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 March 31, 2024



☐	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 New York Stock Exchange

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 May 03, 2024, there were 17,062,704 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 March 31, 2024 and December 31, 2023	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2024 and 2023	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2024 and 2023	5

	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2024 and 2023	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	50

PART II – OTHER INFORMATION		51

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

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)
	March 31,		December 31,
	2024		2023*
ASSETS:
Cash and due from banks	$	48,329	$	61,586
Interest-bearing deposits with banks		343,778		233,237
Federal funds sold		85,834		57,448
Total cash and cash equivalents		477,941		352,271
Securities available-for-sale, at fair value		474,347		408,410
Securities held-to-maturity, at amortized cost		180,169		281,236
Other investments		13,718		13,662
Loans held for sale		4,861		4,418
Loans and leases		3,477,555		3,444,462
Less: Allowance for credit losses		(34,203)		(35,066)
Loans and leases, net		3,443,352		3,409,396
Premises and equipment, net		92,694		92,963
Other real estate owned		696		517
Goodwill and other intangibles, net		106,537		107,148
Bank owned life insurance		83,957		83,434
Other assets		76,418		75,932
Total assets	$	4,954,690	$	4,829,387

LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand	$	907,254	$	898,044
Interest-bearing demand		996,298		1,006,915
Money market and savings		1,952,410		1,812,427
Time deposits		538,159		550,468
Total deposits		4,394,121		4,267,854
Borrowings		9,849		13,078
Subordinated debt		42,120		42,099
Other liabilities		41,804		46,470
Total liabilities		4,487,894		4,369,501
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; 17,056,704 and 16,988,879 shares issued and outstanding, respectively		17,057		16,989
Additional paid-in capital		296,061		295,699
Retained earnings		181,103		173,105
Accumulated other comprehensive income (loss)		(27,425)		(25,907)
Total shareholders' equity		466,796		459,886
Total liabilities and shareholders' equity	$	4,954,690	$	4,829,387

* Derived from audited financial statements.

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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


		Three Months Ended
	March 31,
	2024		2023
Interest income:
Loans and leases, including fees	$	50,020	$	44,728
Securities:
Taxable		4,548		3,651
Tax-exempt		352		353
Federal funds sold and other earning assets		4,863		4,446
Total interest income		59,783		53,178
Interest expense:
Deposits		27,035		16,346
Borrowings		128		224
Subordinated debt		899		626
Total interest expense		28,062		17,196
Net interest income		31,721		35,982
Provision for credit losses		(440)		550
Net interest income after provision for credit losses		32,161		35,432
Noninterest income:
Service charges on deposit accounts		1,612		1,445
Mortgage banking		280		172
Investment services		1,380		1,005
Insurance commissions		1,103		1,259
Interchange and debit card transaction fees, net		1,253		1,383
Other		2,752		1,661
Total noninterest income		8,380		6,925
Noninterest expense:
Salaries and employee benefits		16,639		16,742
Occupancy and equipment		3,396		3,208
FDIC insurance		915		541
Other real estate and loan related expense		584		572
Advertising and marketing		302		355
Data processing and technology		2,465		2,163
Professional services		924		807
Amortization of intangibles		612		659
Other		2,716		2,482
Total noninterest expense		28,553		27,529
Income before income tax expense		11,988		14,828
Income tax expense		2,630		3,328
Net income	$	9,358	$	11,500
Earnings per common share:
Basic	$	0.56	$	0.69
Diluted	$	0.55	$	0.68
Weighted average common shares outstanding:
Basic		16,849,735		16,791,406
Diluted		16,925,408		16,896,494

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)


	Three Months Ended
	March 31,
	2024		2023
Net income	$	9,358	$	11,500
Other comprehensive income (loss):
Investment securities:
Unrealized holding gains (losses) on securities available-for-sale		(3,107)		8,276
Tax effect		803		(2,138)
Amortization of unrealized gains (losses) on investment securities transferred from available-for-sale to held-to-maturity		35		40
Tax effect		(9)		(10)
Unrealized gains (losses) on securities available-for-sale, net of tax		(2,278)		6,168
Fair value hedging activities:
Unrealized gains (losses) on fair value municipal security hedges		420		—
Tax effect		(108)		—
Reclassification adjustment for realized losses (gains) included in net income		106		—
Tax effect		(27)		—
Unrealized gains (losses) on fair value hedged instruments arising during the period, net of tax		391		—
Cash flow hedging activities:
Unrealized gains (losses) on cash flow hedges		460		722
Tax effect		(119)		(186)
Reclassification adjustment for realized losses (gains) included in net income		38		—
Tax effect		(10)		—
Unrealized gains (losses) on cash flow hedge instruments arising during the period, net of tax		369		536

Total other comprehensive income (loss)		(1,518)		6,704
Comprehensive income	$	7,840	$	18,204

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three Months Ended March 31, 2024 and 2023

(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, 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	—		—		—		11,500		—		11,500
Other comprehensive income	—		—		—		—		6,704		6,704
Common stock issued pursuant to:
Stock options exercised	15,705		15		150		—		—		165
Restricted stock, net of forfeitures	87,582		88		(88)		—		—		—
Stock compensation expense	—		—		538		—		—		538
Common stock dividend ($0.08 per share)	—		—		—		(1,354)		—		(1,354)
Balance, March 31, 2023	17,004,092	$	17,004	$	294,930	$	160,085	$	(28,620)	$	443,399

Balance, December 31, 2023	16,988,879	$	16,989	$	295,699	$	173,105	$	(25,907)	$	459,886
Net income	—		—		—		9,358		—		9,358
Other comprehensive loss	—		—		—		—		(1,518)		(1,518)
Common stock issued pursuant to:
Stock options exercised	4,500		4		39		—		—		43
Restricted stock, net of forfeitures	68,757		69		(69)		—		—		—
Restricted stock withheld for taxes	(5,432)		(5)		(126)		—		—		(131)
Stock compensation expense	—		—		518		—		—		518
Common stock dividend ($0.08 per share)	—		—		—		(1,360)		—		(1,360)
Balance, March 31, 2024	17,056,704	$	17,057	$	296,061	$	181,103	$	(27,425)	$	466,796

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2024		2023
Cash flows from operating activities:
Net income	$	9,358	$	11,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,460		2,614
Amortization of intangible assets		612		659
Provision for credit losses		(440)		550
Stock compensation expense		518		538
Deferred income tax expense		1,439		3,475
Increase in cash surrender value of bank owned life insurance		(523)		(469)
Net gains from mortgage banking		(250)		(172)
Origination of loans held for sale		(10,825)		(10,319)
Proceeds from sales of loans held for sale		10,632		8,919
Net (gain) loss from sale/disposal of fixed assets		(1,373)		8
Net change in:
Accrued interest receivable		(64)		(217)
Accrued interest payable		(781)		106
Other assets		(1,616)		1,674
Other liabilities		(2,071)		(7,512)
Net cash provided by operating activities		7,076		11,354
Cash flows from investing activities:
Available-for-sale:
Proceeds from maturities, calls and paydowns		11,394		7,554
Purchases		(81,009)		(76,606)
Held-to-maturity:
Proceeds from maturities, calls and paydowns		100,527		628
Proceeds from sales of other investments		—		1,480
Purchases of other investments		(205)		(9)
Net increase in loans and leases		(34,057)		(28,943)
Proceeds from sale of fixed assets		3,248		623
Purchases of premises and equipment		(2,914)		(1,561)
Net cash used in investing activities		(3,016)		(96,834)
Cash flows from financing activities:
Net increase in deposits		126,287		152,493
Net decrease in securities sold under agreements to repurchase		(1,229)		(729)
Repayment of borrowings		(2,000)		(24,585)
Cash dividends paid		(1,360)		(1,354)
Issuance of common stock		43		165
Restricted shares withheld for taxes		(131)		—
Net cash provided by financing activities		121,610		125,990
Net change in cash and cash equivalents		125,670		40,510
Cash and cash equivalents, beginning of period		352,271		266,424
Cash and cash equivalents, end of period	$	477,941	$	306,934
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	28,843	$	17,091
Net cash paid during the period for income taxes		5		19
Noncash investing and financing activities:
Recognition of operating lease assets in exchange for lease liabilities		99		—
Acquisition of real estate through foreclosure		179		272

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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the "Company," “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 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 credit losses, the valuation of foreclosed assets and deferred taxes, 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, 2023.

