental consolidation pro-forma as if Sunbelt had been acquired January 1, 2022

43,008

11,548

120,681

29,992

2021:









Supplemental consolidation pro-forma as if Sunbelt had been acquired January 1, 2021

$
37,335

$
9,750

$
102,613

$
28,612

~~Sevier County Bancshares, Inc.~~

On September 1, 2021, the Company completed the acquisition of Sevier County Bancshares, Inc., a Tennessee corporation (“SCB”), pursuant to an Agreement and Plan of Merger dated April 13, 2021 (the “Merger Agreement”).

In connection with the merger, the Company acquired $484.9 million of assets and assumed $443.1 million of liabilities. Pursuant to the Merger Agreement, at the effective time of the merger, SCB shareholders were entitled to receive for each share of SCB common stock, no par value per share, outstanding immediately prior to the Merger, either (i) $10.17 in cash (the “Per Share Cash Consideration”), or (ii) 0.4116 shares of Company common stock, par value $1.00 (the “Per Share Stock Consideration”). Pursuant to the terms of the Merger Agreement, (i) each SCB shareholder holding 20,000 shares or more of SCB common stock will receive the Per Share Stock Consideration and (ii) each SCB shareholder holding fewer than 20,000 shares of SCB common stock may elect to receive either the Per Share Stock Consideration or the Per Share Cash Consideration.SmartFinancial issued 1,692,168 shares of SmartFinancial common stock and paid $9.6 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $17.2 million, representing the intangible value of SCB’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 $1.6 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

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

Initial


As recorded

Fair value

Subsequent

As recorded

by SCB

adjustments

Adjustments

by the Company
Assets:






Cash & cash equivalents

$
84,313

$
—

$
—

$
84,313
Investment securities available-for-sale

64,219

(614)

—

63,605
Restricted investments

533

—

—

533
Loans

304,620

(4,551)

(3,049)

297,020
Allowance for loan losses

(3,644)

3,644

—

—
Premises and equipment, net

15,579

(295)

(22)

15,262
Bank owned life insurance

7,116

—

—

7,116
Deferred tax asset, net

10,340

(4,007)

769

7,102
Core deposit intangible

—

1,550

—

1,550
Interest Receivable

884

—

—

884
Other assets

920

(272)

(533)

115
Total assets acquired

$
484,880

$
(4,545)

$
(2,835)

$
477,500

Liabilities:






Deposits

$
435,036

$
—

$
—

$
435,036
Time deposit premium

—

888

—

888
Subordinated debt

2,500

—

—

2,500
Payables and other liabilities

5,563

115

(1,254)

4,424
Total liabilities assumed

443,099

1,003

(1,254)

442,848
Excess of assets acquired over liabilities assumed

$
41,781




Aggregate fair value adjustments



$
(5,548)

$
(1,581)


Total identifiable net assets





34,652
Consideration transferred:






Cash





9,568
Common stock issued (1,692,168 shares)





42,255
Total fair value of consideration transferred





51,823

Goodwill





$
17,171

~~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):.

September 1, 2021
Accounted for pursuant to ASC 310-30:

Contractually required principal and interest

$
30,293
Non-accretable differences

7,609
Cash flows expected to be collected

22,684
Accretable yield

3,552
Fair value

$
19,132


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by Sunbelt		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	319	$	—	$	—	$	319
Customer list intangible		—		1,948		—		1,948
Equipment, net		13		(13)		—		—
Other assets		17		—		—		17
Total assets acquired	$	349	$	1,935	$	—	$	2,284

Liabilities:
Payables and other liabilities	$	364	$	—	$	—	$	364
Total liabilities assumed		364		—		—		364
Excess of liabilities acquired over assets assumed	$	(15)
Aggregate fair value adjustments			$	1,935	$	—
Total identifiable net assets								1,920
Consideration transferred:
Purchase price								6,500
Total fair value of consideration transferred								6,500

Goodwill							$	4,580

~~Fountain Leasing, LLC~~

On May 3, 2021, the Company completed the acquisition of Fountain Leasing, LLC, a Tennessee limited liability company, pursuant to the Purchase Agreement (the “Purchase Agreement”), dated May 2, 2021, by and among the Bank and the members of Fountain Leasing, LLC. Following the closing of the acquisition, on May 4, 2021, the Company changed the name of Fountain Leasing, LLC to Fountain Equipment Finance, LLC (“Fountain”).

~~In connection with the acquisition, the Company acquired $54.1 million of assets and assumed $683 thousand of liabilities. Pursuant to the Purchase Agreement, the Company~~ ~~paid an aggregate amount of consideration to the Fountain members of $14.0 million in cash at closing, and the Company repaid approximately $45.8 million of Fountain’s indebtedness. In~~

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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 $6.0 million, which is excluded from consideration pursuant to ASC 805, in future cash payments from the Company based on future results of the acquired business over various periods through December 31, 2026. 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 $2.4 million, representing the intangible value of Fountains business and reputation within the markets it served. The goodwill recognized is expected to be deductible for income tax purposes. The Company established an intangible asset related to customer relationships of $2.7 million, amortizing sum-of-the-years digits over 96 months (8 years).

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

As recorded

Fair value

Subsequent

As recorded

by Fountain

adjustments

Adjustments

by the Company
Assets:






Cash & cash equivalents

$
413

$
—

$
—

$
413
Leases

54,945

(720)

—

54,225
Allowance for lease losses

(1,796)

1,796

—

—
Customer list intangible

—

2,658

—

2,658
Other repossessed assets

319

—

—

319
Other assets

233

—

—

233
Total assets acquired

$
54,114

$
3,734

$
—

$
57,848

Liabilities:






Payables and other liabilities

$
683

$
(229)

$
—

$
454
Total liabilities assumed

683

(229)

—

454
Excess of assets acquired over liabilities assumed

$
53,431




Aggregate fair value adjustments



$
3,963

$
—


Total identifiable net assets





57,394
Consideration transferred:






Cash





59,794
Total fair value of consideration transferred





59,794

Goodwill





$
2,400

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

May 3, 2021
Accounted for pursuant to ASC 310-30:

Contractually required principal and interest

$
6,018
Non-accretable differences

447
Cash flows expected to be collected

5,571
Accretable yield

649
Fair value

$
4,922

Note 3. Earnings Per Share

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

presented below. There were no antidilutive shares for the three and nine months ended September 30, ~~2022,~~2023, and September 30, ~~2021,~~2022, respectively.

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Basic earnings per share computation:
Net income available to common shareholders	$	11,543	$	9,600	$	30,018	$	28,134	$	2,067	$	11,543	$	22,403	$	30,018
Average common shares outstanding – basic		16,749,255		15,557,528		16,734,298		15,192,919		16,807,548		16,749,255		16,801,840		16,734,298
Basic earnings per share	$	0.69	$	0.62	$	1.79	$	1.85	$	0.12	$	0.69	$	1.33	$	1.79
Diluted earnings per share computation:
Net income available to common shareholders	$	11,543	$	9,600	$	30,018	$	28,134	$	2,067	$	11,543	$	22,403	$	30,018
Average common shares outstanding – basic		16,749,255		15,557,528		16,734,298		15,192,919		16,807,548		16,749,255		16,801,840		16,734,298
Incremental shares from assumed conversions:
Stock options and restricted stock		122,767		133,598		133,672		119,836		111,087		122,767		105,485		133,672
Average common shares outstanding - diluted		16,872,022		15,691,126		16,867,970		15,312,755		16,918,635		16,872,022		16,907,325		16,867,970
Diluted earnings per common share	$	0.68	$	0.61	$	1.78	$	1.84	$	0.12	$	0.68	$	1.33	$	1.78

Note 4. Securities

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

September 30, 2022




Gross

Gross


Amortized

Unrealized

Unrealized

Fair
Available-for-sale:

Cost

Gains

Losses

Value
U.S. Treasury

$
242,018

$
—

$
(20,242)

$
221,776
U.S. Government-sponsored enterprises (GSEs)

1,650

—

(17)

1,633
Municipal securities

55,422

3

(1,308)

54,117
Other debt securities

30,967

—

(2,126)

28,841
Mortgage-backed securities (GSEs)

241,531

1

(28,176)

213,356
Total

$
571,588

$
4

$
(51,869)

$
519,723

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

September 30, 2022




Gross

Gross


Amortized

Unrealized

Unrealized

Fair
Held-to-maturity:

Cost

Gains

Losses

Value
U.S. Treasury

$
150,353

$
—

$
(6,095)

$
144,258
U.S. Government-sponsored enterprises (GSEs)

50,838

—

(8,735)

42,103
Municipal securities

53,935

—

(10,330)

43,605
Mortgage-backed securities (GSEs)

31,978

—

(4,968)

27,010
Total

$
287,104

$
—

$
(30,128)

$
256,976

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 31, 2021




Gross

Gross


Amortized

Unrealized

Unrealized

Fair
Available-for-sale:

Cost

Gains

Losses

Value
U.S. Treasury

$
138,212

$
64

$
(518)

$
137,758
U.S. Government-sponsored enterprises (GSEs)

21,898

76

(173)

21,801
Municipal securities

67,310

512

(2)

67,820
Other debt securities

26,989

313

(82)

27,220
Mortgage-backed securities (GSEs)

228,011

971

(1,128)

227,854
Total

$
482,420

$
1,936

$
(1,903)

$
482,453

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


	December 31, 2021								September 30, 2023
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
Available-for-sale:									Cost		Gains		Losses		Value
U.S. Treasury									$	84,550	$	—	$	(10,817)	$	73,733
U.S. Government-sponsored enterprises (GSEs)	$	31,023	$	20	$	(87)	$	30,956		59,683		1,430		(160)		60,953
Municipal securities		45,946		63		(19)		45,990		18,661		2		(1,158)		17,505
Other debt securities										34,784		67		(4,225)		30,626
Mortgage-backed securities (GSEs)										231,153		—		(28,839)		202,314
Total	$	76,969	$	83	$	(106)	$	76,946	$	428,831	$	1,499	$	(45,199)	$	385,131


	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,126	$	—	$	(2,925)	$	147,201
U.S. Government-sponsored enterprises (GSEs)		49,642		—		(9,013)		40,629
Municipal securities		52,947		—		(8,872)		44,075
Mortgage-backed securities (GSEs)		29,598		—		(5,178)		24,420
Total	$	282,313	$	—	$	(25,988)	$	256,325


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	241,506	$	—	$	(17,853)	$	223,653
U.S. Government-sponsored enterprises (GSEs)		1,593		—		(18)		1,575
Municipal securities		19,210		17		(616)		18,611
Other debt securities		32,959		—		(2,408)		30,551
Mortgage-backed securities (GSEs)		233,948		6		(24,451)		209,503
Total	$	529,216	$	23	$	(45,346)	$	483,893


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,295	$	—	$	(5,613)	$	144,682
U.S. Government-sponsored enterprises (GSEs)		50,539		—		(8,037)		42,502
Municipal securities		53,694		—		(7,550)		46,144
Mortgage-backed securities (GSEs)		31,421		—		(4,136)		27,285
Total	$	285,949	$	—	$	(25,336)	$	260,613

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, securities with a carrying value totaling approximately ~~$299.3~~$347.9 million and ~~$201.2~~$304.8 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

~~During~~

For the ~~first quarter of 2022,~~three and nine months ended September 30, 2023, the Company ~~transferred $162.4~~recorded no gross gains and for the three and nine months ended September 30, 2023, the Company recorded gross losses of $6.8 million ~~of available-for-sale securities~~and $6.8 million, related to the held-to-maturity category, reflecting the Company’s intent to hold those securities to maturity. Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The related $2.0 million of unrealized holding loss that was included in the transfer is retained in accumulated other comprehensive income, net of tax, and in the carrying value of the held-to-maturity securities. This amount will be amortized as an adjustment to interest income over the remaining life of the securities. This will offset the impact of amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.

~~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 Financial Instruments~~ ~~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.~~

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

of investment securities. There were no gross gains or gross losses related to the sale of investment securities for the three and nine months ended September 30, 2022.

The amortized cost and estimated fair value of securities at September 30, ~~2022~~2023 by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2022				September 30, 2023
	Amortized		Fair		Amortized		Fair
Available-for-sale:	Cost		Value		Cost		Value
Due in one year or less	$	270	$	270	$	11,410	$	11,386
Due from one year to five years		202,625		188,431		56,074		49,911
Due from five years to ten years		80,375		71,663		119,939		112,003
Due after ten years		46,787		46,003		10,255		9,517
		330,057		306,367		197,678		182,817
Mortgage-backed securities		241,531		213,356		231,153		202,314
Total	$	571,588	$	519,723	$	428,831	$	385,131

Held-to-maturity:
Due in one year or less	$	—	$	—	$	150,126	$	147,201
Due from one year to five years		150,353		144,257		—		—
Due from five years to ten years		38,311		32,465		47,513		39,301
Due after ten years		66,462		53,244		55,076		45,403
		255,126		229,966		252,715		231,905
Mortgage-backed securities		31,978		27,010		29,598		24,420
Total	$	287,104	$	256,976	$	282,313	$	256,325

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~~AFS and ~~held-to-maturity~~HTM have been in a continuous unrealized loss position (in thousands):


	September 30, 2022															September 30, 2023
	Less than 12 Months					12 Months or Greater					Total					Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	207,805	$	(17,749)	18	$	13,972	$	(2,493)	2	$	221,777	$	(20,242)	20	$	—	$	—	—	$	73,733	$	(10,817)	9	$	73,733	$	(10,817)	9
U.S. Government-sponsored enterprises (GSEs)		1,267		(13)	1		366		(4)	2		1,633		(17)	3		20,181		(143)	4		1,488		(17)	3		21,669		(160)	7
Municipal securities		53,565		(1,308)	43		—		—	—		53,565		(1,308)	43		7,729		(283)	10		9,475		(875)	17		17,204		(1,158)	27
Other debt securities		25,975		(1,877)	22		2,865		(249)	3		28,840		(2,126)	25		2,654		(270)	2		26,980		(3,955)	25		29,634		(4,225)	27
Mortgage-backed securities (GSEs)		198,452		(26,983)	102		14,833		(1,193)	14		213,285		(28,176)	116		29,670		(547)	15		172,645		(28,292)	89		202,315		(28,839)	104
Total	$	487,064	$	(47,930)	186	$	32,036	$	(3,939)	21	$	519,100	$	(51,869)	207	$	60,234	$	(1,243)	31	$	284,321	$	(43,956)	143	$	344,555	$	(45,199)	174

	September 30, 2022															September 30, 2023
	Less than 12 Months					12 Months or Greater					Total					Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	144,257	$	(6,095)	4	$	—	$	—	—	$	144,257	$	(6,095)	4	$	—	$	—	—	$	147,201	$	(2,925)	4	$	147,201	$	(2,925)	4
U.S. Government-sponsored enterprises (GSEs)		19,613		(3,763)	5		22,491		(4,972)	8		42,104		(8,735)	13		—		—	—		40,629		(9,013)	13		40,629		(9,013)	13
Municipal securities		43,149		(10,233)	34		455		(97)	1		43,604		(10,330)	35		—		—	—		44,076		(8,872)	35		44,076		(8,872)	35
Mortgage-backed securities (GSEs)		27,010		(4,968)	5		—		—	—		27,010		(4,968)	5		—		—	—		24,419		(5,178)	5		24,419		(5,178)	5
Total	$	234,029	$	(25,059)	48	$	22,946	$	(5,069)	9	$	256,975	$	(30,128)	57	$	—	$	—	—	$	256,325	$	(25,988)	57	$	256,325	$	(25,988)	57

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	134,414	$	(7,610)	9	$	89,239	$	(10,243)	11	$	223,653	$	(17,853)	20
U.S. Government-sponsored enterprises (GSEs)		1,266		(14)	1		309		(4)	2		1,575		(18)	3
Municipal securities		13,146		(616)	20		—		—	—		13,146		(616)	20
Other debt securities		25,044		(1,866)	20		5,506		(542)	6		30,550		(2,408)	26
Mortgage-backed securities (GSEs)		111,598		(8,968)	86		96,285		(15,483)	28		207,883		(24,451)	114
Total	$	285,468	$	(19,074)	136	$	191,339	$	(26,272)	47	$	476,807	$	(45,346)	183

	December 31, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	144,683	$	(5,613)	4	$	—	$	—	—	$	144,683	$	(5,613)	4
U.S. Government-sponsored enterprises (GSEs)	$	13,048	$	(2,503)	3	$	29,451	$	(5,534)	10	$	42,499	$	(8,037)	13
Municipal securities		40,770		(6,387)	28		5,375		(1,163)	7		46,145		(7,550)	35
Mortgage-backed securities (GSEs)		—		—	—		27,285		(4,136)	5		27,285		(4,136)	5
Total	$	198,501	$	(14,503)	35	$	62,111	$	(10,833)	22	$	260,612	$	(25,336)	57

For any securities classified as available-for-sale that are in an unrealized loss position at the balance sheet date, the Company assesses whether it intends to sell the security, or more likely than not will be required to sell the security before recovery of its amortized cost basis which would require a write-down to fair value through net income. Because the Company currently does not intend to sell those available-for-sale securities that have an unrealized loss at September 30, 2023, and it is not likely that they we will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company has determined that no write-down is necessary. In addition, the Company evaluates whether any portion of the decline in fair value of available-for-sale securities is the result of credit deterioration, which would require the recognition of an allowance for credit losses. The unrealized losses associated with available-for-sale securities at September 30, 2023, are driven by changes in interest rates and are not due to the credit quality of the securities, and accordingly, no allowance for credit losses is considered necessary related to available-for-sale securities at September 30, 2023. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

The unrealized losses in the Company’s held-to-maturity portfolio were caused by changes in the interest rate environment. The Company has a zero-loss expectation for its U.S. treasury securities in addition to U.S. Government-sponsored enterprises (GSEs) and mortgage-backed securities (GSEs), and accordingly, no allowance for credit losses is estimated for these securities. The held-to-maturity state and municipal securities are general obligation bonds which have a very low historical default rate due to issuers generally having unlimited taxing authority to service the debt. All debt securities in an unrealized loss position as of September 30, 2023, continue to perform as scheduled and we do not believe there is a credit loss or a provision for credit losses is necessary.

The Company utilizes bond credit ratings assigned by third party ratings agencies to monitor the credit quality of debt securities held-to-maturity. At September 30, 2023, all debt securities classified as held-to-maturity were rated AA or higher by the ratings agencies. Updated credit ratings are obtained as they become available from the ratings agencies.

Allowance for Credit Losses

The Company adopted ASU 2016-13 on January 1, 2023, and based on the analysis of the underlying risk characteristics of its AFS and HTM portfolios, including credit ratings and other qualitative factors, there was no provision for credit

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

December 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
Available-for-sale:

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Securities
U.S. Treasury

$
99,959

$
(518)

11

$
—

$
—

—

$
99,959

$
(518)

11
U.S. Government-sponsored enterprises (GSEs)

14,156

(168)

2

579

(5)

2

14,735

(173)

4
Municipal securities

2,519

(2)

1

—

—

—

2,519

(2)

1
Other debt securities

5,983

(82)

6

—

—

—

5,983

(82)

6
Mortgage-backed securities (GSEs)

159,725

(1,002)

31

8,233

(126)

6

167,958

(1,128)

37
Total

$
282,342

$
(1,772)

51

$
8,812

$
(131)

8

$
291,154

$
(1,903)

59

December 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
Held-to-maturity:

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Securities
U.S. Government-sponsored enterprises (GSEs)

$
21,901

$
(87)

8

$
—

$
—

—

$
21,901

$
(87)

8
Municipal securities

4,173

(19)

6

—

—

—

4,173

(19)

6
Total

$
26,074

$
(106)

14

$
—

$
—

—

$
26,074

$
(106)

14

~~The Company reviews~~losses related to AFS or HTM securities recorded during 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 factorsthree and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

~~Based on this evaluation, the Company concluded that any unrealized losses at~~nine months ended September 30, ~~2022, 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~~2023, because the ~~issuers. As of September 30, 2022, the Company does not intend, and will not be required, to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.~~ACL was deemed immaterial.

