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Section 1: 10-Q (10-Q SMARTFINANCIAL INC SEPTEMBER 30 2019)

Document
    

United States Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
¨
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to               

Commission File Number:333-203449
400910156_tlogoa07.jpg 

(Exact name of registrant as specified in its charter) 
Tennessee
 
62-1173944
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5401 Kingston Pike, Suite 600 Knoxville, Tennessee
 
37919
(Address of principal executive offices)
 
(Zip Code)
 
 
 
865-437-5700
 
Not Applicable
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal
 
 
year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of Exchange on which Registered
Common Stock, par value $1.00
SMBK
The Nasdaq Stock Market

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

1

    

 
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  x

As of November 6, 2019 there were 13,961,723 shares of common stock, $1.00 par value per share, issued and outstanding.

2

    

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

    

PART I –FINANCIAL INFORMATION 
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED BALANCE SHEETS 
(Dollars in thousands, except for share data)
 
 
(Unaudited)
September 30,
2019
 
December 31,
2018
ASSETS:
 
 

 
 

Cash and due from banks
 
$
23,110

 
$
40,015

Interest-bearing deposits with banks
 
146,300

 
75,807

Federal funds sold
 
1,524

 

Total cash and cash equivalents
 
170,934

 
115,822

Securities available-for-sale, at fair value
 
171,507

 
201,688

Other investments
 
12,913

 
11,499

Loans held for sale
 
3,068

 
1,979

Loans
 
1,864,679

 
1,775,260

  Less: Allowance for loan losses
 
(9,792
)
 
(8,275
)
    Loans, net
 
1,854,887

 
1,766,985

Premises and equipment, net
 
58,386

 
56,012

Other real estate owned
 
1,561

 
2,495

Goodwill and core deposit intangible, net
 
77,534

 
79,034

Bank owned life insurance
 
24,796

 
24,381

Other assets
 
14,899

 
14,514

Total assets
 
$
2,390,485

 
$
2,274,409

LIABILITIES AND SHAREHOLDERS' EQUITY:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing demand
 
$
365,024

 
$
319,861

Interest-bearing demand
 
351,474

 
311,482

Money market and savings
 
634,934

 
641,945

Time deposits
 
646,641

 
648,676

Total deposits
 
1,998,073

 
1,921,964

Securities sold under agreement to repurchase
 
4,368

 
11,756

Federal Home Loan Bank advances and other borrowings
 
25,460

 
11,243

Subordinated debt
 
39,240

 
39,177

Other liabilities
 
17,304

 
7,258

Total liabilities
 
2,084,445

 
1,991,398

Shareholders' equity:
 
 

 
 

Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding
 

 

Common stock, $1 par value; 40,000,000 shares authorized; 13,957,973 and 13,933,504 shares issued and outstanding, respectively
 
13,958

 
13,933

Additional paid-in capital
 
232,573

 
231,852

Retained earnings
 
59,806

 
39,991

Accumulated other comprehensive loss
 
(297
)
 
(2,765
)
Total shareholders' equity
 
306,040

 
283,011

Total liabilities and shareholders' equity
 
$
2,390,485

 
$
2,274,409


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

4

    

SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except for share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 

 
 

 
 
 
 
Loans, including fees
 
$
25,515

 
$
21,571

 
$
75,768

 
$
61,451

Securities available-for-sale:
 
 
 
 
 
 
 
 
  Taxable
 
748

 
839

 
2,591

 
2,611

  Tax-exempt
 
338

 
129

 
1,173

 
240

Federal funds sold and other earning assets
 
743

 
529

 
2,059

 
1,137

Total interest income
 
27,344

 
23,068

 
81,591

 
65,439

 
 
 
 
 
 
 
 
 
Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
5,605

 
3,969

 
16,644

 
9,608

Securities sold under agreements to repurchase
 
5

 
11

 
19

 
35

Federal Home Loan Bank advances and other borrowings
 
10

 
209

 
231

 
568

Subordinated debt
 
584

 
19

 
1,757

 
19

Total interest expense
 
6,204

 
4,208

 
18,651

 
10,230

Net interest income
 
21,140

 
18,860

 
62,940

 
55,209

Provision for loan losses
 
724

 
302

 
1,914

 
1,607

Net interest income after provision for loan losses
 
20,416

 
18,558

 
61,026

 
53,602

 
 
 
 
 
 
 
 
 
Noninterest income:
 
 

 
 

 
 
 
 