Recently Issued and Adopted Accounting Pronouncements:

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. ASU 2022-03 did not have an impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” ASU 2023-01 requires entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. ASU 2023-01 also provides certain practical expedients applicable to private companies and not-for-profit organizations. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-01 did not have an impact on the Company’s Consolidated Financial Statements.

In March 2023, the FASB issued ASU No. 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 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. The guidance is effective for fiscal years beginning after December 15, 2023. ASU 2023-02 did not have an impact on the Company’s Consolidated Financial Statements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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, 2023, as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is accessing ASU 2023-07, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.

In December 2023, FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. The guidance is effective for us for fiscal years beginning after December 15, 2024, though early adoption is permitted. The Company is accessing ASU 2023-09, and its adoption is not expected to have a significant impact on our Consolidated Financial Statements.

Note 2. 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 presented below. There were no antidilutive shares for the three months ended March 31, 2024, and March 31, 2023, 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
	March 31,
	2024		2023
Basic earnings per share computation:
Net income available to common shareholders	$	9,358	$	11,500
Average common shares outstanding – basic		16,849,735		16,791,406
Basic earnings per share	$	0.56	$	0.69
Diluted earnings per share computation:
Net income available to common shareholders	$	9,358	$	11,500
Average common shares outstanding – basic		16,849,735		16,791,406
Incremental shares from assumed conversions:
Stock options and restricted stock		75,673		105,088
Average common shares outstanding - diluted		16,925,408		16,896,494
Diluted earnings per common share	$	0.55	$	0.68

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3. Securities

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 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 are amortized to their earliest call date.

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.

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


	March 31, 2024
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	84,065	$	—	$	(8,790)	$	75,275
U.S. Government-sponsored enterprises (GSEs)		48,393		725		(169)		48,949
Municipal securities		18,407		98		(487)		18,018
Other debt securities		39,321		164		(3,546)		35,939
Mortgage-backed securities (GSEs)		319,389		699		(23,922)		296,166
Total	$	509,575	$	1,686	$	(36,914)	$	474,347


	March 31, 2024
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	50,030	$	—	$	(227)	$	49,803
U.S. Government-sponsored enterprises (GSEs)		49,032		—		(7,897)		41,135
Municipal securities		52,423		—		(6,582)		45,841
Mortgage-backed securities (GSEs)		28,684		—		(4,250)		24,434
Total	$	180,169	$	—	$	(18,956)	$	161,213


	December 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	84,307	$	—	$	(8,274)	$	76,033
U.S. Government-sponsored enterprises (GSEs)		46,983		1,256		(146)		48,093
Municipal securities		18,616		135		(475)		18,276
Other debt securities		36,863		93		(3,887)		33,069
Mortgage-backed securities (GSEs)		254,288		588		(21,937)		232,939
Total	$	441,057	$	2,072	$	(34,719)	$	408,410

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	December 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,066	$	—	$	(1,482)	$	148,584
U.S. Government-sponsored enterprises (GSEs)		49,336		—		(7,143)		42,193
Municipal securities		52,680		—		(6,178)		46,502
Mortgage-backed securities (GSEs)		29,154		—		(3,895)		25,259
Total	$	281,236	$	—	$	(18,698)	$	262,538

At March 31, 2024 and December 31, 2023, securities with a carrying value totaling approximately $444.6 million and $358.3 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

For the three months ended March 31, 2024, and 2023 there were no gross gains or gross losses related to the sale of investment securities.

The amortized cost and estimated fair value of securities at March 31, 2024, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2024
	Amortized		Fair
Available-for-sale:	Cost		Value
Due in one year or less	$	1,280	$	1,274
Due from one year to five years		88,430		79,446
Due from five years to ten years		87,487		84,734
Due after ten years		12,989		12,727
		190,186		178,181
Mortgage-backed securities		319,389		296,166
Total	$	509,575	$	474,347

Held-to-maturity:
Due in one year or less	$	50,030	$	49,802
Due from one year to five years		745		701
Due from five years to ten years		47,201		40,121
Due after ten years		53,509		46,155
		151,485		136,779
Mortgage-backed securities		28,684		24,434
Total	$	180,169	$	161,213

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	March 31, 2024
	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	$	—	$	—	—	$	75,276	$	(8,790)	9	$	75,276	$	(8,790)	9
U.S. Government-sponsored enterprises (GSEs)		9,906		(141)	3		6,532		(28)	5		16,438		(169)	8
Municipal securities		2,156		(11)	5		12,565		(476)	19		14,721		(487)	24
Other debt securities		2,408		(41)	2		29,415		(3,505)	26		31,823		(3,546)	28
Mortgage-backed securities (GSEs)		63,256		(831)	21		177,765		(23,091)	87		241,021		(23,922)	108
Total	$	77,726	$	(1,024)	31	$	301,553	$	(35,890)	146	$	379,279	$	(36,914)	177

	March 31, 2024
	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	$	—	$	—	—	$	49,802	$	(227)	2	$	49,802	$	(227)	2
U.S. Government-sponsored enterprises (GSEs)		—		—	—		41,135		(7,897)	13		41,135		(7,897)	13
Municipal securities		—		—	—		45,840		(6,582)	35		45,840		(6,582)	35
Mortgage-backed securities (GSEs)		—		—	—		24,434		(4,250)	5		24,434		(4,250)	5
Total	$	—	$	—	—	$	161,211	$	(18,956)	55	$	161,211	$	(18,956)	55


	December 31, 2023
	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	$	—	$	—	—	$	76,033	$	(8,274)	9	$	76,033	$	(8,274)	9
U.S. Government-sponsored enterprises (GSEs)		9,743		(137)	3		1,482		(9)	3		11,225		(146)	6
Municipal securities		2,786		(2)	2		9,849		(473)	17		12,635		(475)	19
Other debt securities		2,986		(17)	2		29,057		(3,870)	26		32,043		(3,887)	28
Mortgage-backed securities (GSEs)		16,401		(229)	8		176,351		(21,708)	88		192,752		(21,937)	96
Total	$	31,916	$	(385)	15	$	292,772	$	(34,334)	143	$	324,688	$	(34,719)	158

	December 31, 2023
	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	$	—	$	—	—	$	148,584	$	(1,482)	4	$	148,584	$	(1,482)	4
U.S. Government-sponsored enterprises (GSEs)		—		—	—		42,194		(7,143)	13		42,194		(7,143)	13
Municipal securities		—		—	—		46,500		(6,178)	35		46,500		(6,178)	35
Mortgage-backed securities (GSEs)		—		—	—		25,258		(3,895)	5		25,258		(3,895)	5
Total	$	—	$	—	—	$	262,536	$	(18,698)	57	$	262,536	$	(18,698)	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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Company currently does not intend to sell those available-for-sale securities that have an unrealized loss at March 31, 2024, 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 March 31, 2024, 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 March 31, 2024. 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 March 31, 2024, continue to perform as scheduled and we do not believe an allowance 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 March 31, 2024, 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 (ACL”)

There were no past due or nonaccrual AFS or HTM securities at March 31, 2024, or December 31, 2023. 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 losses related to AFS or HTM securities recorded during the three months ended March 31, 2024, and 2023, respectively, because the 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 March 31, 2024, 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):


	March 31,		December 31,
	2024		2023
Federal Reserve Bank stock	$	9,532	$	9,526
Federal Home Loan Bank stock		3,836		3,786
First National Bankers Bank stock		350		350
Total	$	13,718	$	13,662

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Leases and Allowance for Credit Losses

Portfolio Segmentation:

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


	March 31,		December 31,
	2024		2023
Commercial real estate	$	1,743,205	$	1,739,205
Consumer real estate		659,209		649,867
Construction and land development		321,860		327,185
Commercial and industrial		667,903		645,918
Leases		71,909		68,752
Consumer and other		13,469		13,535
Total loans and leases		3,477,555		3,444,462
Less: Allowance for credit losses		(34,203)		(35,066)
Loans and leases, net	$	3,443,352	$	3,409,396

The loan and lease portfolio is disaggregated into segments. 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 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.