Other Investments:

Our other investments consist of restricted non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of September 30, ~~2022,~~2023, the Company determined that there was no impairment on its other investment securities.

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


	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Federal Reserve Bank stock	$	9,781	$	9,693	$	9,669	$	9,783
Federal Home Loan Bank stock		5,397		6,451		3,786		5,397
First National Bankers Bank stock		350		350		350		350
Total	$	15,528	$	16,494	$	13,805	$	15,530

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 5. Loans and Leases and Allowance for ~~Loan and Lease~~Credit Losses

Portfolio Segmentation:

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

September 30, 2022

December 31, 2021

PCI

All Other

PCI

All Other


Loans and Leases¹

Loans and Leases

Total

Loans and Leases¹

Loans and Leases

Total
Commercial real estate

$
16,148

$
1,520,903

$
1,537,051

$
20,875

$
1,363,281

$
1,384,156
Consumer real estate

8,695

553,713

562,408

11,833

465,439

477,272
Construction and land development

1,557

403,450

405,007

2,882

275,504

278,386
Commercial and industrial

2,523

511,757

514,280

2,516

485,508

488,024
Leases

1,472

63,326

64,798

3,170

50,538

53,708
Consumer and other

6

15,566

15,572

71

11,780

11,851
Total loans and leases

30,401

3,068,715

3,099,116

41,347

2,652,050

2,693,397
Less: Allowance for loan and lease losses

(167)

(22,602)

(22,769)

(179)

(19,173)

(19,352)
Loans and leases, net

$
30,234

$
3,046,113

$
3,076,347

$
41,168

$
2,632,877

$
2,674,045

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


	September 30,		December 31,
	2023		2022
Commercial real estate	$	1,667,176	$	1,627,761
Consumer real estate		638,518		587,977
Construction and land development		373,068		402,501
Commercial and industrial		617,115		551,867
Leases		68,538		67,427
Consumer and other		14,584		16,094
Total loans and leases		3,378,999		3,253,627
Less: Allowance for credit losses		(33,687)		(23,334)
Loans and leases, net	$	3,345,312	$	3,230,293

~~For purposes of the disclosures required pursuant to ASC 310, the~~The loan and lease portfolio ~~was~~is 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 loan and lease losses.~~ There are six loan and lease portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, and consumer and other.

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

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are secured by a secured interest in the equipment being leased.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

~~Credit Risk Management:~~

The ~~Company employs a credit risk management process~~Bank occasionally enters into loan participation agreements with ~~defined policies, accountability and routine reporting to manage credit risk~~other banks in the ~~loan and lease portfolio segments. Credit risk management is guided by~~ordinary course of business to diversify credit ~~policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within~~risk. For certain sold participation loans, the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans and leases are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently, as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.

Credit quality and trends in the loan and lease portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by Director, Management and Loan Committees.

The allowance for loan and lease losses is a valuation reserve established through provisions for loan and lease losses charged against income. The allowance for loan and lease losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan and lease portfolio. Loans and leases deemed to be uncollectible are charged against the allowance for loan and lease losses, while recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. The allowance for loan and lease losses is comprised of specific valuation allowances for loans and leases evaluated individually for impairment and general allocations for pools of homogeneous loans and leases with similar risk characteristics and trends.

The allowance for loan and lease losses related to specific loans and leases is based on management’s estimate of potential losses on impaired loans and leases as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan or lease is determined to be collateral dependent or (3) the loans’ or leases’ observable market price. The Company’s homogeneous loan and lease pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, leases and consumer and other loans. The general allocations to these loan and lease pools are based on the historical loss rates for specific loan and lease types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.

The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan and lease portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan and lease structuring and pricing; (6) the impact of the regulatory environment and changes in laws; (7) effectiveness of the Company’s loan and lease policies, procedures and internal controls. The total allowance established for each homogeneous loan and lease pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amountBank has retained effective control of the loans, ~~and leases~~typically by restricting the participating institutions from pledging or selling their share of the loan without permission from the Bank. GAAP requires the participated portion of these loans to be recorded as secured borrowings. The participated portions of these loans are included in the ~~pool.~~

~~The determination~~Commercial Real Estate totals above with a corresponding liability reflected in other borrowings. At September 30, 2023 and December 31, 2022, the balance of ~~the adequacy of the allowance for loan~~such loans totaled $0 and lease losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and leases, management obtains independent appraisals for significant collateral.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~$24.6 million, respectively.

The Company’s loans and leases are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan and lease portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.

While management uses available information to recognize losses on loans and leases, further reductions in the carrying amounts of loans and leases may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and leases. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and leases may change materially in the near term.

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

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Real Estate

Real Estate

Development

Industrial

Leases

and Other

Total
September 30, 2022:













Performing loans and leases

$
1,520,598

$
552,076

$
402,592

$
511,757

$
63,326

$
15,566

$
3,065,915
Impaired loans and leases

305

1,637

858

—

—

—

2,800

1,520,903

553,713

403,450

511,757

63,326

15,566

3,068,715
PCI loans and leases

16,148

8,695

1,557

2,523

1,472

6

30,401
Total loans and leases

$
1,537,051

$
562,408

$
405,007

$
514,280

$
64,798

$
15,572

$
3,099,116

December 31, 2021:












Performing loans and leases

$
1,362,423

$
463,374

$
275,504

$
485,411

$
50,538

$
11,780

$
2,649,030
Impaired loans and leases

858

2,065

—

97

—

—

3,020

1,363,281

465,439

275,504

485,508

50,538

11,780

2,652,050
PCI loans and leases

20,875

11,833

2,882

2,516

3,170

71

41,347
Total loans and leases

$
1,384,156

$
477,272

$
278,386

$
488,024

$
53,708

$
11,851

$
2,693,397

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

Construction

Commercial

Consumer

Commercial

Consumer

and Land

and

and

Real Estate

Real Estate

Development

Industrial

Leases

Other

Total
September 30, 2022:

Performing loans and leases

$
10,552

$
3,868

$
2,781

$
3,835

$
1,034

$
137

$
22,207
Impaired loans and leases

—

—

395

—

—

—

395

10,552

3,868

3,176

3,835

1,034

137

22,602
PCI loans and leases

27

140

—

—

—

—

167
Total loans and leases

$
10,579

$
4,008

$
3,176

$
3,835

$
1,034

$
137

$
22,769

December 31, 2021:

Performing loans and leases

$
9,355

$
3,237

$
1,882

$
3,685

$
330

$
123

$
18,612
Impaired loans and leases

396

69

—

96

—

—

561

9,751

3,306

1,882

3,781

330

123

19,173
PCI loans and leases

30

148

—

—

—

1

179
Total loans and leases

$
9,781

$
3,454

$
1,882

$
3,781

$
330

$
124

$
19,352

2019

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


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


	Three Months Ended September 30, 2022
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	10,600	$	3,835	$	2,904	$	3,659	$	807	$	133	$	21,938
Charged-off loans and leases		—		—		—		(51)		—		(180)		(231)
Recoveries of charge-offs		—		7		—		19		29		33		88
Provision charged to expense		(21)		166		272		208		198		151		974
Ending balance	$	10,579	$	4,008	$	3,176	$	3,835	$	1,034	$	137	$	22,769


	Three Months Ended September 30, 2021														Nine Months Ended September 30, 2023
			Consumer		Construction		Commercial										Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer				Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total		Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	8,382	$	3,323	$	2,061	$	4,442	$	—	$	102	$	18,310	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334
Impact of adopting ASU 2016-13																879		1,952		2,145		1,451		(683)		13		5,757
PCD gross up																2,652		166		25		27		28		—		2,898
Charged-off loans and leases		—		—		—		(41)		(68)		(132)	��	(241)		—		(9)		—		(387)		(211)		(332)		(939)
Recoveries of charge-offs		23		13		—		3		5		33		77		5		13		25		153		—		187		383
Provision charged to expense		1,000		205		157		(603)		288		102		1,149
Provision charged to expense ⁽¹⁾																650		1,006		(177)		439		217		119		2,254
Ending balance	$	9,405	$	3,541	$	2,218	$	3,801	$	225	$	105	$	19,295	$	15,007	$	7,156	$	5,077	$	5,680	$	644	$	123	$	33,687


	Nine Months Ended September 30, 2022
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	9,781	$	3,454	$	1,882	$	3,781	$	330	$	124	$	19,352
Charged-off loans and leases		—		(33)		—		(240)		(108)		(482)		(863)
Recoveries of charge-offs		4		561		—		162		192		131		1,050
Provision charged to expense		794		26		1,294		132		620		364		3,230
Ending balance	$	10,579	$	4,008	$	3,176	$	3,835	$	1,034	$	137	$	22,769

Nine Months Ended September 30, 2021

Consumer

Construction

Commercial

Commercial

Real

and Land

and

Consumer

Real Estate

Estate

Development

Industrial

Leases

and Other

Total
Beginning balance

$
7,579

$
3,471

$
2,076

$
5,107

$
—

$
113

$
18,346
Charged-off loans and leases

—

(60)

—

(45)

(68)

(341)

(514)
Recoveries of charge-offs

29

34

—

13

5

171

252
Provision charged to expense

1,797

96

142

(1,274)

288

162

1,211
Ending balance

$
9,405

$
3,541

$
2,218

$
3,801

$
225

$
105

$
19,295

(1)

In the provision charged to expense there was a release of $489 thousand and $796 thousand for unfunded commitments through the provision for credit losses not reflected in the three and nine months ended September 30, 2023.

We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. Our provision for loan and lease losses for the three and nine months ended September 30, 2022, is $974 thousand million and $3.2 million, respectively and $1.1 million and $1.2 million, during the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, and December 31, 2021, our allowance for loan and lease losses was $22.8 million and $19.4 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for loan and lease losses as a percentage of total loans and leases was 0.73% at September 30, 2022 and 0.72% at December 31, 2021.

2120

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables detail the allowance for credit losses and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
December 31, 2022:
Performing loans and leases	$	10,815	$	3,913	$	2,674	$	3,997	$	1,293	$	136	$	22,828
Impaired loans and leases		—		—		385		—		—		—		385
		10,815		3,913		3,059		3,997		1,293		136		23,213
PCI loans and leases		6		115		—		—		—		—		121
Total allowance for loans and leases	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
December 31, 2022:
Performing loans and leases	$	1,611,815	$	578,342	$	400,114	$	549,974	$	66,459	$	16,091	$	3,222,795
Impaired loans and leases		—		1,283		858		—		—		—		2,141
		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936
PCI loans and leases		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

We maintain the allowance for credit losses at a level that we deem appropriate to adequately cover the expected credit loss in the loan and lease portfolio. Our provision for loan and lease losses for the three and nine months ended September 30, 2023, is $1.3 million and $2.3 million, respectively, and $974 thousand and $3.2 million, during the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, and December 31, 2022, our allowance for credit losses was $33.7 million and $23.3 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans and leases was 1.00% at September 30, 2023, and 0.72% at December 31, 2022.

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of ~~"Other~~“Other Assets Especially ~~Mentioned"~~Mentioned” classification. Loans and leases in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.

Substandard: Loans and leases in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans and leases in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for ~~loan and lease~~credit losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.

The Company evaluates the loan risk grading system definitions and allowance for ~~loan~~credit loss methodology on an ongoing basis. ~~No significant~~There were no changes ~~have been made.~~

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

September 30, 2022

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans and Leases:

Real Estate

Real Estate

Development

Industrial

Leases

and Other

Total
Pass

$
1,490,337

$
550,409

$
402,317

$
506,920

$
63,326

$
15,535

$
3,028,844
Watch

23,663

1,207

227

4,647

—

21

29,765
Special mention

6,519

36

—

73

—

—

6,628
Substandard

384

2,061

906

117

—

10

3,478
Doubtful

—

—

—

—

—

—

—
Total

1,520,903

553,713

403,450

511,757

63,326

15,566

3,068,715

PCI Loans and Leases:

Pass


12,901


7,299


1,075


2,523


1,472


6


25,276
Watch

1,437

194

47

—

—

—

1,678
Special mention

12

55

—

—

—

—

67
Substandard

1,798

1,147

435

—

—

—

3,380
Doubtful

—

—

—

—

—

—

—
Total

16,148

8,695

1,557

2,523

1,472

6

30,401
Total loans and leases

$
1,537,051

$
562,408

$
405,007

$
514,280

$
64,798

$
15,572

$
3,099,116

December 31, 2021

Construction

Commercial

Commercial

Consumer

and Land

and

Consumer

Non PCI Loans and Leases:

Real Estate

Real Estate

Development

Industrial

Leases

and Other

Total
Pass

$
1,330,888

$
460,190

$
275,124

$
480,677

$
50,538

$
11,724

$
2,609,141
Watch

27,246

1,334

237

4,345

—

42

33,204
Special mention

4,120

1,525

70

228

—

—

5,943
Substandard

1,027

2,390

73

213

—

14

3,717
Doubtful

—

—

—

45

—

—

45
Total

1,363,281

465,439

275,504

485,508

50,538

11,780

2,652,050

PCI Loans and Leases:

Pass


16,019


9,714


2,335


2,516


3,170


71


33,825
Watch

1,271

539

91

—

—

—

1,901
Special mention

15

68

—

—

—

—

83
Substandard

3,570

1,512

456

—

—

—

5,538
Doubtful

—

—

—

—

—

—

—
Total

20,875

11,833

2,882

2,516

3,170

71

41,347
Total loans and leases

$
1,384,156

$
477,272

$
278,386

$
488,024

$
53,708

$
11,851

$
2,693,397

~~Past Due Loans and Leases:~~

~~A loan or lease is considered past due if any required principal and interest payments have not been received as of the date such payments were required~~ to ~~be made under the terms of the loan or lease agreement. Generally, management places a loan or lease~~these subsequent to adoption ASU 2016-13 on ~~nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan or lease is 90 days past due.~~

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

September 30, 2022


30-60 Days

61-89 Days

Past Due 90



Total






Past Due and

Past Due and

Days or More

Past Due and

Accruing

Accruing

and Accruing

Nonaccrual

Nonaccrual

PCI

Current

Total
Commercial real estate

$
103

$
—

$
—

$
305

$
408

$
16,148

$
1,520,495

$
1,537,051
Consumer real estate

271

132

—

2,061

2,464

8,695

551,249

562,408
Construction and land development

—

—

—

858

858

1,557

402,592

405,007
Commercial and industrial

96

58

—

117

271

2,523

511,486

514,280
Leases

143

—

20

29

192

1,472

63,134

64,798
Consumer and other

175

27

—

9

211

6

15,355

15,572
Total

$
788

$
217

$
20

$
3,379

$
4,404

$
30,401

$
3,064,311

$
3,099,116

December 31, 2021


30-60 Days

61-89 Days

Past Due 90



Total






Past Due and

Past Due and

Days or More

Past Due and

Accruing

Accruing

and Accruing

Nonaccrual

Nonaccrual

PCI

Current

Total
Commercial real estate

$
172

$
—

$
—

$
858

$
1,030

$
20,875

$
1,362,251

$
1,384,156
Consumer real estate

884

10

—

2,139

3,033

11,833

462,406

477,272
Construction and land development

91

—

—

—

91

2,882

275,413

278,386
Commercial and industrial

1,191

119

45

116

1,471

2,516

484,037

488,024
Leases

361

—

—

—

361

3,170

50,177

53,708
Consumer and other

99

4

19

11

133

71

11,647

11,851
Total

$
2,798

$
133

$
64

$
3,124

$
6,119

$
41,347

$
2,645,931

$
2,693,397

~~Impaired Loans and Leases:~~

A loan or lease held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan or lease agreement.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

September 30, 2022

December 31, 2021

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance
Impaired loans and leases without a valuation allowance:


















Commercial real estate

$
305

$
305

$
—

$
—

$
—

$
—
Consumer real estate

1,637

1,638

—

1,805

1,806

—
Construction and land development

—

—

—

—

—

—
Commercial and industrial

—

—

—

—

—

—
Leases

—

—

—

—

—

—
Consumer and other

—

—

—

—

—

—

1,942

1,943

—

1,805

1,806

—
Impaired loans and leases with a valuation allowance:












Commercial real estate

—

—

—

858

859

396
Consumer real estate

—

—

—

260

262

69
Construction and land development

858

858

395

—

—

—
Commercial and industrial

—

—

—

97

96

96
Leases

—

—

—

—

—

—
Consumer and other

—

—

—

—

—

—

858

858

395

1,215

1,217

561
PCI loans and leases:












Commercial real estate

522

597

27

707

926

30
Consumer real estate

873

835

140

1,129

1,251

148
Construction and land development

—

—

—

—

—

—
Commercial and industrial

—

—

—

��

—

—
Leases

—

—

—

—

—

—
Consumer and other

—

—

—

5

3

1

1,395

1,432

167

1,841

2,180

179
Total impaired loans and leases

$
4,195

$
4,233

$
562

$
4,861

$
5,203

$
740

January 1, 2023.