Customer service fees
 
767

 
624

 
2,129

 
1,753

Gain (loss) on sale of securities, net
 
1

 

 
34

 
(1
)
Mortgage banking
 
518

 
493

 
1,192

 
1,181

Interchange and debit card transaction fees
 
148

 
144

 
467

 
409

Merger termination fee
 

 

 
6,400

 

Other
 
762

 
570

 
2,089

 
1,562

Total noninterest income
 
2,196

 
1,831

 
12,311

 
4,904

 
 
 
 
 
 
 
 
 
Noninterest expense:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
9,072

 
7,934

 
26,357

 
22,759

Occupancy and equipment
 
1,635

 
1,638

 
4,967

 
4,694

FDIC insurance
 
(219
)
 
158

 
140

 
577

Other real estate and loan related expense
 
335

 
578

 
1,067

 
2,173

Advertising and marketing
 
263

 
228

 
817

 
627

Data processing
 
273

 
407

 
1,465

 
1,534

Professional services
 
573

 
727

 
1,724

 
1,987

Amortization of intangibles
 
341

 
248

 
1,027

 
664

Software as service contracts
 
560

 
507

 
1,696

 
1,477

Merger related and restructuring expenses
 
73

 
838

 
2,792

 
2,458

Other
 
1,802

 
1,497

 
5,045

 
4,346

Total noninterest expense
 
14,708

 
14,760

 
47,097

 
43,296

Income before income tax expense
 
7,904

 
5,629

 
26,240

 
15,210

Income tax expense
 
1,941

 
1,305

 
6,425

 
3,540

Net income
 
$
5,963

 
$
4,324

 
$
19,815

 
$
11,670

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 
 
 
Basic
 
$
0.43

 
$
0.34

 
$
1.42

 
$
0.97

Diluted
 
$
0.42

 
$
0.34

 
$
1.41

 
$
0.96

Weighted average common shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
13,955,859

 
12,718,861

 
13,949,325

 
12,049,151

Diluted
 
14,053,432

 
12,817,556

 
14,038,414

 
12,143,838

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

5

    

SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited) 
(Dollars in thousands)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
5,963

 
$
4,324

 
$
19,815

 
$
11,670

Other comprehensive income, net of tax:
 
 

 
 

 
 

 
 

Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period
 
275

 
(700
)
 
2,493

 
(2,469
)
Reclassification adjustment for (gains) losses realized
 
(1
)
 

 
(25
)
 
1

Total other comprehensive income (loss)
 
274

 
(700
)
 
2,468

 
(2,468
)
Comprehensive income
 
$
6,237

 
$
3,624

 
$
22,283

 
$
9,202


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



6

    

SMARTFINANCIAL, INC. AND SUBSIDIARY 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - (Unaudited) 
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands, except for share data)

 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive (Loss) Gain
 
Total
Balance, December 31, 2017
11,152,561

 
$
11,153

 
$
174,009

 
$
21,889

 
$
(1,198
)
 
$
205,853

Net income

 

 

 
11,670

 

 
11,670

Other comprehensive loss

 

 

 

 
(2,468
)
 
(2,468
)
Common stock issued pursuant to:
 
 
 
 
 
 
 
 
 
 
 
Stock awards
5,947

 
6

 
3

 

 

 
9

Exercise of stock options
132,783

 
133

 
1,386

 

 

 
1,519

   Shareholders of TN Bancshares, Inc.
1,458,981

 
1,459

 
33,273

 

 

 
34,732

Stock compensation expense

 

 
327

 

 

 
327

Balance, September 30, 2018
12,750,272

 
$
12,751

 
$
208,998

 
$
33,559

 
$
(3,666
)
 
$
251,642


Balance, December 31, 2018
13,933,504

 
$
13,933

 
$
231,852

 
$
39,991

 
$
(2,765
)
 
$
283,011

Net income

 

 

 
19,815

 

 
19,815

Other comprehensive income

 

 

 

 
2,468

 
2,468

Common stock issued pursuant to:
 
 
 
 
 
 
 
 
 
 
 
Stock awards
3,298

 
3

 
61

 

 

 
64

Exercise of stock options
21,171

 
22

 
228

 

 

 
250

Stock compensation expense

 

 
432

 

 

 
432

Balance, September 30, 2019
13,957,973

 
$
13,958

 
$
232,573

 
$
59,806

 
$
(297
)
 
$
306,040


Balance, June 30, 2018
12,704,581

 
$
12,705

 
$
208,513

 
$
29,235

 
$
(2,966
)
 