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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.

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


	Three Months Ended March 31, 2024
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	15,264	$	7,249	$	4,874	$	6,924	$	640	$	115	$	35,066
Charged-off loans and leases		—		(107)		(441)		(201)		(77)		(94)		(920)
Recoveries of charge-offs		2		79		—		26		—		28		135
Provision charged to expense ⁽¹⁾		(423)		25		271		(108)		94		63		(78)
Ending balance	$	14,843	$	7,246	$	4,704	$	6,641	$	657	$	112	$	34,203


	Three Months Ended March 31, 2023
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	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		—		—		—		(173)		(9)		(133)		(315)
Recoveries of charge-offs		2		5		—		20		—		28		55
Provision charged to expense		174		260		(10)		37		8		81		550
Ending balance	$	14,528	$	6,411	$	5,219	$	5,359	$	637	$	125	$	32,279

(1)

In the provision charged to expense there was a release of $362 thousand unfunded commitments through the provision for credit losses not reflected in the three months ended March 31, 2024.

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 months ended March 31, 2024, and 2023, is ($78) thousand and $550 thousand, respectively. As of March 31, 2024, and December 31, 2023, our allowance for credit losses was $34.2 million and $35.1 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 0.98% at March 31, 2024, and 1.02% at December 31, 2023.

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 Assets Especially 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

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 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 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 credit loss methodology on an ongoing basis.

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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 based on year of origination (in thousands):


	March 31, 2024
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2024		2023		2022		2021		2020		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	26,854	$	272,348	$	570,319	$	420,101	$	175,214	$	232,580	$	15,370	$	-	$	1,712,786
Watch		-		4,609		1,266		1,930		2,661		10,755		559		-		21,780
Special mention		-		-		3,195		-		-		-		-		-		3,195
Substandard		-		881		-		3,362		308		893		-		-		5,444
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		26,854		277,838		574,780		425,393		178,183		244,228		15,929		-		1,743,205
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Consumer real estate
Pass		20,868		123,370		170,452		95,970		52,595		77,419		110,895		818		652,387
Watch		-		255		-		704		115		97		1,548		-		2,719
Special mention		-		-		-		-		-		52		-		-		52
Substandard		-		194		-		176		253		3,321		107		-		4,051
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		20,868		123,819		170,452		96,850		52,963		80,889		112,550		818		659,209
YTD gross charge-offs		-		-		-		-		-		(107)		-		-		(107)

Construction and land development
Pass		44,621		91,788		112,195		16,914		2,349		11,541		33,024		243		312,675
Watch		3		5,600		2,889		221		-		-		-		-		8,713
Special mention		-		438		-		-		-		-		-		-		438
Substandard		-		-		-		34		-		-		-		-		34
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		44,624		97,826		115,084		17,169		2,349		11,541		33,024		243		321,860
YTD gross charge-offs		-		-		-		-		(441)		-		-		-		(441)

Commercial and industrial
Pass		21,783		163,348		156,287		56,170		21,534		32,713		210,622		613		663,070
Watch		-		158		14		2,905		-		-		519		35		3,631
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		183		614		200		129		76		-		-		1,202
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		21,783		163,689		156,915		59,275		21,663		32,789		211,141		648		667,903
YTD gross charge-offs		-		(85)		(116)		-		-		-		-		-		(201)

Leases
Pass		11,038		26,324		24,078		7,176		2,553		740		-		-		71,909
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		11,038		26,324		24,078		7,176		2,553		740		-		-		71,909
YTD gross charge-offs		-		(77)		-		-		-		-		-		-		(77)

Consumer and other
Pass		1,653		4,682		1,602		715		358		392		4,058		-		13,460
Watch		-		-		-		-		-		9		-		-		9
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		1,653		4,682		1,602		715		358		401		4,058		-		13,469
YTD gross charge-offs		-		(39)		(22)		(9)		(7)		(17)		-		-		(94)

Total loans
Pass		126,817		681,860		1,034,933		597,046		254,603		355,385		373,969		1,674		3,426,287
Watch		3		10,622		4,169		5,760		2,776		10,861		2,626		35		36,852
Special mention		-		438		3,195		-		-		52		-		-		3,685
Substandard		-		1,258		614		3,772		690		4,290		107		-		10,731
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	126,820	$	694,178	$	1,042,911	$	606,578	$	258,069	$	370,588	$	376,702	$	1,709	$	3,477,555
Total YTD gross charge-offs	$	-	$	(201)	$	(138)	$	(9)	$	(448)	$	(124)	$	-	$	-	$	(920)

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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):


	March 31, 2024
					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	$	143	$	51	$	1,068	$	1,262	$	1,741,943	$	1,743,205
Consumer real estate		721		777		492		1,990		657,219		659,209
Construction and land development		—		23		—		23		321,837		321,860
Commercial and industrial		1,817		92		1,843		3,752		664,151		667,903
Leases		881		340		—		1,221		70,688		71,909
Consumer and other		65		23		22		110		13,359		13,469
Total	$	3,627	$	1,306	$	3,425	$	8,358	$	3,469,197	$	3,477,555


	December 31, 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	$	52	$	270	$	1,660	$	1,982	$	1,737,223		1,739,205
Consumer real estate		2,216		1,347		561		4,124		645,743		649,867
Construction and land development		631		—		620		1,251		325,934		327,185
Commercial and industrial		956		330		2,286		3,572		642,346		645,918
Leases		1,208		132		212		1,552		67,200		68,752
Consumer and other		80		9		98		187		13,348		13,535
Total	$	5,143	$	2,088	$	5,437	$	12,668	$	3,431,794	$	3,444,462

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 March 31, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at March 31, 2024 for which there was no related allowance for credit losses recorded (in thousands):


	March 31, 2024						December 31, 2023
	Total		Nonaccrual		Loans Past Due		Total		Nonaccrual		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		With No Allowance		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		for Credit Losses		Still Accruing
Commercial real estate	$	1,752	$	802	$	—	$	2,044	$	1,352	$	—
Consumer real estate		2,466		1,503		—		2,647		1,562		—
Construction and land development		—		—		—		620		—		—
Commercial and industrial		1,953		160		73		2,480		160		—
Leases		—		—		—		140		—		72
Consumer and other		—		—		22		—		—		98
Total	$	6,171	$	2,465	$	95	$	7,931	$	3,074	$	170

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	March 31, 2024
	Real Estate		Other		Total
Commercial real estate	$	4,412	$	—	$	4,412
Consumer real estate		2,445		—		2,445
Construction and land development		—		—		—
Commercial and industrial		—		1,018		1,018
Leases		—		—		—
Consumer and other		—		—		—
Total	$	6,857	$	1,018	$	7,875

	December 31, 2023
	Real Estate		Other		Total
Commercial real estate	$	5,155	$	—	$	5,155
Consumer real estate		2,756		—		2,756
Construction and land development		1,411		—		1,411
Commercial and industrial		—		1,018		1,018
Leases		—		—		—
Consumer and other		—		—		—
Total	$	9,322	$	1,018	$	10,340

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 months ended March 31, 2024. There were no loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2023 (dollars in thousands):


					Payment Delay
	Payment		Term		and Term
Three Months Ended March 31, 2024	Delay		Extension		Extension		Total
Commercial real estate	$	—	$	200	$	—	$	200
Consumer real estate		—		—		—		—
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Leases		—		—		—		—
Consumer and other		—		—		—		—
Total	$	—	$	200	$	—	$	200

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024 (dollars in thousands):


	Weighted-Average
	Term
	Extension
Three Months Ended March 31, 2024	(in months)
Commercial real estate		3
Consumer real estate		—
Construction and land development		—
Commercial and industrial		—
Leases		—
Consumer and other		—

No loan modifications made to borrowers experiencing financial difficulty defaulted during the three months ended March 31, 2024, and 2023, respectively.