2522

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended September 30,

2022

2021


Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans and leases without a valuation allowance:








Commercial real estate

$
304

$
—

$
—

$
—
Consumer real estate

1,742

72

2,171

19
Construction and land development

—

—

—

—
Commercial and industrial

—

—

—

—
Leases

—

—

—

—
Consumer and other

—

—

—

—

2,046

72

2,171

19
Impaired loans and leases with a valuation allowance:








Commercial real estate

—

—

858

—
Consumer real estate

—

—

261

3
Construction and land development

858

—

—

—
Commercial and industrial

—

—

154

2
Leases

—

—

—

—
Consumer and other

—

—

—

—

858

—

1,273

5
PCI loans and leases:








Commercial real estate

525

11

1,230

27
Consumer real estate

880

12

1,176

21
Construction and land development

—

—

—

—
Commercial and industrial

—

—

258

1
Leases

—

—

—

—
Consumer and other

—

—

10

—

1,405

23

2,674

49
Total impaired loans and leases

$
4,309

$
95

$
6,118

$
73

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


	September 30, 2023
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	168,217	$	553,613	$	436,468	$	187,188	$	141,248	$	118,422	$	14,878	$	8,163	$	1,628,197
Watch		20,665		1,269		2,418		2,652		3,848		267		-		-		31,119
Special mention		-		3,234		-		-		-		-		-		-		3,234
Substandard		968		-		3,145		51		-		462		-		-		4,626
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		189,850		558,116		442,031		189,891		145,096		119,151		14,878		8,163		1,667,176
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Consumer real estate
Pass		94,979		179,838		100,852		55,222		34,531		53,597		109,227		3,032		631,278
Watch		171		71		319		289		-		108		1,714		-		2,672
Special mention		-		-		-		-		-		54		-		-		54
Substandard		198		905		-		-		164		2,908		339		-		4,514
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		95,348		180,814		101,171		55,511		34,695		56,667		111,280		3,032		638,518
YTD gross charge-offs		-		-		-		-		-		(9)		-		-		(9)

Construction and land development
Pass		95,692		166,355		50,591		4,188		5,162		7,265		35,908		1,797		366,958
Watch		4,194		399		451		-		-		2		-		-		5,046
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		36		620		-		408		-		-		1,064
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		99,886		166,754		51,078		4,808		5,162		7,675		35,908		1,797		373,068
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		137,793		174,721		67,809		24,379		11,313		26,674		164,939		8,006		615,634
Watch		-		631		214		129		75		75		138		-		1,262
Special mention		-		-		-		-		-		-		-		13		13
Substandard		206		-		-		-		-		-		-		-		206
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		137,999		175,352		68,023		24,508		11,388		26,749		165,077		8,019		617,115
YTD gross charge-offs		-		(154)		(50)		(183)		-		-		-		-		(387)

Leases
Pass		23,304		29,453		10,074		4,459		933		315		-		-		68,538
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		23,304		29,453		10,074		4,459		933		315		-		-		68,538
YTD gross charge-offs		(27)		(163)		(9)		-		(12)		-		-		-		(211)

Consumer and other
Pass		5,539		2,314		1,060		671		148		229		4,538		73		14,572
Watch		-		-		-		-		12		-		-		-		12
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		5,539		2,314		1,060		671		160		229		4,538		73		14,584
YTD gross charge-offs		(22)		(115)		(62)		(48)		(26)		(59)		-		-		(332)

Total loans
Pass		525,524		1,106,294		666,854		276,107		193,335		206,502		329,490		21,071		3,325,177
Watch		25,030		2,370		3,402		3,070		3,935		452		1,852		-		40,111
Special mention		-		3,234		-		-		-		54		-		13		3,301
Substandard		1,372		905		3,181		671		164		3,778		339		-		10,410
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	551,926	$	1,112,803	$	673,437	$	279,848	$	197,434	$	210,786	$	331,681	$	21,084	$	3,378,999
Total YTD gross charge-offs	$	(49)	$	(432)	$	(121)	$	(231)	$	(38)	$	(68)	$	-	$	-	$	(939)

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Nine Months Ended September 30,

2022

2021


Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans and leases without a valuation allowance:








Commercial real estate

$
152

$
—

$
1,000

$
1
Consumer real estate

1,839

92

1,778

39
Construction and land development

—

—

—

—
Commercial and industrial

—

—

—

—
Leases

—

—

—

—
Consumer and other

—

—

—

—

1,991

92

2,778

40
Impaired loans and leases with a valuation allowance:






Commercial real estate

429

—

1,218

104
Consumer real estate

87

—

352

11
Construction and land development

429

—

—

—
Commercial and industrial

32

—

141

7
Leases

—

—

—

—
Consumer and other

—

—

—

—

977

—

1,711

122
PCI loans and leases:








Commercial real estate

765

46

410

27
Consumer real estate

879

40

1,169

64
Construction and land development

—

—

—

—
Commercial and industrial

—

—

263

3
Leases

—

—

—

—
Consumer and other

2

—

15

—

1,646

86

1,857

94
Total impaired loans and leases

$
4,614

$
178

$
6,346

$
256

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating as of December 31, 2022, prior to the adoption of ASU 2016-13 (in thousands):


	December 31, 2022
					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
Pass	$	1,579,387	$	576,428	$	399,846	$	545,210	$	66,459	$	16,057	$	3,183,387
Watch		29,810		1,496		224		4,523		—		19		36,072
Special mention		2,539		35		—		61		—		—		2,635
Substandard		79		1,666		902		180		—		15		2,842
Doubtful		—		—		—		—		—		—		—
Total		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936

PCI Loans and Leases:
Pass		11,924		6,927		1,054		1,893		968		3		22,769
Watch		1,439		188		46		—		—		—		1,673
Special mention		11		54		—		—		—		—		65
Substandard		2,572		1,183		429		—		—		—		4,184
Doubtful		—		—		—		—		—		—		—
Total		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

Past Due Loans and Leases:

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

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


	September 30, 2023
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	862	$	—	$	—	$	862	$	1,666,314	$	1,667,176
Consumer real estate		706		401		34		1,141		637,377		638,518
Construction and land development		110		408		—		518		372,550		373,068
Commercial and industrial		1,384		945		98		2,427		614,688		617,115
Leases		118		—		—		118		68,420		68,538
Consumer and other		95		—		97		192		14,392		14,584
Total	$	3,275	$	1,754	$	229	$	5,258	$	3,373,741	$	3,378,999


	December 31, 2022
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	54	$	—	$	—	$	54	$	1,627,707		1,627,761
Consumer real estate		594		—		—		594		587,383		587,977
Construction and land development		—		—		—		—		402,501		402,501
Commercial and industrial		185		18		—		203		551,664		551,867
Leases		1,024		84		143		1,251		66,176		67,427
Consumer and other		103		4		—		107		15,987		16,094
Total	$	1,960	$	106	$	143	$	2,209	$	3,251,418	$	3,253,627

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at September 30, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at September 30, 2023 for which there was no related allowance for credit losses recorded (in thousands):


	September 30, 2023						December 31, 2022
	Total		Nonaccrual		Loans Past Due		Total		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		Still Accruing
Commercial real estate	$	741	$	—	$	—	$	—	$	—
Consumer real estate		2,064		1,154		34		1,665		—
Construction and land development		620		—		—		920		—
Commercial and industrial		314		—		98		180		—
Leases		195		—		—		28		143
Consumer and other		—		—		97		15		—
Total	$	3,934	$	1,154	$	229	$	2,808	$	143

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


	September 30, 2023
	Real Estate		Other		Total
Commercial real estate	$	3,836	$	—	$	3,836
Consumer real estate		2,434		—		2,434
Construction and land development		1,411		—		1,411
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
Total	$	7,681	$	—	$	7,681

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Impaired Loans and Leases:

The following table presents impaired loans at December 31, 2022, as determined under ASC 310 prior to the adoption of ASU 2016-13. A loan or lease held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan or lease agreement. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2022, by loan classification (in thousands):


	December 31, 2022
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—	$	—
Consumer real estate		1,283		1,282		—
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,283		1,282		—
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—		—
Consumer real estate		—		—		—
Construction and land development		858		858		385
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		858		858		385
PCI loans and leases:
Commercial real estate		500		580		6
Consumer real estate		684		646		115
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,184		1,226		121
Total impaired loans and leases	$	3,325	$	3,366	$	506

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three and nine months ended September 30, 2022, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Three Months Ended September 30, 2022
	Average		Interest
	Recorded		Income
	Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	304	$	—
Consumer real estate		1,742		72
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		2,046		72
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—
Consumer real estate		—		—
Construction and land development		858		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		858		—
PCI loans and leases:
Commercial real estate		525		11
Consumer real estate		880		12
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		1,405		23
Total impaired loans and leases	$	4,309	$	95


	Nine Months Ended September 30, 2022
	Average		Interest
	Recorded		Income
	Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	152	$	—
Consumer real estate		1,839		92
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		1,991		92
Impaired loans and leases with a valuation allowance:
Commercial real estate		429		—
Consumer real estate		87		—
Construction and land development		429		—
Commercial and industrial		32		—
Leases		—		—
Consumer and other		—		—
		977		—
PCI loans and leases:
Commercial real estate		765		46
Consumer real estate		879		40
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		2		—
		1,646		86
Total impaired loans and leases	$	4,614	$	178

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

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


					Payment Delay				Total Class
	Payment		Term		and Term				of Financing
Three months ended September 30, 2023	Delay		Extension		Extension		Total		Receivable
Commercial real estate	$	—	$	528	$	—	$	528	0.03	%
Consumer real estate		—		514		—		514	0.08
Construction and land development		—		748		—		748	0.20
Commercial and industrial		—		—		—		—	-
Leases		—		—		—		—	-
Consumer and other		—		—		—		—	-
Total	$	—	$	1,790	$	—	$	1,790	0.05	%


Nine months ended September 30, 2023
Commercial real estate	$	403	$	566	$	—	$	969	0.06	%
Consumer real estate		—		514		—		514	0.08
Construction and land development		—		748		—		748	0.20
Commercial and industrial		63		—		153		216	0.04
Leases		—		—		—		—	-
Consumer and other		—		—		—		—	-
Total	$	466	$	1,828	$	153	$	2,447	0.07	%

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


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


Nine months ended September 30, 2023
Commercial real estate		23	$	23
Consumer real estate		15		—
Construction and land development		9		—
Commercial and industrial		30		7
Leases		—		—
Consumer and other		—		—

~~Troubled Debt Restructurings:~~No loan modifications made to borrowers experiencing financial difficulty, defaulted during the three and nine months ended September 30, 2023.

~~For the periods presented, impaired~~

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The table below shows an age analysis of loans ~~included loans~~and leases made to borrowers experiencing financial difficulty that were classified as troubled debt restructurings (“TDRs”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

~~In assessing whether~~modified on or ~~not a borrower is experiencing financial difficulties,~~after January 1, 2023, that date 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~~ adopted ASU 2022-02 (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.thousands):

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.


	September 30, 2023
					90 Days
			30-89 Days		or More
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial real estate	$	—	$	—	$	—	$	968	$	968
Consumer real estate		139		—		—		376		515
Construction and land development		288		—		—		460		748
Commercial and industrial		—		—		—		216		216
Leases		—		—		—		—		—
Consumer and other		—		—		—		—		—
Total	$	427	$	—	$	—	$	2,020	$	2,447

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, 2022, and~~ December 31, ~~2021,~~2022, prior to the adoption ASU 2022-02, management had approximately ~~$108~~$101 thousand ~~and $206 thousand, respectively, in loans~~ that ~~met~~meet the criteria ~~for TDR,~~of trouble debt restructured (“TDR”), none 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 ~~are~~were no loans ~~that were~~ modified as a TDR during the nine months ended September 30, ~~2022 and 2021, respectively. There were no loans that were modified as TDRs during the past nine months and for which there was a subsequent payment default.~~2022.

Foreclosure Proceedings and Balances:

As of September 30, ~~2022,~~2023, there were notwo residential real estate properties totaling $304 thousand secured by real estate included in other real estate owned and there were ~~three~~no residential real estate ~~loan~~loans in the process of foreclosure.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

~~Purchased Credit Impaired Loans and Leases:~~

The Company has acquired loans and leases 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 and leases are as follows ~~(in thousands)~~:

September 30,

December 31,


2022

2021
Commercial real estate

$
26,622

$
31,600
Consumer real estate

10,599

14,215
Construction and land development

3,052

3,699
Commercial and industrial

2,470

3,424
Leases

1,754

3,557
Consumer and other

34

125
Total loans and leases

44,531

56,620
Less: Remaining purchase discount

(14,130)

(15,273)
Total loans and leases, net of purchase discount

30,401

41,347
Less: Allowance for loan and leases losses

(167)

(179)
Carrying amount, net of allowance

$
30,234

$
41,168

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021
Accretable yield, beginning of period

$
15,736

$
14,522

$
14,618

$
16,889
Additions

—

4,072

—

4,721
Accretion income

(839)

(2,151)

(2,780)

(5,180)
Reclassification

1,729

254

2,127

1,931
Other changes, net

(415)

(1,034)

2,246

(2,698)
Accretable yield, end of period

$
16,211

$
15,663

$
16,211

$
15,663

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. ~~For 2021,~~Considering the recent economic conditions, the Company performed a Step 1 goodwill impairment test (which compares the fair value of a reporting unit with its carrying amount, including goodwill) at June 30, 2023, and the results ofindicated that there was no impairment. Management will continue to evaluate the ~~qualitative assessment provided no indication of potential impairment.~~economic conditions at future reporting periods for applicable changes.

The Company’s other intangible assets consist of core deposit, customer relationships and tradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the customer relationships are amortized over a weighted average of 10.4 years and the tradename is amortized over five years.

2829

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,		September 30,		December 31,
	2022		2021		2023		2022
Goodwill:
Balance, beginning of period	$	91,565	$	74,135	$	96,145	$	91,565
Acquisition of PFG		—		323
Acquisition of Fountain		—		2,400
Acquisition of SCB		—		17,171
Acquisition of Sunbelt		4,580		—		—		4,580
Adjustment, due to sale		—		(2,464)
Balance, end of the period	$	96,145	$	91,565	$	96,145	$	96,145


	Core Deposit		Customer Relationships		Tradename				Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:	Intangibles		Intangibles		Intangibles		Total		Intangibles		Intangibles		Intangibles		Total
September 30, 2022:
September 30, 2023:
Beginning balance January 1, 2023, gross									$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization										(9,329)		(2,164)		(63)		(11,556)
Balance, September 30, 2023, other intangible assets, net									$	8,141	$	3,506	$	-	$	11,647

December 31, 2022:
Beginning balance January 1, 2022, gross	$	17,470	$	3,722	$	63	$	21,255	$	17,470	$	3,722	$	63	$	21,255
Acquisition of Sunbelt		-		1,948		-		1,948		-		1,948		-		1,948
Balance, September 30, 2022, other intangible assets, gross		17,470		5,670		63		23,203
Balance, December 31, 2022, other intangible assets, gross										17,470		5,670		63		23,203
Less: accumulated amortization		(7,575)		(1,280)		(33)		(8,888)		(8,021)		(1,519)		(36)		(9,576)
Balance, September 30, 2022, other intangible assets, net	$	9,895	$	4,390	$	30	$	14,315
Balance, December 31, 2022, other intangible assets, net									$	9,449	$	4,151	$	27	$	13,627

December 31, 2021:
Beginning balance January 1, 2021, gross	$	15,920	$	1,064	$	63	$	17,047
Acquisition of Fountain		-		2,658		-		2,658
Acquisition of SCB		1,550		-		-		1,550
Balance, December 31, 2021, other intangible assets, gross		17,470		3,722		63		21,255
Less: accumulated amortization		(6,212)		(733)		(23)		(6,968)
Balance, December 31, 2021, other intangible assets, net	$	11,258	$	2,989	$	40	$	14,287

The aggregate amortization expense for other intangible assets for the three and nine months ended September 30, ~~2022,~~2023, was ~~$650~~$647 thousand and ~~$1.9~~$2.0 million, respectively, and for the three and nine months ended September 30, ~~2021,~~2022, was ~~$711~~$650 thousand and ~~$1.6~~$1.9 million, ~~respectively,~~respectively.

~~The~~As of September 30, 2023, the estimated aggregate amortization expense for future periods for intangibles is as follows (in thousands):


Remainder of 2022	$	688
2023		2,609
Remainder of 2023			$	643
2024		2,438		2,425
2025		2,258		2,256
2026		2,086		2,086
2027				1,904
Thereafter		4,236		2,333
Total	$	14,315	$	11,647

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Note 7. Borrowings, Line of Credit and Subordinated Debt

Borrowings:

At September 30, ~~2022,~~2023, total borrowings were ~~$18.4~~$14.1 million compared to ~~$87.6~~$41.9 million at December 31, ~~2021. During the nine month period ending September 30, 2022, the FHLB called two advances totaling $75 million.~~2022. Borrowings consist of the following (~~dollars~~ in thousands):


	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Securities sold under customer repurchase agreements	$	5,923	$	5,085	$	6,117	$	4,775
FHLB borrowings		—		75,000
Loan participation agreements⁽¹⁾						—		24,585
Other borrowings		12,500		7,500		8,000		12,500
Total	$	18,423	$	87,585	$	14,117	$	41,860

(1)

During the first quarter of 2023, the loan participation agreements were amended to permit sales accounting treatment and removed from other borrowings.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Securities Sold Under Agreements to Repurchase:

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis.

The Company had securities sold under agreements to repurchase with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was ~~$9.3~~$7.6 million and ~~$10.1~~$9.2 million at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The average balance of repurchase agreements during the ~~nine month~~nine-month period ended September 30, 2023, and 2022 ~~and 2021~~ was ~~$5.2~~$5.0 million and ~~$5.4~~$5.2 million, respectively. The maximum month-end outstanding balance for the ~~nine month~~nine-month period ended September 30, 2023, and 2022 ~~and 2021~~ was ~~$5.9~~$6.1 million and ~~$7.2~~$5.9 million, respectively.

Other Borrowings:

The Company has a ~~Loan and Security Agreement and~~ revolving line of credit for an aggregate amount of ~~$25~~$35 million. The maturity of the line of credit is ~~March 24, 2023.~~February 1, 2025. At September 30, ~~2022, $12.5~~2023, $8.0 million was outstanding under the line of credit, and ~~$12.5~~$27.0 million of the line of credit remained available to the Company.

Subordinated Debt:

On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which was outstanding as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. Unamortized debt issuance cost was ~~$506~~$422 thousand and ~~$570~~$485 thousand at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

The Notes initially bears interest at a rate of 5.625% per annum from and including September 28, 2018, to but excluding October 2, 2023, with interest during this period payable semi-annually in arrears. From and including October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate will, with the sunset of LIBOR, reset quarterly to an annual floating rate equal to three-month ~~LIBOR, or an alternative rate determined in accordance with the terms of the Notes if three-month LIBOR cannot be determined,~~CME Term SOFR, plus ~~255~~281.161 basis points, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company, in whole or in part, on or after October 2, 2023, and at any time, in whole but not in part, upon the occurrence of certain events. The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

The ~~Notes~~Notes’ unamortized debt issuance costs totaled ~~$506~~$422 thousand at September 30, ~~2022,~~2023, and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand and $63 thousand for the three and nine months ended September 30, 2023, and 2022, ~~and 2021,~~ respectively.

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

On September 1, 2021, the Company acquired $2.5 million of subordinated notes (“sub-debt”) from the acquisition of SCB. The sub-debt bears interest at a rate of 6.75% per annum until August 14, 2024, with the interest during this period payable semi-annually in arrears. From and including August 14, 2024, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, or an alternative rate determined in accordance with the terms of the sub-debt if three-month LIBOR cannot be determined, plus 530.25 basis points, with interest during this period payable quarterly in arrears. In relation to the three-month LIBOR rate being no longer available in the future, the Company anticipates using the three-month term SOFR rate in future repricing. The sub-debt is redeemable by the Company, in whole or in part, on or after August 14, 2024, and at any time, in whole but not in part, upon the occurrence of certain events. The sub-debt has been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8. Employee Benefit Plans

401(k) Plan:

The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After 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~~three- and ~~nine month~~nine-month periods ending September 30, ~~2022,~~2023, was ~~$419~~$475 thousand and ~~$1,266 thousand,~~$1.4 million, respectively. The Company’s contribution to the Plan for the three and nine months ended September 30, ~~2021,~~2022, was ~~$287~~$419 thousand and ~~$925 thousand,~~$1.3 million, respectively.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At September 30, ~~2022,~~2023, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has ~~1,766,245~~1,676,663 Rights available for future grants or awards.