$
247,487

Net income

 

 

 
4,324

 

 
4,324

Other comprehensive loss

 

 

 

 
(700
)
 
(700
)
Common stock issued pursuant to:
 
 
 
 
 
 
 
 
 
 
 
Stock awards
5,553

 
6

 
(6
)
 

 

 

Exercise of stock options
40,138

 
40

 
407

 

 

 
447

Stock compensation expense

 

 
84

 

 

 
84

Balance, September 30, 2018
12,750,272

 
$
12,751

 
$
208,998

 
$
33,559

 
$
(3,666
)
 
$
251,642


Balance, June 30, 2019
13,953,209

 
$
13,953

 
$
232,386

 
$
53,843

 
$
(571
)
 
$
299,611

Net income

 

 

 
5,963

 

 
5,963

Other comprehensive income

 

 

 

 
274

 
274

Common stock issued pursuant to:
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
4,764

 
5

 
33

 

 

 
38

Stock compensation expense

 

 
154

 

 

 
154

Balance, September 30, 2019
13,957,973

 
$
13,958

 
$
232,573

 
$
59,806

 
$
(297
)
 
$
306,040


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


7

    

SMARTFINANICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
19,815

 
$
11,670

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
3,296

 
2,943

Accretion of fair value purchase accounting adjustments, net
 
(4,337
)
 
(5,426
)
Provision for loan losses
 
1,914

 
1,607

Stock compensation expense
 
432

 
327

(Gain) loss from redemption and sale on securities available-for-sale
 
(34
)
 
1

Deferred income tax expense
 
1,178

 
1,097

Increase in cash surrender value of bank owned life insurance
 
(415
)
 
(441
)
Loss on disposal of fixed assets
 
14

 
41

Net (gains) losses from sale of other real estate owned
 
(43
)
 
434

Net gains from sale of loans
 
(1,192
)
 
(1,181
)
Origination of loans held for sale
 
(49,333
)
 
(42,313
)
Proceeds from sales of loans held for sale
 
49,435

 
45,750

Net change in:
 
 
 
 
Accrued interest receivable
 
(207
)
 
(678
)
Accrued interest payable
 
900

 
228

Other assets
 
(330
)
 
3,039

Other liabilities
 
5,029

 
2,008

Net cash provided by operating activities
 
26,122

 
19,106

Cash flows from investing activities:
 
 
 
 
Proceeds from sales of securities available-for-sale
 
16,515

 
24,563

Proceeds from maturities and calls of securities available-for-sale
 
15,555

 
2,525

Proceeds from paydowns of securities available-for-sale
 
10,166

 
14,457

Purchases of securities available-for-sale
 
(6,074
)
 
(41,804
)
Purchases of other investments
 
(1,414
)
 
(3,840
)
Net cash and cash equivalents received in business combination
 

 
5,653

Net increase in loans
 
(85,424
)
 
(82,165
)
Purchases of premises and equipment
 
(4,506
)
 
(1,885
)
Proceeds from sale of other real estate owned
 
1,395

 
3,446

Net cash used in investing activities
 
(53,787
)
 
(79,050
)
Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
75,634

 
65,879

Net decrease in securities sold under agreements to repurchase
 
(7,388
)
 
(7,268
)
Issuance of common stock
 
314

 
1,528

Net proceeds from subordinated debt
 

 
39,158

Proceeds from Federal Home Loan Bank advances and other borrowings
 
145,176

 
160,700

Repayment of Federal Home Loan Bank advances and other borrowings
 
(130,959
)
 
(182,976
)
Net cash provided by financing activities
 
82,777

 
77,021

Net change in cash and cash equivalents
 
55,112

 
17,077

Cash and cash equivalents, beginning of period
 
115,822

 
113,027

Cash and cash equivalents, end of period
 
$
170,934

 
$
130,104

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid during the period for interest
 
$
17,751

 
$
10,003

Cash paid during the period for income taxes
 
3,635

 
726

Noncash investing and financing activities:
 
 
 
 
Change in unrealized (gains) losses on securities available-for-sale
 
$
(3,263
)
 
$
3,255

Acquisition of real estate through foreclosure
 
417

 
3,151

Financed sales of other real estate owned
 

 
257

Change in goodwill due to acquisition
 
(473
)
 
15,791

Initial recognition of operating lease right-of-use assets
 
2,344

 

Initial recognition of operating lease liabilities
 
2,344

 

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

8

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



Note 1. Presentation of Financial Information
  
Nature of Business:

SmartFinancial, Inc. (the "Company") is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the "Bank"). The Company provides a variety of financial services to individuals and corporate customers through its offices in Tennessee, Alabama, Florida, and Georgia. 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 consolidated financial information in this report for September 30, 2019 and September 30, 2018 has not been audited by an independent registered public accounting firm. The consolidated financial statements presented herein conform to U.S. generally accepted accounting principles ("GAAP") and to general industry practices. In the opinion of the Company’s management, the accompanying interim financial statements contain all material adjustments necessary to present fairly the Company's financial condition, the results of operations, and cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired and liabilities assumed in acquisitions.
 