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The table below shows an age analysis of loans and leases made to borrowers experiencing financial difficulty that were modified in the last twelve months, (in thousands):


	March 31, 2024
					90 Days
			30-89 Days		or More
	Current		Past Due		Past Due		Nonaccrual		Total
Commercial real estate	$	741	$	—	$	—	$	378	$	1,119
Consumer real estate		2,339		50		—		100		2,489
Construction and land development		682		—		—		—		682
Commercial and industrial		—		—		—		129		129
Leases		—		—		—		—		—
Consumer and other		—		—		—		—		—
Total	$	3,762	$	50	$	—	$	607	$	4,419

Foreclosure Proceedings and Balances:

As of March 31, 2024, there were two residential real estate properties totaling $279 thousand secured by real estate included in other real estate owned and there was two residential real estate loans totaling $694 thousand in the process of foreclosure.

Note 5. 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.

The Company’s other intangible assets consist of core deposit intangibles, insurance agency customer relationships and insurance agency tradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the insurance agency customer relationships are amortized over 14 years and the insurance agency tradename is amortized over five years.

The carrying amount of goodwill at March 31, 2024, and December 31, 2023, was $96.1 million, respectively.

Other intangible assets as of the dates indicated is summarized below (in thousands):


	Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:	Intangibles		Intangibles		Intangibles		Total
March 31, 2024:
Beginning balance January 1, 2024, gross	$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization		(10,183)		(2,565)		(63)		(12,811)
Balance, March 31, 2024, other intangible assets, net	$	7,287	$	3,105	$	-	$	10,392

December 31, 2023:
Beginning balance January 1, 2023, gross	$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization		(9,758)		(2,379)		(63)		(12,200)
Balance, December 31, 2023, other intangible assets, net	$	7,712	$	3,291	$	-	$	11,003

The aggregate amortization expense for other intangible assets for the three months ended March 31, 2024, and 2023, was $612 thousand and $659 thousand, respectively.

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As of March 31, 2024, the estimated aggregate amortization expense for future periods for intangibles is as follows (in thousands):


Remainder of 2024	$	1,813
2025		2,256
2026		2,086
2027		1,904
2028		1,139
Thereafter		1,194
Total	$	10,392

Note 6. Borrowings, Line of Credit and Subordinated Debt

Borrowings:

At March 31, 2024, total borrowings were $9.8 million compared to $13.1 million at December 31, 2023. Borrowings consist of the following (in thousands):


	March 31,		December 31,
	2024		2023
Securities sold under customer repurchase agreements	$	3,849	$	5,078
Other borrowings		6,000		8,000
Total	$	9,849	$	13,078

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 $7.4 million and $7.6 million at March 31, 2024 and December 31, 2023, respectively. The average balance of repurchase agreements during the three-month period ended March 31, 2024, and 2023 was $4.8 million and $4.4 million, respectively. The maximum month-end outstanding balance for the three-month period ended March 31, 2024, and 2023 was $5.3 million and $4.2 million, respectively.

Other Borrowings:

The Company has a revolving line of credit for an aggregate amount of $35 million. The maturity of the line of credit is February 1, 2025. At March 31, 2024, $6.0 million was outstanding under the line of credit, and $29.0 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, 2023 and December 31, 2022. Unamortized debt issuance cost was $380 thousand and $401 thousand at March 31, 2024 and December 31, 2023, 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. On 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

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floating rate equal to three-month CME Term SOFR, plus 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’ unamortized debt issuance costs totaled $380 thousand at March 31, 2024, and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand for the three months ended March 31, 2024, and 2023, respectively.

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.

Note 7. 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 months ending March 31, 2024, and 2023, was $500 thousand and $466 thousand, respectively.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At March 31, 2024, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has 1,605,020 Rights available for future grants or awards.

The Company’s 2015 Stock Incentive Plan has 11,840 Rights issued.

Stock Options:

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


		Weighted
		Average
		Exercisable
	Number	Price
Outstanding at December 31, 2023	16,340	$	13.55
Granted	—		—
Exercised	(4,500)		9.60
Forfeited	—		—
Outstanding at March 31, 2024	11,840	$	15.05

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Information pertaining to stock options outstanding at March 31, 2024, is as follows:

Options Outstanding

Options Exercisable

Weighted-

Average

Weighted-

Remaining

Average

Exercise

Number

Contractual

Exercise

Number

Exercise

Prices

Outstanding

Life

Price

Exercisable

Price

15.05

11,840

1.50 years

15.05

11,840

15.05

Outstanding, end of period

11,840

1.50 years

15.05

11,840

15.05

The Company did not recognize any stock option-based compensation expense during the three months ended March 31, 2024, and 2023, 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.

Stock options of 4,500 and 15,705 shares were exercised during the three month periods ended March 31, 2024, and 2023, respectively. The income tax benefit recognized for the exercise of options during the three months ended March 31, 2024, and 2023, was $14 thousand and $65 thousand, respectively.

The intrinsic value of options exercised during the three months ended March 31, 2024, and 2023, was $54 thousand and $242 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at March 31, 2024, was $71 thousand. Cash received from options exercised under all share-based payment arrangements for the three months ended March 31, 2024, was $43 thousand.

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Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended March 31, 2024, is presented below:


		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2023	171,770	$	22.22
Granted	69,643		24.15
Vested	(39,576)		21.28
Forfeited/expired	(886)		26.53
Balance at March 31, 2024	200,951	$	23.06

The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three months ended March 31, 2024, and 2023, was $518 thousand and $538 thousand, respectively. As of March 31, 2024, there was $2.5 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 2.47 years. The grant-date fair value of restricted stock awards vested was $842 thousand for the three months ended March 31, 2024.

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, 2023	20,000	$	20.70
Granted	—		—
Exercised	—		—
Forfeited	—		—
Outstanding at March 31, 2024	20,000	$	20.70

Information pertaining to SARs outstanding at March 31, 2024, is as follows:

SARs Outstanding

SARs Exercisable

Weighted-

Average

Weighted-

Remaining

Average

Weighted- Average

Exercise

Number

Contractual

Exercise

Number

Exercise

Prices

Outstanding

Life

Price

Exercisable

Price

20.70

20,000

0.75 years

20.70

20,000

20.70

Outstanding, end of period

20,000

0.75 years

20.70

20,000

20.70

SARs compensation expense of ($56) thousand and ($95) thousand was recognized for the three month periods ended March 31, 2024, and 2023, respectively. The credit in expense for the three month periods ended March 31, 2024, and 2023, respectively, was due to adjustments related to the fair value evaluation of SARs.

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Note 8. 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):


	March 31,		December 31,
	2024		2023
Commitments to extend credit	$	696,828	$	716,951
Standby letters of credit		17,855		7,611

At March 31, 2024, and December 31, 2023, the allowance for credit losses for these off-balance sheet commitments was $2.0 million and $2.4 million, respectively. The expense (credit) related to the allowance for credit losses for off-balance sheet commitments during the three months ended March 31, 2024, and 2023, was ($362) thousand and $75 thousand, 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 commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At March 31, 2024 and December 31, 2023, 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 9. 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

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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.

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 measured on a recurring basis:

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.

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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
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2024:
Assets:
Securities available-for-sale:
U.S. Treasury	$	75,275	$	—	$	75,275	$	—
U.S. Government-sponsored enterprises (GSEs)		48,949		—		48,949		—
Municipal securities		18,018		—		18,018		—
Other debt securities		35,939		—		35,939		—
Mortgage-backed securities (GSEs)		296,166		—		296,166		—
Total securities available-for-sale		474,347		—		474,347		—

Derivative financial instruments and interest rate swap agreements		12,949		—		12,949		—
Total assets at fair value	$	487,296	$	—	$	487,296	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	13,907	$	—	$	13,907	$	—

December 31, 2023:
Assets:
Securities available-for-sale:
U.S. Treasury	$	76,033	$	—	$	76,033	$	—
U.S. Government-sponsored enterprises (GSEs)		48,093		—		48,093		—
Municipal securities		18,276		—		18,276		—
Other debt securities		33,069		—		33,069		—
Mortgage-backed securities (GSEs)		232,939		—		232,939		—
Total securities available-for-sale		408,410		—		408,410		—

Derivative financial instruments and interest rate swap agreements		12,821		—		12,821		—
Total assets at fair value	$	421,231	$	—	$	421,231	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	14,807	$	—	$	14,807	$	—

During the three months ending March 31, 2024 and twelve months ended December 31, 2023, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

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Assets Measured at Fair Value on a Nonrecurring Basis:

Under certain circumstances management 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
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2024:
Collateral dependent loans	$	653	$	—	$	—	$	653
Other real estate owned		179		—		—		179