The Company’s 2015 Stock Incentive Plan has 11,840 Rights issued. In addition, the Company has ~~30,790~~4,500 Rights issued from the Cornerstone Non-Qualified Plan ~~Options. This plan~~Options, which does 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, 2021	79,667	$	10.17
Outstanding at December 31, 2022				32,045	$	12.04
Granted	—		—	—		—
Exercised	(32,003)		8.43	(15,705)		10.47
Forfeited	(2,369)		11.90	—		—
Outstanding at September 30, 2022	45,295	$	11.31
Outstanding at September 30, 2023				16,340	$	13.55

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

Information pertaining to stock options outstanding at September 30, ~~2022,~~2023, is as follows:


		Options Outstanding				Options Exercisable				Options Outstanding				Options Exercisable
			Weighted-								Weighted-
			Average	Weighted-			Weighted-				Average	Weighted-			Weighted-
			Remaining	Average			Average				Remaining	Average			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
$	9.48	14,290	0.45 years	$	9.48	14,290	$	9.48	9.60	4,500	0.42 years	$	9.60	4,500	$	9.60
	9.60	16,500	1.19 years		9.60	16,500		9.60	15.05	11,840	2.00 years		15.05	11,840		15.05
	15.05	14,505	2.67 years		15.05	14,505		15.05
Outstanding, end of period	Outstanding, end of period	45,295	1.43 years	$	11.31	45,295	$	11.31	Outstanding, end of period	16,340	1.57 years	$	13.55	16,340	$	13.55

The Company did not recognize any stock option-based compensation expense during the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively, as all stock options issued are fully vested, and no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

The intrinsic value of options exercised during the three and nine months ended September 30, 2022, was $9 thousand and $565 thousand. No stock options were exercised during the three months ended September 30, 2021. The intrinsic value of options exercised during the nine months ended September 30, 2021, was $220 thousand. The aggregate intrinsic value of total options outstanding and exercisable options at September 30, 2022, was $607 thousand. Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2022, was $270 thousand.

Stock options of 603 and 32,003 shares were exercised during the three and nine month periods ended September 30, 2022, respectively. No stock options were exercised during the three months ended September 30, 2021. Stock options of 19,040 shares were exercised during the nine month period ended September 30, 2021. The income tax benefit recognized for the exercise of options during the three and nine months ended September 30, 2022, was a benefit of $64 thousand and $147 thousand, respectively, and for the nine months ended September 30, 2021, was a benefit of $9 thousand.

~~Restricted Stock Awards:~~

~~A summary of the activity of the Company’s unvested restricted stock awards for the period ended September 30, 2022, is presented below:~~

Weighted

Average

Grant-Date

Number

Fair Value
Balance at December 31, 2021

144,367

$
19.49
Granted

23,115

26.57
Vested

(34,146)

24.13
Forfeited/expired

(3,500)

16.44
Balance at September 30, 2022

129,836

$
19.61

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, 2022, was $281 thousand and $991 thousand, respectively, and was $163 thousand and $525 thousand, during the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was $1.2 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of ~~2.08~~ ~~years. The grant-date fair value of restricted stock awards vested was $824 thousand for the nine months ended September 30, 2022.~~

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

No stock options were exercised during the three months ended September 30, 2023. Stock options of 15,705 shares were exercised during the nine-month period ended September 30, 2023. Stock options of 603 and 32,003 shares were exercised during the three- and nine-month periods ended September 30, 2022, respectively. The income tax benefit recognized for the exercise of options during the nine months ended September 30, 2023, was a benefit of $60 thousand, and for the three and nine months ended September 30, 2022, was a benefit of $64 thousand and a benefit of $147 thousand, respectively.

No stock options were exercised during the three months ended September 30, 2023. The intrinsic value of options exercised during the nine months ended September 30, 2023, was $242 thousand, and $9 thousand and $565 thousand, during the three and nine months ended September 30, 2022, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at September 30, 2023, was $128 thousand. Cash received from options exercised under all share-based payment arrangements for the nine months ended September 30, 2023, was $165 thousand.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended September 30, 2023, is presented below:


		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2022	129,836	$	19.61
Granted	89,582		26.23
Vested	(27,172)		23.39
Forfeited/expired	(9,912)		22.45
Balance at September 30, 2023	182,334	$	22.15

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, 2023, was $271 thousand and $1.2 million, respectively, and was $281 thousand and $991 thousand, during the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was $1.8 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of 1.97 years. The grant-date fair value of restricted stock awards vested was $636 thousand for the nine months ended September 30, 2023.

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, 2022	36,000	$	18.25
Granted	—		—
Exercised	(8,000)		15.19
Forfeited	—		—
Outstanding at September 30, 2023	28,000	$	19.13

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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

Weighted

Average


Number

Exercisable Price
Outstanding at December 31, 2021

55,000

$
18.21
Granted

—

—
Exercised

(12,500)

18.12
Forfeited

—

—
Outstanding at September 30, 2022

42,500

$
18.23

Information pertaining to SARs outstanding at September 30, ~~2022,~~2023, 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	16,000	1.25 years	$	15.19	—	$	—	15.19	8,000	0.25 years	$	15.19	8,000	$	15.19
	18.12	6,500	0.25 years		18.12	6,500		18.12	20.70	20,000	1.25 years		20.70	—		—
	20.70	20,000	2.25 years		20.70	—		—	Outstanding, end of period	28,000	0.97 years	$	19.13	8,000	$	15.19
	Outstanding, end of period	42,500	1.57 years	$	18.23	6,500	$	18.12

SARs compensation expense of ~~$31~~$5 thousand and ($~~12)~~118) thousand was recognized for the three and nine months ended September 30, ~~2022,~~2023, respectively, and ~~$49~~$31 thousand and ~~$162~~($12) thousand for the three and nine months ended September 30, ~~2021.~~2022. The credit ~~in expense~~adjustment for the ~~nine month period~~nine-month periods ended September 30, 2023, and September 30, 2022, ~~was due to adjustments~~respectively, is related to the fair value evaluation of SARs.

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.

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


	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Commitments to extend credit	$	885,945	$	669,770	$	746,921	$	911,998
Standby letters of credit		16,111		17,868		15,567		6,897

At September 30, 2023, and December 31, 2022, the allowance for these off-balance sheet commitments was $2.3 million and $85 thousand, respectively. With the adoption of ASU 2016-13, effective January 1, 2023, there was an increase in the allowance of $3.0 million on these off-balance sheet commitments. The expense (credit) related to the allowance for off-balance sheet commitments during the three and nine months ended September 30, 2023, was ($489) thousand and ($795) thousand, respectively, and was $0 thousand and $15 thousand, during the three and nine months ended September 30, 2022, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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, ~~2022~~2023 and December 31, ~~2021,~~2022, 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.

Fair Value Hierarchy:

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

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

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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

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

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

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

~~The following methodologies were used by the Company in estimating fair value disclosures for financial instruments:~~

~~Securities available-for-sale~~ - The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

The following methodologies were used by the Company in estimating fair value disclosures for financial instruments:

Securities available-for-sale – The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.

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

Recurring Measurements of Fair Value:

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


			Quoted Prices in		Significant		Significant				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, 2022:
September 30, 2023:
Assets:
Securities available-for-sale:
U.S. Treasury	$	221,776	$	—	$	221,776	$	—	$	73,733	$	—	$	73,733	$	—
U.S. Government-sponsored enterprises (GSEs)		1,633		—		1,633		—		60,953		—		60,953		—
Municipal securities		54,117		—		54,117		—		17,505		—		17,505		—
Other debt securities		28,841		—		28,841		—		30,626		—		30,626		—
Mortgage-backed securities (GSEs)		213,356		—		213,356		—		202,314		—		202,314		—
Total securities available-for-sale		519,723		—		519,723		—		385,131		—		385,131		—

Derivative financial instruments and interest rate swap agreements		12,433		—		12,433		—		16,191		—		16,191		—
Total assets at fair value	$	532,156	$	—	$	532,156	$	—	$	401,322	$	—	$	401,322	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	12,457	$	—	$	12,457	$	—	$	17,647	$	—	$	17,647	$	—

December 31, 2021:
December 31, 2022:
Assets:
Securities available-for-sale:
U.S. Treasury	$	137,758			$	137,758	$	—	$	223,653	$	—	$	223,653	$	—
U.S. Government-sponsored enterprises (GSEs)		21,801		—		21,801		—		1,575		—		1,575		—
Municipal securities		67,820		—		67,820		—		18,611		—		18,611		—
Other debt securities		27,220		—		27,220		—		30,551		—		30,551		—
Mortgage-backed securities (GSEs)		227,854		—		227,854		—		209,503		—		209,503		—
Total securities available-for-sale		482,453		—		482,453		—		483,893		—		483,893		—

Interest rate swaps agreements for customer loans		1,326		—		1,326		—
Derivative financial instruments and interest rate swap agreements										11,834		—		11,834		—
Total assets at fair value	$	483,779	$	—	$	483,779	$	—	$	495,727	$	—	$	495,727	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	4,893	$	—	$	4,893	$	—	$	13,110	$	—	$	13,110	$	—

During the nine months ending September 30, 2023 and twelve months ended December 31, 2022, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Assets Measured at Fair Value on a Nonrecurring Basis:

Under certain circumstances management adjusts fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):


			Quoted Prices in		Significant		Significant				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, 2022:
September 30, 2023:
Collateral dependent loans	$	1,691	$	—	$	—	$	1,691	$	4,315	$	—	$	—	$	4,315
Other real estate owned		27		—		—		27		271		—		—		271

December 31, 2021:
December 31, 2022:
Collateral dependent loans	$	2,280	$	—	$	—	$	2,280	$	1,536	$	—	$	—	$	1,536
Other real estate owned		367		—		—		367		915		—		—		915

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, 2022:
September 30, 2023:
Collateral dependent loans	$	1,691	Appraisal	Appraisal discounts	25	%	$	4,315	Appraisal	Appraisal discounts	39	%
Other real estate owned		27	Appraisal	Appraisal discounts	10	%		271	Appraisal	Appraisal discounts	26	%

December 31, 2021:
December 31, 2022:
Collateral dependent loans	$	2,280	Appraisal	Appraisal discounts	25	%	$	1,536	Appraisal	Appraisal discounts	25	%
Other real estate owned		367	Appraisal	Appraisal discounts	13	%		915	Appraisal	Appraisal discounts	29	%

Collateral dependent loans: A collateral dependent loan is measured based on the fair value of the collateral securing these loans, less selling costs. Collateral dependent loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above. The amount of valuation allowance on collateral dependent loans was $2.8 million and $506 thousand as of September 30, 2023, and December 31, 2022, respectively.

Other real estate owned: Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The 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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, the difference is recognized in noninterest expense.

Carrying value and estimated fair value:

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


	Fair Value Measurements Using										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, 2022:
September 30, 2023:
Assets:
Cash and cash equivalents	$	543,029	$	543,029	$	—	$	—	$	543,029	$	400,258	$	400,258	$	—	$	—	$	400,258
Securities available-for-sale		519,723		—		519,723		—		519,723		385,131		—		385,131		—		385,131
Securities held-to-maturity		287,104		—		256,976		—		256,976		282,313		—		256,325		—		256,325
Other investments		15,528		N/A		N/A		N/A		N/A		13,805		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,079,089		—		—		2,992,294		2,992,294		3,348,046		—		—		3,210,772		3,210,772
Derivative financial instruments and interest rate swap agreements		12,433		—		12,433		—		12,433		16,191		—		16,191		—		16,191

Liabilities:
Noninterest-bearing demand deposits		1,186,209		—		1,186,209		—		1,186,209		923,763		—		923,763		—		923,763
Interest-bearing demand deposits		962,901		—		962,901		—		962,901		993,717		—		993,717		—		993,717
Money market and savings deposits		1,663,355		—		1,663,355		—		1,663,355		1,766,409		—		1,766,409		—		1,766,409
Time deposits		467,944		—		466,371		—		466,371		562,620		—		558,744		—		558,744
Borrowings		18,423		—		18,423		—		18,423		14,117		—		14,117		—		14,117
Subordinated debt		41,994		—		—		40,202		40,202		42,078		—		—		39,650		39,650
Derivative financial instruments and interest rate swap agreements		12,457		—		12,457		—		12,457		17,647		—		17,647		—		17,647

December 31, 2021:
December 31, 2022:
Assets:
Cash and cash equivalents	$	1,045,077	$	1,045,077	$	—	$	—	$	1,045,077	$	266,424	$	266,424	$	—	$	—	$	266,424
Securities available-for-sale		482,453		—		482,453		—		482,453		483,893		—		483,893		—		483,893
Securities held-to-maturity		76,969		—		76,946				76,946		285,949		—		260,613				260,613
Other investments		16,494		N/A		N/A		N/A		N/A		15,530		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		2,679,148		—		—		2,676,181		2,676,181		3,232,045		—		—		3,143,921		3,143,921
Interest rate swaps agreements for customer loans		1,326		—		1,326		—		1,326
Derivative financial instruments and interest rate swap agreements												11,834		—		11,834		—		11,834

Liabilities:
Noninterest-bearing demand deposits		1,055,125		—		1,055,125		—		1,055,125		1,072,449		—		1,072,449		—		1,072,449
Interest-bearing demand deposits		899,158		—		899,158		—		899,158		965,911		—		965,911		—		965,911
Money market and savings deposits		1,493,007		—		1,493,007		—		1,493,007		1,583,481		—		1,583,481		—		1,583,481
Time deposits		574,648		—		576,598		—		576,598		455,259		—		451,899		—		451,899
Borrowings		87,585		—		88,082		—		88,082		41,860		—		41,860		—		41,860
Subordinated debt		41,930		—		—		43,374		43,374		42,015		—		—		40,439		40,439
Derivative financial instruments and interest rate swap agreements		4,893		—		4,893		—		4,893		13,110		—		13,110		—		13,110

Limitations:

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

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

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument, as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk, are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of 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 adopted ASU 2017-12, Derivatives and Hedging (Topic 815) -– Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations.

~~A summary~~During the fourth quarter of 2022 the ~~Company’s fair value hedge relationships for the periods presented are as follows~~ ~~(dollars in thousands)~~:

Weighted








Average

Balance

Remaining

Weighted

Sheet

Maturity

Average

Receive

Notional

Estimated
Asset/Liability derivatives

Location

(In Years)

Pay Rate

Rate

Amount

Fair Value
September 30, 2022:

Interest rate swap agreements - securities

Other assets

5.45

3.09
%
3 month LIBOR

$
36,000

$
1,752

December 31, 2021:

Interest rate swap agreements - securities

Other liabilities

6.20

3.09
%
3 month LIBOR

$
36,000

$
(3,567)

Company dissolved this hedging relationship. The effects of the Company’s fair value hedge relationships reported in interest income in 2022 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		Nine Months Ended
	September 30,				September 30,				September 30,		September 30,
	2022		2021		2022		2021		2022		2022
Interest income on tax-exempt securities	$	403	$	549	$	1,183	$	1,675	$	403	$	1,183
Effects of fair value hedge relationships		(83)		(218)		(527)		(781)		(83)		(527)
Reported interest income on tax-exempt securities	$	320	$	331	$	656	$	894	$	320	$	656


	Three Months Ended				Nine Months Ended				Three Months Ended		Nine Months Ended
	September 30,				September 30,				September 30,		September 30,
Gain (loss) on fair value hedging relationship	2022		2021		2022		2021		2022		2022
Interest rate swap agreements - securities:
Hedged items	$	1,808	$	288	$	5,319	$	1,994	$	1,808	$	5,319
Derivative designated as hedging instruments	$	(1,808)	$	(288)	$	(5,319)	$	(1,994)		(1,808)		(5,319)
Carry amount of hedged assets - securities available-for-sale	$	36,165	$	43,258	$	36,165	$	43,258		36,165		36,165

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Derivatives Designated as Cash Flow Hedges:

~~During the third quarter of 2022, the~~The Company ~~entered~~enters into interest rate ~~derivatives~~derivative contracts on assets and liabilities that ~~were~~are designated as qualifying cash flow hedges. The Company hedges ~~to hedge~~ the exposure to variability in expected future cash flows attributable to changes in ~~a contractually~~contractual specified interest ~~rate. Specifically, the Company executed $100 million, notional amount, in interest rate collars to hedge the variable rate index on a portion of the Company’s commercial loan portfolio.~~rates. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in ~~achieving~~ offsetting cash flows attributable to the hedged ~~risk during the term of the hedge if a cash flow hedge.~~risk. At inception, a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in ~~AOCI~~accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see -– Consolidated Statements of Comprehensive Income (Loss). Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability, as future interest payments are made on the underlying assets. At September 30, ~~2022, no interest expense or interest income is expected to be reclassified from AOCI over~~2023, the Company estimates that in the next 12 ~~months.~~ months an additional $797 thousand will be reclassified as a decrease in interest income and $969 thousand will be reclassified as a decrease in interest expense.

At September 30, 2023 and December 31, 2022, cash flow hedges are as follows (in thousands):


		September 30, 2022				December 31, 2021					September 30, 2023				December 31, 2022
	Balance Sheet	Notional		Estimated		Notional		Estimated		Balance Sheet	Notional		Estimated		Notional		Estimated
	Location	Amount		Fair Value		Amount		Fair Value		Location	Amount		Fair Value		Amount		Fair Value
Cash flow hedges:
Assets	Other assets	$	-	$	-	$	-	$	-	Other assets	$	150,000	$	698	$	-	$	-
Liabilities	Other liabilities		100,000		(1,775)		-		-	Other liabilities		100,000		(2,165)		100,000		(1,304)

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



Derivatives in cash flow hedging relationships:		Amount of Gain (Loss) Recognized on OCI on Derivative	Location of Gain or (Loss) Recognized from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income
Three months ended September 30, 2023
Interest rate swaps - Assets	$	(432)	Interest income	$	(173)
Interest rate swaps - Liabilities		585	Interest expense		(157)

Three months ended September 30, 2022
Interest rate swaps - Assets	$	(1,775)	—	$	—
Interest rate swaps - Liabilities		—	—		—

Nine months ended September 30, 2023
Interest rate swaps - Assets	$	(2,165)	Interest income	$	(275)
Interest rate swaps - Liabilities		698	Interest expense		(165)

Nine months ended September 30, 2022
Interest rate swaps - Assets	$	(1,775)	—	$	—
Interest rate swaps - Liabilities		—	—		—

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Total interest income	$	55,448	$	—	$	160,823	$	—
Effects of cash flow hedge relationships		(173)		—		(275)		—
Reported total interest income	$	55,275	$	—	$	160,548	$	—

Total interest expense	$	24,426	$	—	$	62,150	$	—
Effects of cash flow hedge relationships		(157)		—		(165)		—
Reported total interest expense	$	24,269	$	—	$	61,985	$	—

Non-hedged derivatives:

~~During the second quarter of 2021, the~~The Company ~~initiated~~provides a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value isare recognized as other noninterest income in the current period.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):


	September 30, 2022				December 31, 2021				September 30, 2023				December 31, 2022
		Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	150,997	$	10,682	$	48,125	$	1,326	$	243,239	$	15,482	$	216,656	$	11,834
Liabilities		150,997		(10,682)		48,125		(1,326)		243,239		(15,482)		216,656		(11,834)

The Company establishes limits and monitors exposures for customer swap positions. Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income. Such fees were as follows (in thousands):

~~Table of Contents~~

~~SMARTFINANCIAL, INC. AND SUBSIDIARY~~

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Interest rate swap agreements	$	53	$	479	$	1,449	$	489	$	326	$	53	$	823	$	1,449

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes. At September 30, ~~2022~~2023, collateral totaling $910 thousand and $1.4 million at December 31, ~~2021, collateral totaling $6.7 million and $2.4 million, respectively,~~2022, was pledged to the derivative counterparties to comply with collateral requirements.

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 12. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company follows the guidance of ASU No. 2016-02 and all subsequent ASUs that modified this topic (collectively referred to as ~~"Topic 842"~~“Topic 842”).

Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2034. All of our leases are classified as operating leases. Operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.

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


		September 30,		December 31,			September 30,		December 31,
	Classification	2022		2021		Classification	2023		2022
Assets:
Operating lease right-of-use assets	Other assets	$	8,889	$	9,812	Other assets	$	10,097	$	9,314
Liabilities:
Operating lease liabilities	Other liabilities	$	9,015	$	9,881	Other liabilities	$	10,345	$	9,457

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.

As of September 30, ~~2022,~~2023, the weighted average remaining lease term was ~~9.48~~9.18 years and the weighted average discount rate was ~~2.16%~~2.86%.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Lease costs:
Operating lease costs	$	438	$	403	$	1,247	$	1,220
Variable lease costs		30		26		87		76
Total	$	468	$	429	$	1,334	$	1,296
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	393	$	385	$	1,142	$	1,163

4142

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021

2022

2021
Lease costs:








Operating lease costs

$
403

$
270

$
1,220

$
764
Variable lease costs

26

18

76

66
Total

$
429

$
288

$
1,296

$
830
Other information:








Cash paid for amounts included in the measurement of lease liabilities:








Operating cash flows from operating leases

$
385

$
257

$
1,163

$
740

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, ~~2022,~~2023, were as follows (in thousands):


	Amounts		Amounts
Remainder of 2022	$	391
2023		1,340
Remainder of 2023			$	276
2024		1,116		1,455
2025		1,047		1,359
2026		946		1,291
2027				1,107
Thereafter		5,250		6,476
Total future minimum lease payments		10,090		11,964
Amounts representing interest		(1,075)		(1,619)
Present value of net future minimum lease payments	$	9,015	$	10,345

Note 13. Regulatory Matters

Regulatory Capital Requirements:

The final rules implementing the Basel Committee on Banking ~~Supervision's~~Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the 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). 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, ~~2022,~~2023, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the ~~"well capitalized"~~“well capitalized” regulatory classification.

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

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether to declare a dividend of any particular size, the Company’s board of directors must consider its and the Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

During the nine months ended September 30, 2023, the Bank paid $10 million in dividends to the Company, and since the first quarter of 2023, the Company has paid a quarterly common stock dividend of $0.08 per share. The amount and

4243

Table of Contents

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~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 and nine months ended September 30, 2022, the Bank did not pay a dividend to the Company and since the first quarter of 2022, the Company has paid a quarterly common stock dividend of $0.07 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, ~~2022,~~2023, and December 31, ~~2021~~2022 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, 2022
September 30, 2023
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	412,647	11.44	%	$	288,445	8.00	%		N/A	N/A		$	449,546	11.90	%	$	302,100	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		347,884	9.65	%		216,334	6.00	%		N/A	N/A			380,272	10.07	%		226,575	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		347,884	9.65	%		162,250	4.50	%		N/A	N/A			380,272	10.07	%		169,931	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		347,884	7.40	%		188,070	4.00	%		N/A	N/A			380,272	8.13	%		187,074	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	411,529	11.41	%	$	288,523	8.00	%	$	360,653	10.00	%	$	447,326	11.87	%	$	301,538	8.00	%	$	376,922	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		388,760	10.78	%		216,392	6.00	%		288,523	8.00	%		420,130	11.15	%		226,153	6.00	%		301,538	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		388,760	10.78	%		162,294	4.50	%		234,425	6.50	%		420,130	11.15	%		169,615	4.50	%		244,999	6.50	%
Tier 1 Capital (to Average Assets)²		388,760	8.27	%		188,071	4.00	%		235,089	5.00	%		420,130	9.00	%		186,792	4.00	%		233,490	5.00	%

December 31, 2021
December 31, 2022
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	386,627	12.55	%	$	246,483	8.00	%		N/A	N/A		$	425,957	11.40	%	$	298,966	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		325,345	10.56	%		184,862	6.00	%		N/A	N/A			360,608	9.65	%		224,224	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		325,345	10.56	%		138,647	4.50	%		N/A	N/A			360,608	9.65	%		168,168	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		325,345	7.45	%		174,578	4.00	%		N/A	N/A			360,608	7.95	%		181,387	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	378,055	12.29	%	$	246,053	8.00	%	$	307,566	10.00	%	$	426,947	11.44	%	$	298,476	8.00	%	$	373,094	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		358,703	11.66	%		184,539	6.00	%		246,053	8.00	%		403,613	10.82	%		223,857	6.00	%		298,476	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		358,703	11.66	%		138,405	4.50	%		199,918	6.50	%		403,613	10.82	%		167,892	4.50	%		242,511	6.50	%
Tier 1 Capital (to Average Assets)		358,703	8.23	%		174,384	4.00	%		217,980	5.00	%		403,613	8.90	%		181,383	4.00	%		226,729	5.00	%

¹The prompt corrective action provisions are applicable at the Bank level only.

²Average assets for the above calculations were based on the most recent quarter.

4344

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), presented net of tax, were as follows (in thousands):


											Three Months Ended September 30, 2023
																			Accumulated
											Securities		Securities		Fair Value				Other
											Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
											Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, June 30, 2023											$	(33,132)	$	(684)	$	—	$	(1,201)	$	(35,017)

Other comprehensive income (loss)												(4,325)		—		—		115		(4,210)
Reclassification of amounts included in net income												5,044		27		—		—		5,071
Net other comprehensive income (loss) during period												719		27		—		115		861

Ending balance, September 30, 2023											$	(32,413)	$	(657)	$	—	$	(1,086)	$	(34,156)

	Three Months Ended September 30, 2022										Three Months Ended September 30, 2022
									Accumulated										Accumulated
	Securities		Securities		Fair Value				Other		Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive		Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)		Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, June 30, 2022	$	(23,526)	$	(804)	$	(318)	$	—	$	(24,648)	$	(23,526)	$	(804)	$	(318)	$	—	$	(24,648)

Other comprehensive income (loss)		(14,942)		—		69		(1,317)		(16,190)		(14,942)		—		69		(1,317)		(16,190)
Reclassification of amounts included in net income		—		31		—		—		31		—		31		—		—		31
Net other comprehensive income (loss) during period		(14,942)		31		69		(1,317)		(16,159)		(14,942)		31		69		(1,317)		(16,159)

Ending balance, September 30, 2022	$	(38,468)	$	(773)	$	(249)	$	(1,317)	$	(40,807)	$	(38,468)	$	(773)	$	(249)	$	(1,317)	$	(40,807)

	Three Months Ended September 30, 2021
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, June 30, 2021	$	2,051	$	—	$	287	$	—	$	2,338

Other comprehensive income		210		—		44		—		254
Reclassification of amounts included in net income		(33)		—		—		—		(33)
Net other comprehensive income during period		177		—		44		—		221

Ending balance, September 30, 2021	$	2,228	$	—	$	331	$	—	$	2,559

~~��~~

Nine Months Ended September 30, 2022






Accumulated

Securities

Securities

Fair Value

Other

Available-for-

Transferred to

Municipal

Cash Flow

Comprehensive


Sale

Held-to-Maturity

Security Hedges

Hedges

Income (Loss)
Beginning balance, December 31, 2021

$
25

$
665

$
753

$
—

$
1,443

Other comprehensive income (loss)

(38,493)

(1,490)

(1,002)

(1,317)

(42,302)
Reclassification of amounts included in net income

—

52

—

—

52
Net other comprehensive income (loss) during period

(38,493)

(1,438)

(1,002)

(1,317)

(42,250)

Ending balance, September 30, 2022

$
(38,468)

$
(773)

$
(249)

$
(1,317)

$
(40,807)

Nine Months Ended September 30, 2021






Accumulated

Securities

Securities

Fair Value

Other

Available-for-

Transferred to

Municipal

Cash Flow

Comprehensive


Sale

Held-to-Maturity

Security Hedges

Hedges

Income (Loss)
Beginning balance, December 31, 2020

$
2,968

$
—

$
(785)

$
—

$
2,183

Other comprehensive income (loss)

(707)

—

1,116

—

409
Reclassification of amounts included in net income

(33)

—

—

—

(33)
Net other comprehensive income (loss) during period

(740)

—

1,116

—

376

Ending balance, September 30, 2021

$
2,228

$
—

$
331

$
—

$
2,559


	Nine Months Ended September 30, 2023
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2022	$	(33,616)	$	(742)	$	—	$	(966)	$	(35,324)

Other comprehensive income (loss)		(3,841)		—		—		(120)		(3,961)
Reclassification of amounts included in net income		5,044		85		—		—		5,129
Net other comprehensive income (loss) during period		1,203		85		—		(120)		1,168

Ending balance, September 30, 2023	$	(32,413)	$	(657)	$	—	$	(1,086)	$	(34,156)

	Nine Months Ended September 30, 2022
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2021	$	25	$	665	$	753	$	—	$	1,443

Other comprehensive income (loss)		(38,493)		(1,490)		(1,002)		(1,317)		(42,302)
Reclassification of amounts included in net income		—		52		—		—		52
Net other comprehensive income (loss) during period		(38,493)		(1,438)		(1,002)		(1,317)		(42,250)

Ending balance, September 30, 2022	$	(38,468)	$	(773)	$	(249)	$	(1,317)	$	(40,807)

4445

Table of Contents

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

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

Forward-Looking Statement

The Company may from time to time make written or oral statements, including statements contained in this 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 effects of the COVID-19 (and the variants thereof) 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~~the impact of current and future economic and market conditions generally (including seasonality) and in the ~~U.S. economy, including a recession, in particular in Tennessee,~~financial services industry, nationally and ~~other markets in which we operate, which~~ ~~could have a material adverse effect on~~within our ~~capital, financial condition, credit quality, results of operations and future growth,~~primary market areas (particularly Tennessee), including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and the potential for high unemployment rates, as well as the financial stress on borrowers and changes to customer and client behavior (including the velocity of loan repayment) and credit risk ~~that the strength~~as a result of the ~~current economic environment could be weakened~~foregoing;

●

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

●

adverse developments in the banking industry highlighted by high-profile bank failures and the ~~continued~~ impact of ~~rising interest rates, supply chain challenges~~such developments on customer confidence, liquidity and ~~inflation~~;regulatory responses to these developments (including increases in the cost of our deposit insurance assessments), our ability to effectively manage our liquidity risk and any growth plans and the availability of capital and funding;

●

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

●

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

●

competition from financial institutions and other financial service providers;

●

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

●

the impact of recently enacted and future legislation and regulation on our ~~business and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;~~

●

governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve, as well as legislative, tax and regulatory changes, including those that impact the money supply and inflation;

●

the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses, and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;business;

4546

Table of Contents

●

~~developments in our mortgage banking business, including loan modifications, general demand, and the effects of judicial or regulatory requirements or guidance;~~

●

~~negative changes~~weakness in the real estate ~~markets in~~market, including the secondary residential mortgage market, which ~~we operate~~can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and ~~have our primary lending activities, which may result in an unanticipated decline in real estate values in our market area;~~delinquencies, profits on sales of mortgage loans, and the value of mortgage servicing rights;

●

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

●

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

●

the risks ~~relating~~of mergers, acquisitions and divestitures, including our ability to ~~the recently completed acquisitions including, without limitation: unexpected transaction costs, including the costs of integrating operations; the risks that the businesses will not be integrated~~continue to identify acquisition targets, successfully ~~or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely~~acquire and integrate desirable financial institutions and realize expected revenues and revenue ~~synergies, including as the result of revenues being lower than expected;~~synergies;

●

cyber attacks, computer viruses or other malware that may breach the security of our websites or other systems we operate or rely upon for services to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems and negatively impact our operations and our reputation in the ~~market;~~

●

~~risks related to our reliance on third parties to provide key components~~market, including as a result of ~~our business infrastructure, including the risks related to disruptions in services or financial difficulties of third-party vendors;~~increased remote working;

●

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;~~

●

~~significant turbulence or a disruption in~~Reserve, as well as legislative, tax and regulatory changes that impact the ~~capital or financial markets~~money supply and ~~the effect of a fall in stock market prices on our investment securities;~~inflation;

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to retain the services of key personnel;

●

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 programsuncertainty related to the ~~COVID-19 pandemic;~~transition away from LIBOR;

●

changes in accounting principles, policies, or guidelines, including the impact of ASU 2016-13 Current Expected Credit Loss (“CECL”);

●

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

●

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

●

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

●

the ~~continued impact~~risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the ~~COVID-19 pandemic on~~length of time and amount of resources required to consummate such transactions, and may reduce the ~~Company’s assets, business, cash flows, financial condition, liquidity, prospects~~anticipated benefit; and ~~results of operations;~~

●

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

●

~~disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including Russia’s military action in Ukraine, terrorism or other geopolitical events; and~~

●

~~risks associated with widespread inflation or deflation.~~ us.

4647

Table of Contents

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

~~Economic Conditions~~

The economic conditions and growth prospects for our markets, even against the headwinds of inflation and recessionary concerns, continue to reflect a solid and positive overall outlook with economic activity close to pre-pandemic levels. Increasing interest rates and rising building costs have caused some slowing of the highly robust single family housing market, however, there continues to be a shortage of housing in several Tennessee markets. Worker shortages especially in the restaurant, hospitality and retail industries combined with supply chain disruptions impacting numerous industries and inflationary conditions has had some impact on the level of economic growth. Ongoing higher inflation levels and higher interest rates could have a negative impact on both our consumer and commercial borrowers.

Critical Accounting Estimates

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. On January 1, 2023, we adopted FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”) which significantly changes our methodology for determining our Allowance for Credit Losses (“ACL”) and ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, See Note 1. Recently Issued and Adopted Accounting Pronouncements in the Notes to our Consolidated Financial Statements in this Form 10-Q for further information related to these changes. There have been no other significant changes in the Company’s application of critical accounting policies since December 31, ~~2021.~~2022.

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the third quarter and first nine months of ~~2022:~~2023:

●

~~Announced and completed~~Net income totaled $2.1 million, or $0.12 per diluted common share, during the ~~asset purchase~~third quarter of ~~Sunbelt.~~2023 compared to $11.5 million, or $0.68 per diluted common share, for the same period in 2022.

●

Net income totaled ~~$11.5~~$22.4 million, or ~~$0.68 per diluted common share, during the third quarter of 2022 compared to $9.6 million, or $0.61 per diluted common share, for the same period in 2021.~~

●

~~Net income totaled $30.0 million, or $1.78~~$1.33 per diluted common share, during the first nine months of ~~2022~~2023 compared to ~~$28.1~~$30.0 million, or ~~$1.84~~$1.78 per diluted common share, for the same period in ~~2021.~~2022.

●

During the third quarter of 2023 the Company sold $159.6 million in available-for-sale securities, as part of a balance sheet optimization transaction that resulted in a $5.0 million loss, net of tax.

●

Annualized return on average assets for the three months ended September 30, 2023, and 2022 was 0.17% and ~~2021 was~~ 0.95% ~~and 0.97%~~, respectively.

●

Annualized return on average assets for the nine months ended September 30, 2023, and 2022 was 0.63% and ~~2021 was~~ 0.85% ~~and 1.04%~~, respectively.

●

Net organic ~~loans~~loan and ~~leases is strong~~lease increased year-to-date for ~~2022,~~2023, with net loans and leases increasing ~~$517.2~~$115.0 million from December 31, ~~2021.~~2022.

●

On January 1, 2023, the Company adopted ASU 2016-13, which resulted in a $8.7 million, or 37.1%, increase in the ACL at the adoption date, with initial adoption entry being recorded through retained earnings, net of tax.

4748

Table of Contents

Selected Financial Information

The following is a summary of certain financial information for the ~~three~~three- and ~~nine month~~nine-month periods ended September 30, ~~2022~~2023 and ~~2021~~2022 and as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022 (dollars in thousands, except per share data):


	Three Months Ended									Nine Months Ended									Three Months Ended									Nine Months Ended
	September 30,									September 30,									September 30,									September 30,
	2022			2021				Change		2022			2021				Change		2023			2022				Change		2023			2022				Change
Income Statement:
Interest income	$	42,297		$	33,311		$	8,986		$	111,521		$	92,455		$	19,066		$	55,275		$	42,297		$	12,978		$	160,548		$	111,521		$	49,027
Interest expense		5,589			2,929			2,660			11,632			8,916			2,716			24,269			5,589			18,680			61,985			11,632			50,353
Net interest income		36,708			30,382			6,326			99,889			83,539			16,350			31,006			36,708			(5,702)			98,563			99,889			(1,326)
Provision for loan and lease losses		974			1,149			(175)			3,230			1,211			2,019
Net interest income after provision for loan and lease losses		35,734			29,233			6,501			96,659			82,328			14,331
Provision for credit losses																				795			974			(179)			1,458			3,230			(1,772)
Net interest income after provision for credit losses																				30,211			35,734			(5,523)			97,105			96,659			446
Noninterest income		6,250			6,309			(59)			20,590			17,143			3,447			691			6,250			(5,559)			14,746			20,590			(5,844)
Noninterest expense		27,230			23,309			3,921			78,874			63,570			15,304			28,516			27,230			1,286			83,455			78,874			4,581
Income before income taxes		14,754			12,233			2,521			38,375			35,901			2,474			2,386			14,754			(12,368)			28,396			38,375			(9,979)
Income tax expense		3,211			2,633			578			8,357			7,767			590			319			3,211			(2,892)			5,993			8,357			(2,364)
Net income	$	11,543		$	9,600		$	1,943		$	30,018		$	28,134		$	1,884		$	2,067		$	11,543		$	(9,476)		$	22,403		$	30,018		$	(7,615)

Per Share Data:
Basic income per common share	$	0.69		$	0.62		$	0.07		$	1.79		$	1.85		$	(0.06)		$	0.12		$	0.69		$	(0.57)		$	1.33		$	1.79		$	(0.47)
Diluted income per common share	$	0.68		$	0.61		$	0.07		$	1.78		$	1.84		$	(0.06)		$	0.12		$	0.68		$	(0.57)		$	1.33		$	1.78		$	(0.47)

Performance Ratios:
Return on average assets		0.95	%		0.97	%		(0.02)	%		0.85	%		1.04	%		(0.18)	%		0.17	%		0.95	%		(0.78)	%		0.63	%		0.85	%		(0.21)	%
Return on average shareholders' equity		10.77	%		9.70	%		1.07	%		9.46	%		10.05	%		(0.59)	%		1.84	%		10.77	%		(8.93)	%		6.80	%		9.46	%		(2.65)	%


	September 30,		December 31,				September 30,		December 31,
	2022		2021			Change	2023		2022			Change
Balance Sheet:
Loans and leases, net	$	3,076,347	$	2,674,045	$	402,302	$	3,345,312	$	3,230,293	$	115,019
Deposits		4,280,409		4,021,938		258,471		4,246,509		4,077,100		169,409

Analysis of Results of Operations

Third quarter of ~~2022~~2023 compared to ~~2021~~2022

Net income was $2.1 million, or $0.12 per diluted common share, for the third quarter of 2023, compared to $11.5 million, or $0.68 per diluted common share, for the third quarter of ~~2022, compared to $9.6 million, or $0.61 per diluted common share, for the third quarter of 2021.~~2022. For the three months ended September 30, ~~2022,~~2023, when compared to the comparable period in ~~2021,~~2022, the ~~increase~~decrease in net income of ~~$1.9~~$9.5 million was ~~due to an increase~~primarily driven by a decline of $5.5 million in net interest income ~~after~~and provision ~~for loan~~in credit losses, $5.6 million in noninterest income, and ~~lease losses~~an increase of ~~$6.5~~$1.3 million ~~offset by increases~~ in noninterest expense, ~~of $3.9~~offset by a reduction $2.9 million ~~and~~in income tax ~~expense~~expense. The decline in noninterest income was associated with a $6.8 million pre-tax loss on the sale of ~~$578 thousand.~~available-for-sale securities, as a result from the balance sheet optimization transaction described in the Securities Portfolio section. The tax equivalent net interest margin was 2.81% for the third quarter of 2023, compared to 3.29% for the third quarter of ~~2022, compared to 3.35% for the third quarter of 2021.~~2022. Noninterest income to average assets was 0.06% for the third quarter of 2023, decreasing from 0.52% for the third quarter of ~~2022, decreasing from 0.64% for the third quarter of 2021.~~2022. Noninterest expense to average assets ~~decreased~~increased to 2.37% in the third quarter of 2023, from 2.25% in the third quarter of ~~2022, from 2.35% in the third quarter of 2021.~~2022.