December 31, 2023:
Collateral dependent loans	$	1,295	$	—	$	—	$	1,295
Other real estate owned		279		—		—		279

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


					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
March 31, 2024:
Collateral dependent loans	$	653	Appraisal	Appraisal discounts	79	%
Other real estate owned		179	Appraisal	Appraisal discounts	35	%

December 31, 2023:
Collateral dependent loans	$	1,295	Appraisal	Appraisal discounts	73	%
Other real estate owned		279	Appraisal	Appraisal discounts	33	%

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 $3.1 million and $3.5 million as of March 31, 2024, and December 31, 2023, 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

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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
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
March 31, 2024:
Assets:
Cash and cash equivalents	$	477,941	$	477,941	$	—	$	—	$	477,941
Securities available-for-sale		474,347		—		474,347		—		474,347
Securities held-to-maturity		180,169		—		161,213		—		161,213
Other investments		13,718		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,448,213		—		—		3,295,376		3,295,376
Derivative financial instruments and interest rate swap agreements		12,949		—		12,949		—		12,949

Liabilities:
Noninterest-bearing demand deposits		907,254		—		907,254		—		907,254
Interest-bearing demand deposits		996,298		—		996,298		—		996,298
Money market and savings deposits		1,952,410		—		1,952,410		—		1,952,410
Time deposits		538,159		—		534,548		—		534,548
Borrowings		9,849		—		9,849		—		9,849
Subordinated debt		42,120		—		—		39,903		39,903
Derivative financial instruments and interest rate swap agreements		13,907		—		13,907		—		13,907

December 31, 2023:
Assets:
Cash and cash equivalents	$	352,271	$	352,271	$	—	$	—	$	352,271
Securities available-for-sale		408,410		—		408,410		—		408,410
Securities held-to-maturity		281,236		—		262,538				262,538
Other investments		13,662		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,413,814		—		—		3,308,980		3,308,980
Derivative financial instruments and interest rate swap agreements		12,821		—		12,821		—		12,821

Liabilities:
Noninterest-bearing demand deposits		898,044		—		898,044		—		898,044
Interest-bearing demand deposits		1,006,915		—		1,006,915		—		1,006,915
Money market and savings deposits		1,812,427		—		1,812,427		—		1,812,427
Time deposits		550,468		—		548,397		—		548,397
Borrowings		13,078		—		13,078		—		13,078
Subordinated debt		42,099		—		—		39,822		39,822
Derivative financial instruments and interest rate swap agreements		14,807		—		14,807		—		14,807

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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 10.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 certain fixed rate securities designated as available-for-sale. The hedging strategy converts the fixed interest rates to SOFR-based variable interest rates. These derivatives are designated as partial term hedges covering specified periods of time prior to the maturity date of the hedged securities. The Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities in 2018, which allows such partial term hedge designations.

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


		Weighted
		Average
	Balance	Remaining	Weighted
	Sheet	Maturity	Average		Receive	Notional		Estimated
Asset/Liability derivatives	Location	(In Years)	Pay Rate		Rate	Amount		Fair Value
March 31, 2024:
Interest rate swap agreements - securities	Other assets	3.38	4.24	%	SOFR Overnight	$	26,457	$	91
Interest rate swap agreements - securities	Other liabilities	1.96	4.28	%	SOFR Overnight	$	22,050	$	(100)

December 31, 2023:
Interest rate swap agreements - securities	Other liabilities	3.40	4.25	%	SOFR Overnight	$	27,050	$	(536)

The effects of the Company’s fair value hedge relationships reported in interest income on taxable AFS securities on the consolidated income statement were as follows (in thousands):


	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2024		2023
Interest income on taxable AFS securities	$	4,442	$	3,651
Effects of fair value hedge relationships		106		—
Reported interest income on taxable AFS securities	$	4,548	$	3,651


	Three Months Ended		Three Months Ended
	March 31,		March 31,
Gain (loss) on fair value hedging relationship	2024		2023
Interest rate swap agreements - securities:
Hedged items	$	(9)	$	—
Derivative designated as hedging instruments		9		—
Carry amount of hedged assets - mortgage backed securities		48,507		—

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Derivatives Designated as Cash Flow Hedges:

The Company enters into interest rate derivative contracts on assets and liabilities that are designated as qualifying cash flow hedges. The Company hedges the exposure to variability in expected future cash flows attributable to changes in contractual specified interest 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 offsetting cash flows attributable to the hedged 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 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 March 31, 2024, the Company estimates that in the next 12 months an additional $368 thousand will be reclassified as a decrease in interest income and $259 thousand will be reclassified as a decrease in interest expense.

At March 31, 2024 and December 31, 2023, cash flow hedges are as follows (in thousands):


	March 31, 2024					December 31, 2023
	Balance Sheet	Notional		Estimated		Balance Sheet	Notional		Estimated
	Location	Amount		Fair Value		Location	Amount		Fair Value
Cash flow hedges:
Assets	Other liabilities	$	100,000	$	(1,121)	Other liabilities	$	100,000	$	(556)
Liabilities	Other assets		150,000		207	Other liabilities		150,000		(881)
Liabilities	Other liabilities		25,000		(18)	Other assets		25,000		7

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 March 31, 2024
Interest rate swaps - Assets	$	(1,121)	Interest income	$	(204)
Interest rate swaps - Liabilities		189	Interest expense		(242)

Three Months Ended March 31, 2023
Interest rate swaps - Assets	$	(581)	Interest income	$	(6)
Interest rate swaps - Liabilities		—	Interest expense		—

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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
	March 31,
	2024		2023
Total interest income	$	59,987	$	53,184
Effects of cash flow hedge relationships		(204)		(6)
Reported total interest income	$	59,783	$	53,178

Total interest expense	$	28,304	$	17,196
Effects of cash flow hedge relationships		(242)		—
Reported total interest expense	$	28,062	$	17,196

Non-hedged derivatives:

The Company 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 are recognized as other noninterest income in the current period.

At March 31, 2024 and December 31, 2023, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):


	March 31, 2024				December 31, 2023
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	289,187	$	12,651	$	294,133	$	12,813
Liabilities		289,187		(12,651)		294,133		(12,813)

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):

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 March 31, 2024, collateral totaling $670 thousand and $390 thousand at December 31, 2023, was pledged to the derivative counterparties to comply with collateral requirements.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11. 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 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 2035. 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):


		March 31,		December 31,
	Classification	2024		2023
Assets:
Operating lease right-of-use assets	Other assets	$	9,681	$	9,894
Liabilities:
Operating lease liabilities	Other liabilities	$	10,119	$	10,303

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 March 31, 2024, the weighted average remaining lease term was 8.78 years and the weighted average discount rate was 2.88%.

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
	March 31,
	2024		2023
Lease costs:
Operating lease costs	$	451	$	404
Variable lease costs		30		23
Total	$	481	$	427
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	421	$	379

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2024, were as follows (in thousands):


	Amounts
Remainder of 2024	$	1,198
2025		1,407
2026		1,334
2027		1,149
2028		1,144
Thereafter		5,371
Total future minimum lease payments		11,603
Amounts representing interest		(1,484)
Present value of net future minimum lease payments	$	10,119

Note 12. Regulatory Matters

Regulatory Capital Requirements:

The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective January 1, 2015. 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 March 31, 2024, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the “well capitalized” regulatory classification.

In December 2018, the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (“FDIC”) 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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the three months ended March 31, 2024, the Bank paid $5 million in dividends to the Company, and the Company paid a quarterly common stock dividend of $0.08 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 March 31, 2024, and December 31, 2023 are presented below (dollars in thousands):


									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2024
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	456,659	11.85	%	$	308,231	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		393,088	10.20	%		231,173	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		393,088	10.20	%		173,380	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		393,088	8.23	%		191,043	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	462,143	12.00	%	$	307,991	8.00	%	$	384,989	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		432,268	11.23	%		230,993	6.00	%		307,991	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		432,268	11.23	%		173,245	4.50	%		250,243	6.50	%
Tier 1 Capital (to Average Assets)²		432,268	9.07	%		190,725	4.00	%		238,406	5.00	%

December 31, 2023
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	448,050	11.80	%	$	303,658	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		385,795	10.16	%		227,744	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		385,795	10.16	%		170,808	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		385,795	8.27	%		186,672	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	456,134	12.02	%	$	303,680	8.00	%	$	379,600	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		427,559	11.26	%		227,760	6.00	%		303,680	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		427,559	11.26	%		170,820	4.50	%		246,740	6.50	%
Tier 1 Capital (to Average Assets)		427,559	9.18	%		186,363	4.00	%		232,954	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.