First nine months of ~~2022~~2023 compared to ~~2021~~2022

Net income totaled $22.4 million, or $1.33 per diluted common share, for the nine months ended 2023, compared to $30.0 million, or $1.78 per diluted common share, for the ~~first~~ nine months ended ~~2022, compared to $28.1~~2022. The decrease of $7.6 million ~~or $1.84 per diluted share, for the first nine months of 2021. The increase~~ in net income for this period was primarily from the ~~increase~~decrease of ~~$14.3 million in net interest income after provision for loan and lease losses and $3.4~~$5.8 million in noninterest income ~~offset by increases~~and an increase in of ~~$15.3~~$4.6 million in noninterest expense, offset by a reduction of $2.4 million in income tax expense. The tax equivalent net interest margin was 3.01% for the first nine months of 2023, compared to 3.10% for the first nine months of ~~2022 compared to 3.37% for the first nine months of 2021.~~2022. Noninterest income to ~~average assets was 0.59% for the first nine months of 2022, decreasing from 0.63% for the first nine months of 2021.~~

4849

Table of Contents

average assets was 0.41% for the first nine months of 2023, decreasing from 0.59% for the first nine months of 2022. Noninterest expense to average assets ~~decreased~~increased to 2.35% in the first nine months of 2023, from 2.24% in the first nine months of ~~2022, from 2.34% in the first nine months of 2021.~~2022.

Net Interest Income and Yield Analysis

Third quarter of ~~2022~~2023 compared to ~~2021~~2022

Net interest income, taxable equivalent, ~~increased~~decreased to $31.1 million for the third quarter of 2023, down from $36.9 million for the third quarter of ~~2022, up from $30.5 million for the third quarter of 2021.~~2022. Net interest income was positively impacted by the increase in balances of loans and leases ~~securities,~~ and the increase in yield/rate on ~~federal funds sold and other earning assets.~~these interest-earning assets, offset by the increase in the cost of interest-bearing liabilities. Average interest-earning assets ~~increased~~decreased from ~~$3.61 billion for the third quarter of 2021, to~~ $4.45 billion for the third quarter of 2022, to $4.40 billion for the third quarter of 2023, primarily from the decrease in our average cash balances, which was offset the Company’s continued organic loan and lease ~~growth, the acquisition of SCB, which was completed September 1, 2021, and the increase in our securities, this was partially offset by a decrease in our overall liquidity position.~~growth. Over this period, average loan and lease balances increased by ~~$500.5 million, average securities increased $547.0~~$323.6 million, average interest-bearing deposits increased by ~~$579.4~~$173.1 million and average ~~noninterest-bearing deposits~~borrowings increased ~~$315.0~~by $3.1 million. Average federal funds sold and other interest earning assets decreased by ~~$215.0~~$358.3 million, average securities decreased $13.9 million and ~~average borrowings~~noninterest-bearing deposits decreased ~~$67.0~~by $241.6 million. The tax equivalent net interest margin decreased to 2.81% for the third quarter of 2023, compared to 3.29% for the third quarter of ~~2022, compared to 3.35% for the third quarter of 2021.~~2022. The yield on earning assets increased from ~~3.67% for the third quarter of 2021, to~~ 3.79% for the third quarter of 2022, to 4.99% for the third quarter of 2023, primarily due the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the ~~Board of Governors of the~~ Federal ~~Reserve System (the “Federal Reserve”).~~Reserve. The cost of average interest-bearing deposits increased from ~~0.34% for the third quarter of 2021, to~~ 0.62% for the third quarter of 2022, to 2.84% for the third quarter of 2023, primarily due to the increase in rates by the Federal ~~Reserve.~~Reserve and increased pricing competition.

4950

Table of Contents

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


	Three Months Ended September 30,												Three Months Ended September 30,
	2022						2021						2023						2022
	Average				Yield/		Average				Yield/		Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Cost		Balance		Interest		Cost
Assets:
Loans and leases, including fees¹	$	3,037,092	$	35,127	4.59	%	$	2,536,591	$	31,674	4.95	%	$	3,360,678	$	47,539	5.61	%	$	3,037,092	$	35,127	4.59	%
Taxable securities		720,114		3,135	1.73	%		187,032		832	1.77	%		743,054		4,335	2.31	%		720,114		3,135	1.73	%
Tax-exempt securities²		101,559		732	2.86	%		87,621		477	2.16	%		64,707		451	2.77	%		101,559		732	2.86	%
Federal funds sold and other earning assets		587,755		3,474	2.34	%		802,712		474	0.23	%		229,487		3,045	5.26	%		587,755		3,474	2.34	%
Total interest-earning assets		4,446,520		42,468	3.79	%		3,613,956		33,457	3.67	%		4,397,926		55,370	4.99	%		4,446,520		42,468	3.79	%
Noninterest-earning assets		362,869						323,067						379,456						362,869
Total assets	$	4,809,389					$	3,937,023					$	4,777,382					$	4,809,389

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	966,437		1,956	0.80	%	$	763,613		414	0.21	%	$	969,122		5,463	2.24	%	$	966,437		1,956	0.80	%
Money market and savings deposits		1,632,510		2,298	0.56	%		1,233,533		854	0.27	%		1,753,671		13,744	3.11	%		1,632,510		2,298	0.56	%
Time deposits		501,919		612	0.48	%		524,327		885	0.67	%		551,191		4,226	3.04	%		501,919		612	0.48	%
Total interest-bearing deposits		3,100,866		4,866	0.62	%		2,521,473		2,153	0.34	%		3,273,984		23,433	2.84	%		3,100,866		4,866	0.62	%
Borrowings		13,141		97	2.93	%		80,188		121	0.60	%		16,228		210	5.13	%		13,141		97	2.93	%
Subordinated debt		41,980		626	5.91	%		40,211		654	6.47	%		42,065		626	5.90	%		41,980		626	5.91	%
Total interest-bearing liabilities		3,155,987		5,589	0.70	%		2,641,872		2,928	0.44	%		3,332,277		24,269	2.89	%		3,155,987		5,589	0.70	%
Noninterest-bearing deposits		1,192,813						877,831						951,179						1,192,813
Other liabilities		35,224						24,522						48,494						35,224
Total liabilities		4,384,024						3,544,225						4,331,950						4,384,024
Shareholders' equity		425,365						392,798						445,432						425,365
Total liabilities and shareholders’ equity	$	4,809,389					$	3,937,023					$	4,777,382					$	4,809,389
Net interest income, taxable equivalent			$	36,879					$	30,529					$	31,101					$	36,879
Interest rate spread					3.09	%					3.23	%					2.11	%					3.09	%
Tax equivalent net interest margin					3.29	%					3.35	%					2.81	%					3.29	%

Percentage of average interest-earning assets to average interest-bearing liabilities					140.89	%					136.80	%					131.98	%					140.89	%
Percentage of average equity to average assets					8.84	%					9.98	%					9.32	%					8.84	%

¹Loans and leases include Paycheck Protection Program (“ PPP”) loans with an average balance of $2.7 million and $22.0 million for the three months ended September 30, 2023, and 2022, respectively. Loan and lease fees included in loan and lease income was $809 thousand and $600 thousand for the three months ended September 30, 2023, and 2022, respectively. Loan and lease fee income for the three months ended September 30, 2023, and 2022, includes $10 thousand and $166 thousand accretion of loan fees on PPP loans, respectively.

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 $95 thousand for the three months ended September 30, and $171 thousand for the three months ended September 30, 2022.

First nine months of 2023 compared to 2022

Net interest income, taxable equivalent, decreased to $98.9 million for the first nine months of 2023, down from $100.4 million for the first nine months of 2022. Net interest income was positively impacted, compared to the prior year, primarily by the increase in balances of loans and leases, securities, and the increase in yield on these interest-earning assets, offset by the increase in the cost of interest-bearing liabilities. Average interest-earning assets increased from $4.33 billion for the first nine months of 2022, to $4.39 billion for the first nine months of 2023, primarily because of deployment of cash into loans and leases, and securities. Over this period, average loan and lease balances increased by $429.2 million, average securities increased $24.1million and average interest-bearing deposits increased by $177.2 million. Average federal funds sold and other interest earning assets decreased by $396.3 million, average borrowings decreased $18.6 million and noninterest-bearing deposits decreased by $139.3 million. The tax equivalent net interest margin decreased to 3.01% for the first nine months of 2023, compared to 3.10% for the first nine months of 2022. The yield on earning assets increased from 3.46% for the first nine months of 2022, to 4.90% for the first nine months of 2023, primarily due the deployment of excess cash and cash equivalents into loans and leases and the increase in rates by the Federal Reserve. The cost of average interest-bearing deposits increased from 0.41% for the first nine months of 2022 to 2.45% for the first nine months of 2023, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.

Table of Contents

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


	Nine Months Ended September 30,
	2023						2022
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost

Assets:
Loans and leases, including fees¹	$	3,309,616	$	137,712	5.56	%	$	2,880,444	$	96,300	4.47	%
Taxable Securities		745,694		12,322	2.21	%		683,926		8,463	1.65	%
Tax-exempt securities²		65,170		1,349	2.77	%		102,872		1,873	2.43	%
Federal funds and other earning assets		267,124		9,448	4.73	%		663,400		5,389	1.09	%
Total interest-earning assets		4,387,604		160,831	4.90	%		4,330,642		112,025	3.46	%
Noninterest-earning assets		365,123						373,081
Total assets	$	4,752,727					$	4,703,723

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	954,585		14,583	2.04	%	$	952,523		3,137	0.44	%
Money market and savings deposits		1,770,232		35,912	2.71	%		1,572,287		4,282	0.36	%
Time deposits		508,600		8,838	2.32	%		531,419		1,965	0.49	%
Total interest-bearing deposits		3,233,417		59,333	2.45	%		3,056,229		9,384	0.41	%
Borrowings		19,309		775	5.37	%		37,933		371	1.31	%
Subordinated debt		42,044		1,877	5.97	%		41,959		1,877	5.98	%
Total interest-bearing liabilities		3,294,770		61,985	2.52	%		3,136,121		11,632	0.50	%
Noninterest-bearing deposits		972,507						1,111,854
Other liabilities		44,703						31,412
Total liabilities		4,311,980						4,279,387
Shareholders' equity		440,747						424,336
Total liabilities and shareholders’ equity	$	4,752,727					$	4,703,723
Net interest income, taxable equivalent			$	98,846					$	100,393
Interest rate spread					2.39	%					2.96	%
Tax equivalent net interest margin					3.01	%					3.10	%

Percentage of average interest-earning assets to average interest-bearing liabilities					133.17	%					138.09	%
Percentage of average equity to average assets					9.27	%					9.02	%

¹Loans and leases include PPP loans with an average balance of ~~$22.0~~$2.9 million and ~~$128.4~~$36.6 million for the ~~three~~nine months ended September 30, ~~2022,~~2023 and ~~2021,~~2022, respectively. Loan and lease fees included in loan and lease income was ~~$660 thousand~~$4.7 million and ~~$3.5~~$3.6 million for the ~~three~~nine months ended September 30, ~~2022,~~2023 and ~~2021,~~2022, respectively. Loan ~~and~~ lease fee income for the ~~three~~nine months ended September 30, 2023, and 2022, ~~and 2021,~~ includes ~~$166~~$28 thousand and ~~$2.9~~$1.9 million accretion of loan fees on PPP loans, respectively.

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 ~~$171~~$283 thousand for the ~~three~~nine months ended September 30, ~~2022,~~2023, and ~~$146~~$504 thousand for the ~~three~~nine months ended September 30, ~~2021.~~2022.

~~First nine months of 2022 compared to 2021~~

Net interest income, taxable equivalent, increased to $100.4 million for the first nine months of 2022, up from $84.0 million for the first nine months of 2021. Net interest income was positively impacted, compared to the prior year, primarily by the increase in balances of loans and leases, securities and federal funds sold and other earning assets. Average interest-earning assets increased from $3.33 billion for the first nine months of 2021, to $4.33 billion for the first nine months of 2022, primarily because of the Company’s continued organic loan and lease growth, the acquisition of Fountain, which was completed on May 3, 2021, the acquisition of SCB, which was completed September 1, 2021, and the increase in our securities and overall liquidity position. Over this period, average loan and lease balances increased by $384.9 million, average securities increased $534.5 million, average federal funds sold and other interest earning assets increased by $78.4 million, average interest-bearing deposits increased by $728.2 million, average noninterest-bearing deposits increased $328.9 million and average borrowings decreased $43.2 million. The tax equivalent net interest margin decreased to 3.10% for the first nine months of 2022, compared to 3.37% for the first nine months of 2021. The yield on earning assets decreased from 3.73% for the first nine months of 2021, to 3.46% for the first nine months of 2022, primarily due to a reduction in PPP fees and loan discount accretion. The cost of average interest-bearing deposits increased from 0.39% for the first nine months of 2021 to 0.41% for the first nine months of 2022, primarily due to the increase in rates by the Federal Reserve.

5052

Table of Contents

Nine Months Ended September 30,

2022

2021


Average




Yield/

Average




Yield/


Balance

Interest

Cost

Balance

Interest

Cost

Assets:













Loans and leases, including fees¹

$
2,880,444

$
96,300

4.47
%
$
2,495,567

$
88,015

4.72
%
Taxable Securities

683,926

8,463

1.65
%

163,005

2,472

2.03
%
Tax-exempt securities²

102,872

1,873

2.43
%

89,244

1,339

2.01
%
Federal funds and other earning assets

663,400

5,389

1.09
%

584,970

1,074

0.25
%
Total interest-earning assets

4,330,642

112,025

3.46
%

3,332,786

92,900

3.73
%
Noninterest-earning assets

373,081





295,074





Total assets

$
4,703,723





$
3,627,860





Liabilities and Shareholders' Equity:













Interest-bearing demand deposits

$
952,523

3,137

0.44
%
$
698,148

974

0.19
%
Money market and savings deposits

1,572,287

4,282

0.36
%

1,112,342

2,580

0.31
%
Time deposits

531,419

1,965

0.49
%

517,566

3,179

0.82
%
Total interest-bearing deposits

3,056,229

9,384

0.41
%

2,328,056

6,733

0.39
%
Borrowings³

37,933

371

1.31
%

81,177

360

0.59
%
Subordinated debt

41,959

1,877

5.98
%

39,650

1,823

6.15
%
Total interest-bearing liabilities

3,136,121

11,632

0.50
%

2,448,883

8,916

0.49
%
Noninterest-bearing deposits

1,111,854





782,960





Other liabilities

31,412





21,553





Total liabilities

4,279,387





3,253,396





Shareholders' equity

424,336





374,464





Total liabilities and shareholders’ equity

$
4,703,723





$
3,627,860





Net interest income, taxable equivalent



$
100,393





$
83,984



Interest rate spread





2.96
%





3.24
%
Tax equivalent net interest margin





3.10
%





3.37
%

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



138.09
%





136.09
%
Percentage of average equity to average assets





9.02
%





10.32
%

¹Loans and leases include PPP loans with an average balance of $36.6 million and $235.0 million for the nine months ended September 30, 2022 and 2021, respectively. Loan and lease fees included in loan and lease income was $3.6 million and $9.0 million for the nine months ended September 30, 2022 and 2021, respectively. Loan lease fee income for the nine months ended September 30, 2022, and 2021, includes $1.9 million and $7.4 million accretion of loan fees on PPP loans, respectively.

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 $504 thousand for the nine months ended September 30, 2022, and $445 thousand for the nine months ended September 30, 2021.

Noninterest Income

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2022		2021			Change	2022		2021			Change	2023		2022			Change	2023		2022			Change
Service charges on deposit accounts	$	1,611	$	1,220	$	391	$	4,376	$	3,278	$	1,098	$	1,736	$	1,611	$	125	$	4,838	$	4,376	$	462
Gain on sale of securities		—		45		(45)		—		45		(45)
Loss on sale of securities														(6,801)		—		(6,801)		(6,801)		—		(6,801)
Mortgage banking		170		994		(824)		1,475		3,238		(1,763)		309		170		139		813		1,475		(662)
Investment services		1,051		448		603		3,186		1,546		1,640		1,461		1,051		410		3,766		3,186		580
Insurance commissions		864		745		119		2,363		2,768		(405)		1,153		864		289		3,551		2,363		1,188
Interchange and debit card transaction fees, net		1,356		1,078		278		4,107		2,839		1,268		1,357		1,356		1		4,087		4,107		(20)
Other		1,198		1,779		(581)		5,083		3,429		1,654		1,476		1,198		278		4,492		5,083		(591)
Total noninterest income	$	6,250	$	6,309	$	(59)	$	20,590	$	17,143	$	3,447	$	691	$	6,250	$	(5,559)	$	14,746	$	20,590	$	(5,844)

~~Table of Contents~~

Third quarter of ~~2022~~2023 compared to ~~2021~~2022

Noninterest income decreased by ~~$59 thousand, or 0.9%,~~$5.6 million during the third quarter of ~~2022~~2023 compared to the same period in ~~2021.~~2022. This quarterly change in total noninterest income primarily resulted from the following:

●

~~Increase in service charges~~Loss on ~~deposit accounts, related to~~sale of securities was associated with a pre-tax loss on the ~~SCB acquisition, deposit growth~~sale of $159.6 million of available-for-sale securities and ~~transaction volume;~~

●

~~Decrease in mortgage banking, related to increased secondary market interest rates driving lower volume;~~moving into higher yielding assets;

●

Increase in investment services, related to organic growth and the ~~addition of a~~ new ~~wealth management~~Dothan, Alabama advisory team hired during the ~~fourth~~second quarter of ~~2021;~~2023;

●

Increase in ~~interchange~~insurance commissions, driven by the addition of Sunbelt Group, LLC (“Sunbelt”) during the third quarter of 2022 and ~~debit card transaction fees, related to increased volume, deposit growth and the SCB acquisition:~~organic growth; and

●

~~Decrease~~Increase in other, primarily related to ~~decreased~~increased fees from capital markets activity.

First nine months of ~~2022~~2023 compared to ~~2021~~2022

Noninterest income ~~increased~~decreased by ~~$3.4~~$5.8 million ~~or 20.1%,~~ during the first nine months of ~~2022~~2023 compared to the same period in ~~2021.~~2022. This change in total noninterest income primarily resulted from the following:

●

Increase in service charges on deposit accounts, related to increased account activity;

●

Loss on sale of securities was associated with a pre-tax loss on the ~~SCB acquisition, deposit growth~~sale of $159.6 million of available-for-sale securities and ~~transaction volume;~~moving into higher yielding assets;

●

Decrease in mortgage banking, related to ~~increased~~lower volume of secondary market ~~interest rates driving lower volume;~~activity;

●

Increase in investment services, primarily related to organic growth;

●

Increase in insurance commissions, driven by the addition of ~~a new wealth management team hired~~Sunbelt during the ~~fourth~~third quarter of ~~2021;~~2022 and organic growth; and

●

Decrease in ~~insurance commissions,~~other, primarily related to decreased fees from ~~commissions on placement of life insurance policies during the first quarter of 2021;~~capital markets activity.

●

~~Increase in interchange and debit card transaction fees, related to increased volume, deposit growth and the SCB acquisition: and~~

●

~~Increase in other, primarily from fee income from the newly created capital markets program in the second quarter of 2021 and new fee income from the acquisition of Fountain.~~

Table of Contents

Noninterest Expense

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2022		2021			Change	2022		2021			Change	2023		2022			Change	2023		2022			Change
Salaries and employee benefits	$	16,317	$	13,594	$	2,723	$	47,036	$	36,666	$	10,370	$	16,785	$	16,317	$	468	$	49,474	$	47,036	$	2,438
Occupancy and equipment		3,167		2,536		631		9,020		7,170		1,850		3,547		3,167		380		10,073		9,020		1,053
FDIC insurance		705		525		180		2,022		1,266		756		825		705		120		2,241		2,022		219
Other real estate and loan related expense		565		407		158		1,930		1,514		416		603		565		38		1,616		1,930		(314)
Advertising and marketing		288		235		53		985		654		331		346		288		58		1,006		985		21
Data processing and technology		1,872		1,753		119		5,185		4,642		543		2,378		1,872		506		6,777		5,185		1,592
Professional services		822		810		12		2,809		2,300		509		735		822		(87)		2,307		2,809		(502)
Amortization of intangibles		650		711		(61)		1,919		1,597		322		647		650		(3)		1,981		1,919		62
Merger related and restructuring expenses		87		464		(377)		607		939		(332)		110		87		23		110		607		(497)
Other		2,757		2,274		483		7,361		6,822		539		2,540		2,757		(217)		7,870		7,361		509
Total noninterest expense	$	27,230	$	23,309	$	3,921	$	78,874	$	63,570	$	15,304	$	28,516	$	27,230	$	1,286	$	83,455	$	78,874	$	4,581

~~Table of Contents~~

Third quarter of ~~2022~~2023 compared to ~~2021~~2022

Noninterest expense increased by ~~$3.9~~$1.3 million ~~or 16.8%,~~ in the third quarter of ~~2022~~2023 as compared to the same period in ~~2021.~~2022. The quarterly increase in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to overall franchise growth, ~~from talent hired~~and to a lesser extent, the Sunbelt acquisition completed in ~~Auburn, Dothan, Montgomery~~September 2022;

●

Increase in occupancy and ~~Birmingham, Alabama~~equipment, related to overall franchise growth; and ~~Tallahassee, Florida~~

●

Increase in ~~2021;~~data processing and technology, as a result of enhancements to our core systems.

First nine months of 2023 compared to 2022

Noninterest expense increased by $4.6 million in the first nine months of 2023 as compared to the same period in 2022. The change in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to overall franchise growth;

●

Increase in occupancy and equipment, due to ongoing infrastructure and facilities added to accommodate growth in operations; and

●

Increase in ~~other, primarily related training and education initiatives and overall growth of franchise.~~

~~First nine months of 2022 compared to 2021~~

Noninterest expense increased by $15.3 million, or 24.1%, in the first nine months of 2022 as compared to the same period in 2021. The change in total noninterest expense primarily resulted from the following:

●

Increase in salary and employee benefits, related to the Fountain acquisition completed May 3, 2021, and overall franchise growth from talent hired in Auburn, Dothan, Montgomery and Birmingham, Alabama and Tallahassee, Florida in 2021;

●

~~Increase in occupancy and equipment, due to ongoing infrastructure and facilities added to accommodate growth in operations;~~

●

~~Increase in FDIC insurance, related to asset growth stemming from our acquisition of SCB, deposit growth and production of originated loan and leases;~~

●

~~Increase in other real estate and loan related expenses, related to the production of originated loans and leases;~~

●

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

●

~~Increase in professional services, due to increased volume of professional services; and~~

●

~~Increase in other, primarily related training and education initiatives and overall growth of franchise.~~build.

Taxes

Third quarter of ~~2022~~2023 compared to ~~2021~~2022

In the third quarter of ~~2022~~2023 income tax expense totaled ~~$3.2 million~~$319 thousand compared to ~~$2.6~~$3.2 million in the ~~second~~third quarter of ~~2021.~~2022. The effective tax rate was approximately 13.4% in the third quarter of 2023 compared to 21.8% in the ~~second quarter of 2022 compared to 22.0%~~ third quarter of ~~2021.~~2022. The primary reason for the 8.4% decline in the effective tax rate was due to lower earnings, largely from the $6.8 million pre-tax loss on sale of available-for-sale securities during the current quarter.

First nine months of ~~2022~~2023 compared to ~~2021~~2022

In the first nine months of ~~2022~~2023 income tax expense totaled ~~$8.4~~$6.0 million compared to ~~$7.8~~$8.4 million in the first nine months of ~~2021.~~2022. The effective tax rate was approximately ~~21.8%~~21.1% for first nine months of ~~2022~~2023 compared to ~~21.6%~~21.8% for the ~~first~~ nine months of ~~2021.~~2022.

The Inflation Reduction Act (“IRA”) was signed into law in August 2022, with most provisions effective beginning in the 2023 tax year, including an alternative corporate minimum tax if certain thresholds are met, a non-deductible excise tax on share repurchase, and transferability

Table of ~~certain federal tax credits. We do not expect the provisions of the IRA to have a material impact on our consolidated financial statements in the near future.~~Contents

Loan and Lease Portfolio

The Company had total net loans and leases outstanding ~~including organic and acquired loans and leases,~~ of approximately ~~$3.08~~$3.35 billion at September 30, ~~2022,~~2023, compared to ~~$2.67~~$3.23 billion at December 31, ~~2021.~~2022. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.

~~Table of Contents~~

~~Organic Loans and Leases~~

Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by $517.2 million, or 23.3%, from December 31, 2021, to $2.74 billion at September 30, 2022.

~~Acquired Loans and Leases~~

Net purchased non-credit impaired loans and leases of $304.6 million at September 30, 2022 decreased by $103.9 million from December 31, 2021. Since December 31, 2021, our net purchased credit impaired (“PCI”) loans and leases, decreased by $10.9 million to $30.2 million at September 30, 2022. The decrease in purchased non-credit impaired loans and leases and PCI loans and leases is related to maturities, paydowns and payoffs.

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


	September 30, 2022												% of				% of
			Purchased		Purchased				% of		September 30,		Gross		December 31,		Gross
			Non-Credit		Credit		Total		Gross		2023		Total		2022		Total
	Organic		Impaired		Impaired		Amount		Total
Commercial real estate-mortgage	$	1,356,822	$	164,081	$	16,148	$	1,537,051	49.6	%
Consumer real estate-mortgage		463,773		89,940		8,695		562,408	18.1	%
Commercial real estate											$	1,667,176	49.3	%	$	1,627,761	50.0	%
Consumer real estate												638,518	18.9	%		587,977	18.1	%
Construction and land development		392,955		10,495		1,557		405,007	13.1	%		373,068	11.0	%		402,501	12.4	%
Commercial and industrial		489,347		22,410		2,523		514,280	16.6	%		617,115	18.3	%		551,867	17.0	%
Leases		44,069		19,257		1,472		64,798	2.1	%		68,538	2.0	%		67,427	2.1	%
Consumer and other		15,092		474		6		15,572	0.5	%		14,584	0.4	%		16,094	0.5	%
Total gross loans and leases receivable, net of deferred fees		2,762,058		306,657		30,401		3,099,116	100.0	%
Allowance for loan and leases losses		(20,583)	$	(2,019)		(167)		(22,769)
Total loans and leases, net	$	2,741,475	$	304,638	$	30,234	$	3,076,347
Total loans and leases												3,378,999	100.0	%		3,253,627	100.0	%
Less: Allowance for credit losses												(33,687)				(23,334)
Loans and leases, net											$	3,345,312			$	3,230,293

December 31, 2021

Purchased

Purchased

% of

Non-Credit

Credit

Total

Gross


Organic

Impaired

Impaired

Amount

Total

Commercial real estate-mortgage

$
1,157,702

$
205,579

$
20,875

$
1,384,156

51.4
%
Consumer real estate-mortgage

346,322

119,117

11,833

477,272

17.7
%
Construction and land development

258,196

17,308

2,882

278,386

10.3
%
Commercial and industrial

449,909

35,599

2,516

488,024

18.1
%
Leases

18,067

32,471

3,170

53,708

2.0
%
Consumer and other

10,536

1,244

71

11,851

0.4
%
Total gross loans and leases receivable, net of deferred fees

2,240,732

411,318

41,347

2,693,397

100.0
%
Allowance for loan and lease losses

(16,441)

(2,732)

(179)

(19,352)



Total loans and leases, net

$
2,224,291

$
408,586

$
41,168

$
2,674,045

~~Table of Contents~~

Loan and Lease Portfolio Maturities

The following table sets forth the maturity distribution of our loans and leases at September 30, ~~2022,~~2023, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):

																		��
											Rate Structure for Loans and Leases														Rate Structure for Loans and Leases
											Maturing Over One Year														Maturing Over One Year
	One Year		One through			Five through	Over Fifteen				Fixed		Floating		One Year		One through			Five through	Over Fifteen				Fixed		Floating
	or Less		Five Years			Fifteen Years	Years		Total		Rate		Rate		or Less		Five Years			Fifteen Years	Years		Total		Rate		Rate
Commercial real estate-mortgage	$	92,689	$	683,726	$	744,300	$	16,336	$	1,537,051	$	930,384	$	513,978	$	70,903	$	924,631	$	663,524	$	8,118	$	1,667,176	$	991,329	$	604,944
Consumer real estate-mortgage		38,039		206,697		201,698		115,974		562,408		255,741		268,628		33,588		215,674		199,146		190,110		638,518		280,763		324,167
Construction and land development		126,582		178,407		75,525		24,493		405,007		165,462		112,963		108,970		161,354		74,130		28,614		373,068		141,211		122,887
Commercial and industrial		109,257		292,161		105,306		7,556		514,280		325,480		79,543		151,422		367,104		92,291		6,298		617,115		370,626		95,067
Leases		2,516		62,282		—		—		64,798		62,282		—		2,481		65,901		156		—		68,538		66,057		—
Consumer and other		7,985		7,081		453		53		15,572		6,890		697		7,574		6,528		428		54		14,584		6,270		740
Total loans and leases	$	377,068	$	1,430,354	$	1,127,282	$	164,412	$	3,099,116	$	1,746,239	$	975,809	$	374,938	$	1,741,192	$	1,029,675	$	233,194	$	3,378,999	$	1,856,256	$	1,147,805

Nonaccrual, Past Due, and Restructured Loans and Leases

Nonperforming loans and leases as a percentage of total gross loans and leases, net of deferred fees, was ~~0.11%~~0.12% as of September 30, ~~2022,~~2023, and ~~0.12%~~0.09% December 31, ~~2021,~~2022, respectively. Total nonperforming assets as a percentage of total assets was ~~0.10%~~0.12% as of September 30, ~~2022,~~2023, and ~~0.11%~~0.10% as of December 31, ~~2021,~~2022, respectively. ~~Acquired PCI loans and leases that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets.~~

Table of Contents

The following table is a summary of our loans and leases that were past due at least 30 days but less than 89 days and 90 days or more past due for the periods presented (dollars in thousands):

Accruing Loans

Accruing Loans

30-89 Days

90 Days or More

Total Accruing

Past Due

Past Due

Past Due Loans

Percentage of

Percentage of

Percentage of

Total

Loans in

Loans in

Loans in

Loans

Amount

Category

Amount

Category

Amount

Category

September 30, 2022

Commercial real estate
$
1,537,051

$
103

0.01
%

$
-

-
%

$
103

0.01
%
Consumer real estate

562,408

403

0.07

-

-

403

0.07

Construction and land development

405,007

-

-

-

-

-

-

Commercial and industrial

514,280

154

0.03

-

-

154

0.03

Leases

64,798

143

0.22

20

0.03

163

0.25

Consumer and other

15,572

202

1.30

-

-

202

1.30

Total
$
3,099,116

$
1,005

0.03

$
20

0.00

$
1,025

0.03

December 31, 2021

Commercial real estate
$
1,384,156

$
172

0.01
%

$
-

-
%

$
172

0.01
%
Consumer real estate

477,272

894

0.19

-

-

894

0.19

Construction and land development

278,386

91

0.03

-

-

91

0.03

Commercial and industrial

488,024

1,310

0.27

45

0.01

1,355

0.28

Leases

53,708

361

0.67

-

-

361

0.67

Consumer and other

11,851

103

0.87

19

0.16

122

1.03

Total
$
2,693,397

$
2,931

0.11

$
64

-

$
2,995

0.11

~~Table of Contents~~


			Accruing Loans				Accruing Loans
			30-89 Days				90 Days or More				Total Accruing
			Past Due				Past Due				Past Due Loans
					Percentage of				Percentage of				Percentage of
		Total			Loans in				Loans in				Loans in
		Loans		Amount	Category			Amount	Category			Amount	Category
September 30, 2023
Commercial real estate	$	1,667,176	$	862	0.05	%	$	-	-	%	$	862	0.05	%
Consumer real estate		638,518		1,107	0.17			34	0.01			1,141	0.18
Construction and land development		373,068		518	0.14			-	-			518	0.14
Commercial and industrial		617,115		2,329	0.38			98	0.02			2,427	0.39
Leases		68,538		118	0.17			-	-			118	0.17
Consumer and other		14,584		95	0.65			97	0.67			192	1.32
Total	$	3,378,999	$	5,029	0.15		$	229	-		$	5,258	0.16

December 31, 2022
Commercial real estate	$	1,627,761	$	54	-	%	$	-	-	%	$	54	-	%
Consumer real estate		587,977		594	0.10			-	-			594	0.10
Construction and land development		402,501		-	-			-	-			-	-
Commercial and industrial		551,867		203	0.04			-	-			203	0.04
Leases		67,427		1,108	1.64			143	0.21			1,251	1.86
Consumer and other		16,094		107	0.66			-	-			107	0.66
Total	$	3,253,627	$	2,066	0.06		$	143	-		$	2,209	0.07

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


	September 30, 2022						December 31, 2021						September 30, 2023						December 31, 2022
			Nonaccrual Loans						Nonaccrual Loans						Nonaccrual Loans						Nonaccrual Loans
					Percentage of						Percentage of						Percentage of						Percentage of
		Total			Loans in			Total			Loans in			Total			Loans in			Total			Loans in
		Loans		Amount	Category			Loans		Amount	Category			Loans		Amount	Category			Loans		Amount	Category
Commercial real estate	$	1,537,051	$	305	0.02	%	$	1,384,156	$	858	0.06	%	$	1,667,176	$	741	0.04	%	$	1,627,761	$	-	-	%
Consumer real estate		562,408		2,061	0.37			477,272		2,139	0.45			638,518		2,064	0.32			587,977		1,665	0.28
Construction and land development		405,007		858	0.21			278,386		-	-			373,068		620	0.17			402,501		920	0.23
Commercial and industrial		514,280		117	0.02			488,024		116	0.02			617,115		314	0.05			551,867		180	0.03
Leases		64,798		29	0.04			53,708		-	-			68,538		195	0.28			67,427		28	0.04
Consumer and other		15,572		9	0.06			11,851		11	0.09			14,584		-	-			16,094		15	0.09
Total	$	3,099,116	$	3,379	0.11		$	2,693,397	$	3,124	0.12		$	3,378,999	$	3,934	0.12		$	3,253,627	$	2,808	0.09

Allowance for loans and leases to nonaccrual loans				673.84%						619.46%
Allowance for credit losses to nonaccrual loans																856.30%						830.98%

Allocation of the Allowance for ~~Loan and Lease~~Credit Losses

We maintain the allowance at a level that we deem appropriate to adequately cover ~~the probable losses inherent~~change in the loan and lease portfolio. Our provision for ~~loan~~credit losses for loans and ~~lease losses~~leases for the nine months ended September 30, ~~2022,~~2023, is ~~$3.2~~$2.3 million compared to ~~$1.2~~$3.2 million in the same period of ~~2021, an increase~~2022, a decrease of ~~$2.0 million.~~$976 thousand. As of September 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, our allowance for ~~loan and lease~~credit losses was ~~$22.8~~$33.7 million and ~~$19.4~~$23.3 million, respectively, which we deemed to be adequate at each of the respective dates. The increase was primarily the result of the implementation ASU 2016-13, which resulted in an increase of $8.7 million to the allowance for credit losses. See Note 1. Recently Issued and Adopted Accounting Pronouncements in the Notes to our Consolidated Financial Statements in this Form 10-Q for further information related to this change. Our allowance for ~~loan and lease~~credit loss as a percentage of total loans and leases was ~~0.73%~~1.00% at September 30, ~~2022~~2023 and 0.72% at December 31, ~~2021,~~2022, respectively.

Our purchased loans and leases were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans and leases will be accreted into income over the life of the loans and leases. A provision for loan and lease losses is recorded for any deterioration in these loans and leases subsequent to the acquisition. As of September 30, 2022, the outstanding principal balance on PCI loan and leases was $44.5 million and the carrying value was $30.2 million, for a net difference of $14.1 million in discounts. At September 30, 2022, there was an allowance on PCI loans and leases of $167 thousand.

The following table sets forth, based on management's best estimate, the allocation of the allowance for credit losses on loans and leases to categories of loans and leases and loan and lease balances by category and the percentage of loans and

Table of Contents

leases in each category to total loans and leases and allowance for credit losses as a percentage of total loans and leases within each loan and lease category for each period presented (dollars in thousands):


			Percentage of Loans					Ratio of Allowance					Percentage of Loans					Ratio of Allowance
	Amount of		in Each Category			Total		Allocated to Loans in			Amount of		in Each Category			Total		Allocated to Loans in
	Allowance Allocated		to Total Loans			Loans		Each Category			Allowance Allocated		to Total Loans			Loans		Each Category
September 30, 2022
September 30, 2023
Commercial real estate	$	10,579		49.6	%	$	1,537,051		0.69	%	$	15,007		49.3	%	$	1,667,176		0.90	%
Consumer real estate		4,008		18.1			562,408		0.71			7,156		18.9			638,518		1.12
Construction and land development		3,176		13.1			405,007		0.78			5,077		11.0			373,068		1.36
Commercial and industrial		3,835		16.6			514,280		0.75			5,680		18.3			617,115		0.92
Leases		1,034		2.1			64,798		1.60			644		2.0			68,538		0.94
Consumer and other		137		0.5			15,572		0.88			123		0.4			14,584		0.84
Total	$	22,769		100.0	%	$	3,099,116		0.73		$	33,687		100.0	%	$	3,378,999		1.00

December 31, 2021
December 31, 2022
Commercial real estate	$	9,781		51.4	%	$	1,384,156		0.71	%	$	10,821		50.0	%	$	1,627,761		0.66	%
Consumer real estate		3,454		17.7			477,272		0.72			4,028		18.1			587,977		0.69
Construction and land development		1,882		10.3			278,386		0.68			3,059		12.4			402,501		0.76
Commercial and industrial		3,781		18.1			488,024		0.77			3,997		17.0			551,867		0.72
Leases		330		2.0			53,708		0.61			1,293		2.1			67,427		1.92
Consumer and other		124		0.4			11,851		1.05			136		0.5			16,094		0.85
Total	$	19,352		100.0	%	$	2,693,397		0.72		$	23,334		100.0	%	$	3,253,627		0.72

~~Table of Contents~~

The allocation by category is determined based on the loans and leases individually assigned call code and risk ~~rating, if applicable, and environmental factors applicable to each category of loan and lease. For impaired loans and leases, those loans and leases are reviewed for a specific allowance allocation.~~rating. Specific valuation allowances ~~related to impaired, non PCI loans and leases were approximately $395 thousand~~was $2.8 million at September 30, ~~2022, compared to $561~~2023, and $385 thousand at December 31, ~~2021.~~2022.