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SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13. 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 March 31, 2024
									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, 2023	$	(23,818)	$	(632)	$	(397)	$	(1,060)	$	(25,907)

Other comprehensive income (loss)		(2,304)		—		312		341		(1,651)
Reclassification of amounts included in net income		—		26		79		28		133
Net other comprehensive income (loss) during period		(2,304)		26		391		369		(1,518)

Ending balance, March 31, 2024	$	(26,122)	$	(606)	$	(6)	$	(691)	$	(27,425)

	Three Months Ended March 31, 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)		6,138		—		—		536		6,674
Reclassification of amounts included in net income		—		30		—		—		30
Net other comprehensive income (loss) during period		6,138		30		—		536		6,704

Ending balance, March 31, 2023	$	(27,478)	$	(712)	$	—	$	(430)	$	(28,620)

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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 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:

●

the impact of current and future economic and market conditions generally (including seasonality) and in the financial services industry, nationally and within our 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 as a result of the 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 impact of such developments on customer confidence, liquidity and 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;

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●

weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and 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 of mergers, acquisitions and divestitures, including our ability to continue to identify acquisition targets, successfully acquire and integrate desirable financial institutions and realize expected revenues and revenue 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, including as a result of increased remote working, which may be exacerbated by recent developments in generative artificial intelligence;

●

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, as well as legislative, tax and regulatory changes that impact the money supply and 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;

●

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 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 length of time and amount of resources required to consummate such transactions, and may reduce the anticipated benefit; and

●

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

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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.

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, 2023. 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, 2023. There have been no other significant changes in the Company’s application of critical accounting policies since December 31, 2023.

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the first quarter of 2024:

●

Net income totaled $9.4 million, or $0.55 per diluted common share, during the first quarter of 2024 compared to $11.5 million, or $0.68 per diluted common share, for the same period in 2023.

●

Annualized return on average assets for the three months ended March 31, 2024, and 2023 was 0.77% and 0.97%, respectively.

●

Net organic loan and lease increased year-to-date for 2024, with net loans and leases increasing $34.0 million from December 31, 2023.

●

Deposit growth of $126.3 million from December 31, 2023.

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Selected Financial Information

The following is a summary of certain financial information for the three month periods ended March 31, 2024 and 2023 and as of March 31, 2024 and December 31, 2023 (dollars in thousands, except per share data):


	Three Months Ended
	March 31,
	2024			2023				Change
Income Statement:
Interest income	$	59,783		$	53,178		$	6,605
Interest expense		28,062			17,196			10,866
Net interest income		31,721			35,982			(4,261)
Provision for credit losses		(440)			550			(990)
Net interest income after provision for credit losses		32,161			35,432			(3,271)
Noninterest income		8,380			6,925			1,455
Noninterest expense		28,553			27,529			1,024
Income before income taxes		11,988			14,828			(2,840)
Income tax expense		2,630			3,328			(698)
Net income	$	9,358		$	11,500		$	(2,142)

Per Share Data:
Basic income per common share	$	0.56		$	0.69		$	(0.13)
Diluted income per common share	$	0.55		$	0.68		$	(0.14)

Performance Ratios:
Return on average assets		0.77	%		0.97	%		(0.20)	%
Return on average shareholders' equity		8.16	%		10.79	%		(2.62)	%


	March 31,		December 31,
	2024		2023			Change
Balance Sheet:
Loans and leases, net	$	3,443,352	$	3,409,396	$	33,956
Deposits		4,394,121		4,267,854		126,267

Analysis of Results of Operations

First quarter of 2024 compared to 2023

Net income was $9.4 million, or $0.55 per diluted common share, for the first quarter of 2024, compared to $11.5 million, or $0.68 per diluted common share, for the first quarter of 2023. For the three months ended March 31, 2024, when compared to the comparable period in 2023, the decrease in net income of $2.1 million was due to a decrease in net interest income after provision for loan and lease losses of $3.3 million, offset by an increase in noninterest income of $1.5 million and noninterest expense of $1.0 million and a decrease in income tax expense of $698 thousand. The tax equivalent net interest margin was 2.85% for the first quarter of 2024, compared to 3.31% for the first quarter of 2023. Noninterest income to average assets was 0.69% for the first quarter of 2024, increasing from 0.59% for the first quarter of 2023. Noninterest expense to average assets increased to 2.35% in the first quarter of 2024, from 2.33% in the first quarter of 2023.

Net Interest Income and Yield Analysis

First quarter of 2024 compared to 2023

Net interest income, taxable equivalent, decreased to $31.8 million for the first quarter of 2024, down from $36.1 million for the first quarter of 2023. Net interest income was positively impacted by the increase in balances of loans and leases and the increase in yield/rate on these interest-earning assets, offset by the increase in the cost of interest-bearing liabilities. Average interest-earning assets increased from $4.43 billion for the first quarter of 2023, to $4.50 billion for the first quarter of 2024, primarily from the increase in our average loan and lease balances from the Company’s continued organic loan and lease growth, which was offset by decreases average securities and average cash balances. Over this period, average loan and lease balances increased by $200.0 million and average interest-bearing deposits increased by $208.8 million. Average securities decreased by $104.1 million, average federal funds sold and other interest earning assets decreased by $24.3 million, average borrowings decreased by $5.6 million and noninterest-bearing deposits decreased by

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$142.8 million. The tax equivalent net interest margin decreased to 2.85% for the first quarter of 2024, compared to 3.31% for the first quarter of 2023. The yield on earning assets increased from 4.88% for the first quarter of 2023, to 5.36% for the first quarter of 2024, 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 2.05% for the first quarter of 2023, to 3.16% for the first quarter of 2024, primarily due to the increase in rates by the Federal Reserve and increased pricing competition.

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


	Three Months Ended March 31,
	2024						2023
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Assets:
Loans and leases, including fees	$	3,458,109	$	50,020	5.82	%	$	3,258,452	$	44,728	5.57	%
Taxable securities		620,805		4,548	2.95	%		723,540		3,651	2.05	%
Tax-exempt securities¹		64,161		445	2.79	%		65,547		447	2.77	%
Federal funds sold and other earning assets		353,913		4,863	5.53	%		378,253		4,446	4.77	%
Total interest-earning assets		4,496,988		59,876	5.36	%		4,425,792		53,272	4.88	%
Noninterest-earning assets		380,231						359,996
Total assets	$	4,877,219					$	4,785,788

Liabilities and Shareholders' Equity:
Interest-bearing demand deposits	$	996,147		6,060	2.45	%	$	944,132		4,227	1.82	%
Money market and savings deposits		1,904,855		16,149	3.41	%		1,820,455		10,381	2.31	%
Time deposits		541,792		4,826	3.58	%		469,361		1,738	1.50	%
Total interest-bearing deposits		3,442,794		27,035	3.16	%		3,233,948		16,346	2.05	%
Borrowings		11,245		128	4.58	%		16,858		224	5.39	%
Subordinated debt		42,107		899	8.59	%		42,022		626	6.04	%
Total interest-bearing liabilities		3,496,146		28,062	3.23	%		3,292,828		17,196	2.12	%
Noninterest-bearing deposits		872,840						1,015,670
Other liabilities		47,085						44,908
Total liabilities		4,416,071						4,353,406
Shareholders' equity		461,148						432,382
Total liabilities and shareholders’ equity	$	4,877,219					$	4,785,788
Net interest income, taxable equivalent			$	31,814					$	36,076
Interest rate spread					2.13	%					2.76	%
Tax equivalent net interest margin					2.85	%					3.31	%

Percentage of average interest-earning assets to average interest-bearing liabilities					128.63	%					134.41	%
Percentage of average equity to average assets					9.46	%					9.03	%

¹Yields 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 $93 thousand and $94 thousands for the three months ended March 31, 2024, and 2023, respectively.

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Noninterest Income

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


	Three Months Ended
	March 31,
	2024		2023			Change
Service charges on deposit accounts	$	1,612	$	1,445	$	167
Mortgage banking		280		172		108
Investment services		1,380		1,005		375
Insurance commissions		1,103		1,259		(156)
Interchange and debit card transaction fees, net		1,253		1,383		(130)
Other		2,752		1,661		1,091
Total noninterest income	$	8,380	$	6,925	$	1,455

First quarter of 2024 compared to 2023

Noninterest income increased by $1.5 million during the first quarter of 2024 compared to the same period in 2023. This quarterly change in total noninterest income primarily resulted from the following:

●

Increase in investment services, related to organic growth and the new Dothan, Alabama advisory team hired during the second quarter of 2023; and

●

Increase in other, primarily related to the $1.3 million gain on sale of a former branch building.

Noninterest Expense

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


	Three Months Ended
	March 31,
	2024		2023			Change
Salaries and employee benefits	$	16,639	$	16,742	$	(103)
Occupancy and equipment		3,396		3,208		188
FDIC insurance		915		541		374
Other real estate and loan related expense		584		572		12
Advertising and marketing		302		355		(53)
Data processing and technology		2,465		2,163		302
Professional services		924		807		117
Amortization of intangibles		612		659		(47)
Other		2,716		2,482		234
Total noninterest expense	$	28,553	$	27,529	$	1,024

First quarter of 2024 compared to 2023

Noninterest expense increased by $1.0 million in the first quarter of 2024 as compared to the same period in 2023. The quarterly increase in total noninterest expense primarily resulted from the following:

●

Increase in FDIC insurance, related to continued asset growth; and

●

Increase in data processing and technology, as a result of overall franchise growth and enhancements to our core systems.

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Taxes

First quarter of 2024 compared to 2023

In the first quarter of 2024 income tax expense totaled $2.6 million compared to $3.3 million in the first quarter of 2023. The effective tax rate was approximately 21.9% in the first quarter of 2024 compared to 22.4% in the first quarter of 2023.

Loan and Lease Portfolio

The Company had total net loans and leases outstanding of approximately $3.44 billion at March 31, 2024, compared to $3.41 billion at December 31, 2023. Loans secured by real estate, consisting of commercial and residential property, are the principal component of our loan and lease portfolio.

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


			% of				% of
	March 31,		Gross		December 31,		Gross
	2024		Total		2023		Total
Commercial real estate	$	1,743,205	50.0	%	$	1,739,205	50.4	%
Consumer real estate		659,209	19.0	%		649,867	18.9	%
Construction and land development		321,860	9.3	%		327,185	9.5	%
Commercial and industrial		667,903	19.2	%		645,918	18.8	%
Leases		71,909	2.1	%		68,752	2.0	%
Consumer and other		13,469	0.4	%		13,535	0.4	%
Total loans and leases		3,477,555	100.0	%		3,444,462	100.0	%
Less: Allowance for credit losses		(34,203)				(35,066)
Loans and leases, net	$	3,443,352			$	3,409,396

Loan and Lease Portfolio Maturities

The following table sets forth the maturity distribution of our loans and leases at March 31, 2024, including the interest rate sensitivity for loans and leases maturing after one year (in thousands):


											Rate Structure for Loans and Leases
											Maturing Over One Year
	One Year		One through			Five through	Over Fifteen				Fixed		Floating
	or Less		Five Years			Fifteen Years	Years		Total		Rate		Rate
Commercial real estate-mortgage	$	90,253	$	1,021,801	$	624,311	$	6,840	$	1,743,205	$	1,029,786	$	623,166
Consumer real estate-mortgage		38,160		205,064		199,501		216,484		659,209		270,711		350,338
Construction and land development		97,400		109,344		82,506		32,610		321,860		100,196		124,264
Commercial and industrial		193,308		371,871		96,949		5,775		667,903		358,873		115,722
Leases		2,325		69,434		150		—		71,909		69,584		—
Consumer and other		6,503		6,472		460		34		13,469		6,666		300
Total loans and leases	$	427,949	$	1,783,986	$	1,003,877	$	261,743	$	3,477,555	$	1,835,816	$	1,213,790

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 0.18% as of March 31, 2024, and 0.24% December 31, 2023, respectively. Total nonperforming assets as a percentage of total assets was 0.18% as of March 31, 2024, and 0.20% as of December 31, 2023, respectively.

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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, excluding nonaccrual loans 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
March 31, 2024
Commercial real estate	$	1,743,205	$	193	0.01	%	$	-	-	%	$	193	0.01	%
Consumer real estate		659,209		1,128	0.17			-	-			1,128	0.17
Construction and land development		321,860		23	0.01			-	-			23	0.01
Commercial and industrial		667,903		1,911	0.29			73	0.01			1,984	0.30
Leases		71,909		1,222	1.70			-	-			1,222	1.70
Consumer and other		13,469		89	0.66			22	0.16			111	0.82
Total	$	3,477,555	$	4,566	0.13		$	95	-		$	4,661	0.13

December 31, 2023
Commercial real estate	$	1,739,205	$	322	0.02	%	$	-	-	%	$	322	0.02	%
Consumer real estate		649,867		2,229	0.34			-	-			2,229	0.34
Construction and land development		327,185		631	0.19			-	-			631	0.19
Commercial and industrial		645,918		1,286	0.20			-	-			1,286	0.20
Leases		68,752		1,340	1.95			72	0.10			1,412	2.05
Consumer and other		13,535		89	0.66			98	0.72			187	1.38
Total	$	3,444,462	$	5,897	0.17		$	170	-		$	6,067	0.18

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


	March 31, 2024						December 31, 2023
			Nonaccrual Loans						Nonaccrual Loans
					Percentage of						Percentage of
		Total			Loans in			Total			Loans in
		Loans		Amount	Category			Loans		Amount	Category
Commercial real estate	$	1,743,205	$	1,752	0.10	%	$	1,739,205	$	2,044	0.12	%
Consumer real estate		659,209		2,466	0.37			649,867		2,647	0.41
Construction and land development		321,860		-	-			327,185		620	0.19
Commercial and industrial		667,903		1,953	0.29			645,918		2,480	0.38
Leases		71,909		-	-			68,752		140	0.20
Consumer and other		13,469		-	-			13,535		-	-
Total	$	3,477,555	$	6,171	0.18		$	3,444,462	$	7,931	0.23

Allowance for credit losses to nonaccrual loans				554.25%						424.75%

Allocation of the Allowance for Credit Losses

We maintain the allowance at a level that we deem appropriate to adequately cover change in the loan and lease portfolio. Our provision for credit losses for loans and leases for the three months ended March 31, 2024, is ($78) thousand compared to $550 thousand in the same period of 2023, a decrease of $628 thousand. As of March 31, 2024, and December 31, 2023, our allowance for credit losses was $34.2 million and $35.1 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit loss as a percentage of total loans and leases was 0.98% at March 31, 2024 and 1.02% at December 31, 2023, respectively.

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

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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
	Amount of		in Each Category			Total		Allocated to Loans in
	Allowance Allocated		to Total Loans			Loans		Each Category
March 31, 2024
Commercial real estate	$	14,843		50.0	%	$	1,743,205		0.85	%
Consumer real estate		7,246		19.0			659,209		1.10
Construction and land development		4,704		9.3			321,860		1.46
Commercial and industrial		6,641		19.2			667,903		0.99
Leases		657		2.1			71,909		0.91
Consumer and other		112		0.4			13,469		0.83
Total	$	34,203		100.0	%	$	3,477,555		0.98

December 31, 2023
Commercial real estate	$	15,264		50.4	%	$	1,739,205		0.88	%
Consumer real estate		7,249		18.9			649,867		1.12
Construction and land development		4,874		9.5			327,185		1.49
Commercial and industrial		6,924		18.8			645,918		1.07
Leases		640		2.0			68,752		0.93
Consumer and other		115		0.4			13,535		0.85
Total	$	35,066		100.0	%	$	3,444,462		1.02

The allowance associated with the individually evaluated loans and leases were approximately $3.1 million at March 31, 2024, compared to $3.5 million at December 31, 2023.