Table of Contents

Analysis of the Allowance for ~~Loan and Lease~~Credit Losses

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


							Ratio of Net (charge-offs)									Ratio of Net (charge-offs)
										Provision for		Net (charge-offs)		Average		Recoveries to
										Credit Losses		Recoveries		Loans		Average Loans
Three Months Ended September 30, 2023
Commercial real estate										$	691	$	2	$	1,655,592		-	%
Consumer real estate											413		(5)		632,102		-
Construction and land development											(369)		-		384,166		-
Commercial and industrial											307		(131)		606,183		(0.02)
Leases											201		(143)		67,515		(0.21)
Consumer and other											41		(67)		15,120		(0.44)
Total										$	1,284	$	(344)	$	3,360,678		(0.01)
	Provision for		Net (charge-offs)		Average		Recoveries to
	Credit Losses		Recoveries		Loans		Average Loans
Three Months Ended September 30, 2022
Commercial real estate	$	(21)	$	-	$	1,531,028		-	%	$	(21)		-	$	1,531,028		-	%
Consumer real estate		166		7		546,286		-			166		7		546,286		0.00
Construction and land development		272		-		383,488		-			272		-		383,488		-
Commercial and industrial		208		(32)		497,378		(0.01)			208		(32)		497,378		(0.01)
Leases		198		29		63,831		0.05			198		29		63,831		0.05
Consumer and other		151		(147)		15,081		(0.97)			151		(147)		15,081		(0.97)
Total	$	974	$	(143)	$	3,037,092		-		$	974	$	(143)	$	3,037,092		-


Three Months Ended September 30, 2021
Nine Months Ended September 30, 2023
Commercial real estate	$	1,000		23	$	1,143,094		-	%	$	650	$	5	$	1,636,661		-	%
Consumer real estate		205		13		448,983		-			1,006		4		618,883		-
Construction and land development		157		-		300,308		-			(177)		25		382,005		0.01
Commercial and industrial		(603)		(38)		605,105		(0.01)			439		(234)		590,088		(0.04)
Leases		288		(63)		27,149		(0.23)			217		(211)		67,076		(0.31)
Consumer and other		102		(99)		11,952		(0.83)			119		(145)		14,903		(0.97)
Total	$	1,149	$	(164)	$	2,536,591		(0.01)		$	2,254	$	(556)	$	3,309,616		(0.02)


Nine Months Ended September 30, 2022
Commercial real estate	$	794	$	4	$	1,471,905		-	%	$	794		4	$	1,471,905		-	%
Consumer real estate		26		528		504,007		0.10			26		528		504,007		0.10
Construction and land development		1,294		-		350,872		-			1,294		-		350,872		-
Commercial and industrial		132		(78)		479,392		(0.02)			132		(78)		479,392		(0.02)
Leases		620		84		60,836		0.14			620		84		60,836		0.14
Consumer and other		364		(351)		13,432		(2.61)			364		(351)		13,432		(2.61)
Total	$	3,230	$	187	$	2,880,444		0.01		$	3,230	$	187	$	2,880,444		0.01


Nine Months Ended September 30, 2021
Commercial real estate	$	1,797		29	$	1,163,262		-	%
Consumer real estate		96		(26)		444,553		(0.01)
Construction and land development		142		-		299,494		-
Commercial and industrial		(1,274)		(32)		541,834		(0.01)
Leases		288		(63)		34,912		-
Consumer and other		162		(170)		11,512		(1.48)
Total	$	1,211	$	(262)	$	2,495,567		(0.01)

We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan and lease portfolio, past loan and lease 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 and lease portfolio, economic conditions, industry and peer bank loan and lease 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 and leases that may be susceptible to significant change.

~~Table of Contents~~

Securities Portfolio

Our available-for-sale securities portfolio is carried at fair market value and our held-to-maturity securities portfolio is carried at amortized cost, and consists primarily of Federal agency bonds, mortgage-backed securities, state and municipal securities and other debt securities. Our securities portfolio ~~increased~~decreased from ~~$559.4~~$769.8 million at December 31, ~~2021,~~2022, to ~~$806.8~~$667.4 million at September 30, ~~2022,~~2023, primarily as a result of ~~strategically deploying~~the sale of $159.6 million in available-for-sale securities, which were predominantly US Treasury securities, yielding 1.37% for a ~~portion~~pre-tax loss of $6.8 million. This sale was part of a balance sheet optimization transaction where the ~~Bank’s cash position. New purchases~~proceeds were ~~focused on U.S. Treasuries to provide cash flow and liquidity.~~redeployed into higher yielding assets. The Company estimates that the loss will be recovered through incremental earnings by no later than 12 months. Our securities to asset ratio has ~~increased~~decreased from ~~12.1%~~16.7% at December 31, ~~2021,~~2022, to ~~16.8%~~13.9% at September 30, ~~2022. Over the past nine months the bank has increased its securities portfolio to strategically invest its excess liquidity.~~2023.

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, ~~2022~~2023 (dollars in thousands).

Table of Contents

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


																					One Year				One through				Five through				Over Ten
	1 or Less				1 to 5				5 to 10				Over 10				Total				or Less				Five Years				Ten Years				Years				Total
			Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average				Average				Average				Average				Average				Average				Average
Available-for-sale:		Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾
U.S. Treasury	$	—	-	%	$	198,158	1.31	%	$	43,860	1.29	%	$	—	-	%	$	242,018	1.31	%	$	—	-	%	$	51,670	1.26	%	$	32,880	1.28	%	$	—	-	%	$	84,550	1.27	%
U.S. Government agencies		—	-			1,650	3.42			—	-			—	-			1,650	3.42			11,280	5.39			225	6.46			48,178	6.66			—	-			59,683	6.42
State and political subdivisions		270	3.80			1,828	3.09			7,038	2.60			46,286	4.09			55,422	3.87			130	5.56			3,185	2.72			5,591	3.06			9,755	3.80			18,661	3.41
Other debt securities		—	-			990	2.95			29,477	4.59			500	4.50			30,967	4.54			—	-			993	3.65			33,291	4.84			500	4.50			34,784	4.80
Mortgage-backed securities		173	1.24			11,149	2.02			78,389	1.68			151,820	2.17			241,531	2.00			40	1.73			6,949	1.57			83,056	2.63			141,108	2.75			231,153	2.67
Total securities	$	443	2.80		$	213,775	1.39		$	158,764	2.15		$	198,606	2.62		$	571,588	2.03		$	11,450	5.38		$	63,022	1.42		$	202,996	3.74		$	151,363	2.82		$	428,831	3.12

Held-to-maturity:
U.S. Treasury	$	—	-	%	$	150,353	1.47	%	$	—	-	%	$	—	-	%	$	150,353	1.47	%	$	150,126	1.47	%	$	—	-	%	$	—	-	%	$	—	-	%	$	150,126	1.47	%
U.S. Government agencies		—	-			—	-			34,013	1.83			16,825	1.92			50,838	1.86			—	-			—	-			43,269	1.84			6,373	2.01			49,642	1.86
State and political subdivisions		—	-			—	-			4,298	2.20			49,637	2.13			53,935	2.14			—	-			—	-			4,247	2.20			48,700	2.13			52,947	2.14
Other debt securities		—	-			—	-			—	-			—	-			—	-			—	-			—	-			—	-			—	-			—	-
Mortgage-backed securities		—	-			—	-			4,893	2.14			27,085	2.12			31,978	2.12			—	-			—	-			4,847	2.14			24,751	2.11			29,598	2.11
Total securities	$	—	-		$	150,353	1.47		$	43,204	1.90		$	93,547	2.09		$	287,104	1.74		$	150,126	1.47		$	—	-		$	52,363	1.90		$	79,824	2.11		$	282,313	1.73

⁽¹⁾~~Based on amortized cost, taxable equivalent basis~~

(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, ~~2022,~~2023, brokered deposits represented approximately ~~0.98%~~0.75% of total deposits.

The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the ~~three~~three- and ~~nine month~~nine-month periods ending September 30, ~~2022~~2023 and ~~2021,~~2022, respectively (dollars in thousands):


	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	September 30, 2022						September 30, 2021						September 30, 2023						September 30, 2022
	Average		% of		Average		Average		% of		Average		Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate		Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	1,192,813	27.8	%	—	%	$	877,831	25.8	%	—	%	$	951,179	22.5	%	—	%	$	1,192,813	27.8	%	—	%
Interest-bearing demand		966,437	22.5	%	0.80	%		763,613	22.5	%	0.21	%		969,122	22.9	%	2.24	%		966,437	22.5	%	0.80	%
Money market and savings		1,632,510	38.0	%	0.56	%		1,233,533	36.3	%	0.27	%		1,753,671	41.5	%	3.11	%		1,632,510	38.0	%	0.56	%
Time deposits		501,919	11.7	%	0.48	%		524,327	15.4	%	0.67	%		551,191	13.0	%	3.04	%		501,919	11.7	%	0.48	%
Total average deposits	$	4,293,679	100.0	%	0.45	%	$	3,399,304	100.0	%	0.25	%	$	4,225,163	100.0	%	2.20	%	$	4,293,679	100.0	%	0.45	%


	Nine Months Ended						Nine Months Ended
	September 30, 2023						September 30, 2022
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	972,507	23.1	%	—	%	$	1,111,854	26.7	%	—	%
Interest-bearing demand		954,585	22.7	%	2.04	%		952,523	22.9	%	0.44	%
Money market and savings		1,770,232	42.1	%	2.71	%		1,572,287	37.7	%	0.36	%
Time deposits		508,600	12.1	%	2.32	%		531,419	12.7	%	0.49	%
Total average deposits	$	4,205,924	100.0	%	1.89	%	$	4,168,083	100.0	%	0.30	%

5859

Table of Contents

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021


Average

% of

Average

Average

% of

Average


Balance

Total

Rate

Balance

Total

Rate

Noninterest-bearing demand

$
1,111,854

26.7
%
—
%
$
782,960

25.2
%
—
%
Interest-bearing demand

952,523

22.9
%
0.44
%

698,148

22.4
%
0.19
%
Money market and savings

1,572,287

37.7
%
0.36
%

1,112,342

35.8
%
0.31
%
Time deposits

531,419

12.7
%
0.49
%

517,566

16.6
%
0.82
%
Total average deposits

$
4,168,083

100.0
%
0.30
%
$
3,111,016

100.0
%
0.29
%

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, 2023, and 2022, was 2.84% and ~~2021, was~~ 0.62% ~~and 0.34%~~, respectively. The increase cost was primarily attributable to the increases in rates ~~by the Federal Reserve.~~and increased pricing competition. The average cost of interest-bearing deposits for the nine months ended September 30, 2023, and 2022, was 2.45% and ~~2021, was~~ 0.41% ~~and 0.39%~~, respectively. The increase cost was primarily attributable to the increases in rates ~~by the Federal Reserve.~~ and increased pricing competition.

Total deposits as of September 30, ~~2022,~~2023, were ~~$4.28~~$4.25 billion, which was an increase of ~~$258.5~~$169.4 million from December 31, ~~2021.~~2022. This increase was primarily from organic deposit growth. As of September 30, ~~2022,~~2023, the Company had outstanding time deposits under $250,000 with balances of ~~$329.8~~$334.4 million and time deposits over $250,000 with balances of ~~$138.2~~$228.2 million.

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


	September 30,		September 30,
	2022		2023
Three months or less	$	41,538	$	45,247
Three to six months		32,254		96,790
Six to twelve months		44,249		54,978
More than twelve months		20,120		31,147
Total	$	138,161	$	228,162

The Company's estimated uninsured deposits totaled $1.7 billion at September 30, 2023, compared to $1.6 billion at December 31, 2022, representing 40.9% and 40.4% of total deposits at September 30, 2023, and December 31, 2022, respectively. These estimates were derived using the same methodologies and assumptions used for the Bank's regulatory reporting.

Borrowings

The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. Borrowings totaled ~~$18.4~~$14.1 million at September 30, ~~2022,~~2023, and consisted of short-term borrowings of ~~$12.5~~$8.0 million, and ~~$5.9~~$6.1 million of securities sold under repurchase agreements. Long-term debt totaled ~~$42.0~~$42.1 million at September 30, ~~2022,~~2023, and ~~$41.9~~$42.0 million at December 31, ~~2021,~~2022, and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements - Note 7 – Borrowings, Line of Credit and Subordinated Debt."

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, ~~2022~~2023 and December 31, ~~2021,~~2022, 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.”

~~Table of Contents~~

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, ~~2022,~~2023, we had ~~$885.9~~$746.9 million of pre-approved but unused lines of credit and ~~$16.1~~$15.6 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

Table of Contents

institutions. For more information regarding our 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”), oversees market risk management and establishes risk measures, limits on policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive overview of the Company’s magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships. We utilize an independent third party earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12-24 months. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12-24 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered. In addition, third parties will join the meetings of ALCO to provide feedback regarding future balance sheet structure, earnings and liquidity strategies. ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. The objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may lengthen or shorten the duration of assets or liabilities.

Interest Rate Sensitivity

Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and leases and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. The primary measurements we use to help us manage interest rate sensitivity are an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.

Earnings Simulation Model We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from our static interest rate forecast over the next 12 months, limits in the decline in net interest income are as follows:


	Estimated % Change in Net Interest Income Over 12 Months
September 30, ~~2022:~~2023:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase	~~1.10%~~	(2.82)%
200 basis points increase	~~2.15%~~	(5.84)%
100 basis points decrease	~~(1.61)%~~3.22%
200 basis points decrease	5.54%

~~Table of Contents~~

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.

Table of Contents

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


	Current Estimated Instantaneous Rate Change
September 30, ~~2022:~~2023:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase	~~0.90%~~	(1.32)%
200 basis points increase	~~0.71%~~	(3.98)%
100 basis points decrease	~~(2.49)%~~1.56%
200 basis points decrease	1.93%

At September 30, 2023, our model results indicated that we were within our policy limits.

Liquidity Risk Management

The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan and lease demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and intend to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

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

The Company has ~~$443 thousand~~$161.6 million in securities that mature throughout the next 12 months. The Company also ~~anticipates $31.2 million of principal payments from mortgage-backed securities over the same period. The Company also~~ has unused borrowing capacity in the amount of ~~$548.5~~$905.4 million available with the Federal Reserve, ~~FHLB,~~Federal Home Loan Bank, several correspondent banks and a line of credit. With these sources of funds, the Company currently anticipates adequate liquidity to meet the expected obligations of its customers.

6162

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information presented in the Market Risk and Liquidity Risk Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of ~~June~~September 30, ~~2022~~2023 (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, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

6263

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part ~~I--Item 1A--Risk~~I – Item 1A – Risk Factors” in our Form 10-K for the year ended December 31, ~~2021.~~2022, and under “Part II – Item 1A – Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and other risks may prove to be important in the future. ~~In addition, these risks may be heightened by the continued disruption and uncertainty resulting from COVID-19.~~

There ~~have been~~are no material changes ~~from~~during the period covered by this Report to the risk factors ~~described~~previously disclosed in our Form 10-K for the year ended December 31, ~~2021.~~2022 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

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

(a)

Not applicable

(b)

Not applicable

(c)

Issuer Purchases of Registered Equity Securities

On November 20, 2018, the Company announced that its board of directors had authorized a stock repurchase plan pursuant to which the Company may purchase up to $10.0 million in shares of the Company’s outstanding common stock. Stock repurchases under the plan will be made from time to time in the open market, at the discretion of the management of the Company, and in accordance with applicable legal requirements. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the program may be extended, modified, amended, suspended, or discontinued at any time. As of September 30, ~~2022,~~2023, we have purchased $5.5 million of the authorized $10.0 million and may purchase up to an additional $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, ~~2022.~~2023.


					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	Weighted		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, 2022 to July 31, 2022	—	$	—	—	$	4,484
August 1, 2022 to August 31, 2022	—		—	—		4,484
September 1, 2022 to September 30, 2022	—		—	—		4,484
July 1, 2023 to July 31, 2023							—	$	—	—	$	4,484
August 1, 2023 to August 31, 2023							—		—	—		4,484
September 1, 2023 to September 30, 2023							—		—	—		4,484
Total	—	$	—	—	$	4,484	—	$	—	—	$	4,484

Table of Contents

Item 3. Defaults Upon Senior Securities.

None.

~~Table of Contents~~

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

~~None.~~Pursuant to Item 408(a) of Regulation S-K, none of the Company's directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023.

6465

Table of Contents

Item 6. Exhibits


Exhibit No.	Description	Location
2.1	Asset Purchase Agreement, dated as of September 1, 2022, by Sunbelt Group, LLC, A. Mark Slater., and Rains Agency Inc.	Incorporated by reference to Exhibit 2.1 to Form 8-K filed September 6, 2022
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
10.1	Separation Agreement, dated as of September 27, 2023, by SmartFinancial, Inc., SmartBank, and Gregory L. Davis	Filed herewith.
31.1	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
31.2	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
32.1	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
101	Interactive Data Files (formatted as Inline XBRL)	Filed herewith.
104	Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)	Filed herewith

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

6566

Table of Contents

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 9, ~~2022~~2023	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	November 9, ~~2022~~2023	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)

6667


	September 1, 2021
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	30,293
Non-accretable differences		7,609
Cash flows expected to be collected		22,684
Accretable yield		3,552
Fair value	$	19,132


	May 3, 2021
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	6,018
Non-accretable differences		447
Cash flows expected to be collected		5,571
Accretable yield		649
Fair value	$	4,922


	September 30, 2022						December 31, 2021
	PCI		All Other				PCI		All Other
	Loans and Leases¹		Loans and Leases		Total		Loans and Leases¹		Loans and Leases		Total
Commercial real estate	$	16,148	$	1,520,903	$	1,537,051	$	20,875	$	1,363,281	$	1,384,156
Consumer real estate		8,695		553,713		562,408		11,833		465,439		477,272
Construction and land development		1,557		403,450		405,007		2,882		275,504		278,386
Commercial and industrial		2,523		511,757		514,280		2,516		485,508		488,024
Leases		1,472		63,326		64,798		3,170		50,538		53,708
Consumer and other		6		15,566		15,572		71		11,780		11,851
Total loans and leases		30,401		3,068,715		3,099,116		41,347		2,652,050		2,693,397
Less: Allowance for loan and lease losses		(167)		(22,602)		(22,769)		(179)		(19,173)		(19,352)
Loans and leases, net	$	30,234	$	3,046,113	$	3,076,347	$	41,168	$	2,632,877	$	2,674,045


	September 30, 2022
	30-60 Days		61-89 Days		Past Due 90				Total
	Past Due and		Past Due and		Days or More				Past Due and
	Accruing		Accruing		and Accruing		Nonaccrual		Nonaccrual		PCI		Current		Total
Commercial real estate	$	103	$	—	$	—	$	305	$	408	$	16,148	$	1,520,495	$	1,537,051
Consumer real estate		271		132		—		2,061		2,464		8,695		551,249		562,408
Construction and land development		—		—		—		858		858		1,557		402,592		405,007
Commercial and industrial		96		58		—		117		271		2,523		511,486		514,280
Leases		143		—		20		29		192		1,472		63,134		64,798
Consumer and other		175		27		—		9		211		6		15,355		15,572
Total	$	788	$	217	$	20	$	3,379	$	4,404	$	30,401	$	3,064,311	$	3,099,116