Analysis of the Allowance for Credit Losses

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


							Ratio of Net (charge-offs)
	Provision for		Net (charge-offs)		Average		Recoveries to
	Credit Losses		Recoveries		Loans		Average Loans
Three Months Ended March 31, 2024
Commercial real estate	$	(423)	$	2	$	1,739,745		-	%
Consumer real estate		25		(28)		653,990		-
Construction and land development		271		(441)		324,251		(0.14)
Commercial and industrial		(108)		(175)		656,360		(0.03)
Leases		94		(77)		70,272		(0.11)
Consumer and other		63		(66)		13,491		(0.49)
Total	$	(78)	$	(785)	$	3,458,109		(0.02)


Three Months Ended March 31, 2023
Commercial real estate	$	174		2	$	1,627,025		-	%
Consumer real estate		260		5		595,469		-
Construction and land development		(10)		-		393,260		-
Commercial and industrial		37		(153)		559,920		(0.03)
Leases		8		(9)		67,373		(0.01)
Consumer and other		81		(105)		15,405		(0.68)
Total	$	550	$	(260)	$	3,258,452		(0.01)

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 decreased from $689.6 million at December 31, 2023, to $654.5

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million at March 31, 2024, primarily as a result of Treasury securities maturities. Our securities to asset ratio has decreased from 14.3% at December 31, 2023, to 13.2% at March 31, 2024.

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 March 31, 2024 (dollars in thousands). 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
	or Less				Five Years				Ten Years				Years				Total
			Weighted				Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average				Average
Available-for-sale:		Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾			Amount	Yield ⁽¹⁾
U.S. Treasury	$	—	-	%	$	84,065	1.27	%	$	—	-	%	$	—	-	%	$	84,065	1.27	%
U.S. Government agencies		1,280	4.50			183	6.75			43,836	6.87			3,094	5.92			48,393	6.75
State and political subdivisions		—	-			3,186	2.74			5,826	3.22			9,395	3.72			18,407	3.39
Other debt securities		—	-			996	4.18			37,825	5.05			500	4.50			39,321	5.02
Mortgage-backed securities		12	1.87			10,937	1.44			121,549	3.54			186,891	3.68			319,389	3.55
Total securities	$	1,292	4.48		$	99,367	1.37		$	209,036	4.50		$	199,880	3.72		$	509,575	3.58

Held-to-maturity:
U.S. Treasury	$	50,030	1.71	%	$	—	-	%	$	—	-	%	$	—	-	%	$	50,030	1.71	%
U.S. Government agencies		—	-			—	-			42,711	1.84			6,321	2.01			49,032	1.86
State and political subdivisions		—	-			745	1.32			4,490	2.17			47,188	2.14			52,423	2.13
Other debt securities		—	-			—	-			—	-			—	-			—	-
Mortgage-backed securities		—	-			—	-			4,818	2.14			23,866	2.12			28,684	2.12
Total securities	$	50,030	1.71		$	745	1.32		$	52,019	1.90		$	77,375	2.13		$	180,169	1.94

(1)

Based on amortized cost, taxable equivalent basis

Deposits

Deposits are the primary source of funds for the Company’s lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company’s primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of March 31, 2024, brokered deposits represented approximately 0.39% of total deposits.

The following tables summarize the average balances outstanding and average interest rates for each major category of deposits for the three month periods ending March 31, 2024 and 2023, respectively (dollars in thousands):


	Three Months Ended						Three Months Ended
	March 31, 2024						March 31, 2023
	Average		% of		Average		Average		% of		Average
	Balance		Total		Rate		Balance		Total		Rate
Noninterest-bearing demand	$	872,840	20.2	%	—	%	$	1,015,670	23.9	%	—	%
Interest-bearing demand		996,147	23.1	%	2.45	%		944,132	22.2	%	1.82	%
Money market and savings		1,904,855	44.1	%	3.41	%		1,820,455	42.8	%	2.31	%
Time deposits		541,792	12.6	%	3.58	%		469,361	11.0	%	1.50	%
Total average deposits	$	4,315,634	100.0	%	2.52	%	$	4,249,618	100.0	%	1.56	%

The Company believes its deposit product offerings are properly structured to attract and retain core deposit relationships. The average cost of interest-bearing deposits for the three months ended March 31, 2024, and 2023, was 3.16% and 2.05%, respectively. The cost increase was primarily attributable to the rate increases.

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Total deposits as of March 31, 2024, were $4.39 billion, which was an increase of $126.3 million from December 31, 2023. This increase was primarily from organic deposit growth. As of March 31, 2024, the Company had outstanding time deposits under $250,000 with balances of $318.4 million and time deposits over $250,000 with balances of $219.7 million.

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


	March 31,
	2024
Three months or less	$	43,585
Three to six months		66,780
Six to twelve months		78,031
More than twelve months		31,345
Total	$	219,741

The Company's estimated uninsured deposits totaled $1.92 billion at March 31, 2024, compared to $1.76 billion at December 31, 2023, representing 43.7% and 41.3% of total deposits at March 31, 2024, and December 31, 2023, 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 down-streamed as Tier 1 capital to the Bank. Borrowings totaled $9.8 million at March 31, 2024, and consisted of short-term borrowings of $6.0 million, and $3.8 million of securities sold under repurchase agreements. Long-term debt totaled $42.1 million at March 31, 2024, and December 31, 2023, respectively, and consisted entirely of subordinated debt. For more information regarding our borrowings, see "Part I - Item 1. Consolidated Financial Statements – Note 6 – 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 March 31, 2024 and December 31, 2023, 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 12 – Regulatory Matters.”

Liquidity and Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. At March 31, 2024, we had $696.8 million of pre-approved but unused lines of credit and $17.9 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. For more information regarding our off-balance sheet arrangements, see “Part I - Item 1. Consolidated Financial Statements – Note 8 – 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

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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
March 31, 2024:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase		(0.72)%
200 basis points increase		(1.16)%
100 basis points decrease		(0.15)%
200 basis points decrease		(1.18)%

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

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


		Current Estimated Instantaneous Rate Change
March 31, 2024:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to:
100 basis points increase		(0.65)%
200 basis points increase		(2.33)%
100 basis points decrease		(0.72)%
200 basis points decrease		(3.24)%

At March 31, 2024, our model results indicated that we were within our policy limits.

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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 $51.3 million in securities that mature throughout the next 12 months. The Company also has unused borrowing capacity in the amount of $906.5 million available with the Federal Reserve, 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.

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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 September 30, 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 March 31, 2024, that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I – Item 1A – Risk Factors” in our Form 10-K for the year ended December 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.

There are no material changes during the period covered by this report to the risk factors previously disclosed in our Form 10-K for the year ended December 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 March 31, 2024, 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 March 31, 2024.


					Maximum
					Number (or
					Approximate
					Dollar Value) of
					Shares That May
				Total Number of Shares	Yet Be Purchased
	Total Number of	Weighted		Purchased as Part of	Under the Plans
	Shares	Average Price Paid		Publicly Announced	or Programs (in
Period	Repurchased	Per Share		Plans or Programs	thousands)
January 1, 2024 to January 31, 2024	—	$	—	—	$	4,484
February 1, 2024 to February 29, 2024	—		—	—		4,484
March 1, 2024 to March 31, 2024	—		—	—		4,484
Total	—	$	—	—	$	4,484

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

(a)

Not applicable

(b)

Not applicable

(c)

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 March 31, 2024.

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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
31.1	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
31.2	Certification pursuant to Rule 13a -14(a)/15d-14(a)	Filed herewith.
32.1	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
32.2	Certification pursuant to 18 USC Section 1350 -Sarbanes-Oxley Act of 2002	Furnished herewith.
101	Interactive Data Files (formatted as Inline XBRL)	Filed herewith.
104	Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)	Filed herewith

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

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SIGNATURES

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


		SmartFinancial, Inc.

Date:	May 9, 2024	/s/ William Y. Carroll, Jr.
		William Y. Carroll, Jr.
		President and Chief Executive Officer
		(principal executive officer)

Date:	May 9, 2024	/s/ Ronald J. Gorczynski
		Ronald J. Gorczynski
		Executive Vice President and Chief Financial Officer
		(principal financial officer and accounting officer)

Three Months Ended

March 31,

Interest rate swap agreements