Recently Issued and Adopted Accounting Pronouncements:

As of January 1, 2019, the Company adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily Accounting Standards Update ASU 2016-02 and subsequent updates. Among other things, these updates require lessees to recognize a lease liability, measured on a discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use asset related to the lessee's right to use, or control the use of, a specified asset for the lease term. The updates did not significantly change lease accounting requirements applicable to lessors and did not significantly impact the Company's consolidated financial statements in relation to contracts whereby the Company acts as a lessor. The Company adopted the updates using a modified-retrospective transition approach and recognized right-of-use lease assets and related lease liabilities as of January 1, 2019. See Note 8 Leases for more information.

In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities must classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 was effective for interim and annual reporting periods beginning after December 15, 2018. All entities were required to use a modified retrospective approach for leases that existed or were entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019.

The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). We elected to apply certain practical adoption expedients provided under the updates whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial

9

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


direct costs for any existing leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations or office space, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated balance sheet. The new guidance requires these lease agreements to be recognized on the consolidated balance sheet as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the Company's consolidated statements of income or the consolidated statements of cash flows. See Note 8 Leases for more information.
 
In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments had the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above.

As of January 1, 2019, the Company adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU expands the scope of Topic 718, Compensation-Stock Compensation (which previously only included payments to employees), to include share-based payment transactions for acquiring goods and services from non-employees. This required entities to apply the requirements of Topic 718 to non-employee awards, except for specific guidance on inputs to an option pricing model and the attribution of cost (i.e., the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). Additionally, the amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards, and clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

As of January 1, 2019, the Company adopted ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2018 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 March 2019, the FASB issued ASU 2019-01, Leases: Codification Improvements (“ASU 2019-01”). ASU 2019-01 provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease standard on adoption year interim amounts. ASU 2019-01 will be effective for us on January 1, 2020 and should not have any material impact on our consolidated financial statements.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU changed the credit loss model on financial instruments measured at amortized cost, available for sale securities and certain purchased financial instruments. Credit losses on financial instruments measured at amortized cost will be determined using a current expected credit loss ("CECL") model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. Purchased financial assets with more-than-insignificant credit deterioration since origination ("PCD assets" which are currently named "PCI Loans") measured at amortized cost will have an allowance for credit losses established at acquisition as part of the purchase price. Subsequent

10

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


increases or decreases to the allowance for credit losses on PCD assets will be recognized in the income statement. Interest income should be recognized on PCD assets based on the effective interest rate, determined excluding the discount attributed to credit losses at acquisition. Credit losses relating to available-for-sale debt securities will be recognized through an allowance for credit losses. The amount of the credit loss is limited to the amount by which fair value is below amortized cost of the available-for-sale debt security. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for the Company and other SEC filers. Early adoption is permitted and if early adopted, all provisions must be adopted in the same period. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the period adopted. A prospective approach is required for securities with other than temporary impairment recognized prior to adoption. The Company is continuing its implementation efforts through its company-wide implementation team. The implementation team meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, conferences, and peer bank meetings. The team continues to evaluate and validate data resources and different loss methodologies. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular an increase to the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

On October 16, 2019, the Financial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that CECL will be effective for larger Public Business Entities ("PBEs") that are SEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies, this will be January 1, 2020.  The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations and the Company meets the regulations as a SRC.  For all other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies).  

Reclassifications:

Certain captions and amounts in the 2018 consolidated financial statements were reclassified to conform to the 2019 financial statement presentation. These reclassifications had no impact on net income or shareholders' equity as previously reported.

 



11

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 2. Earnings Per Share

Basic earnings per common share represents net income divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance (excluding tax impact). Potential common shares that may be issued by the Company relate solely to outstanding stock options, determined using the treasury stock method, and restricted stock awards, determined by the fair value of the Company's stock on date of grant.
 
The following is a summary of the basic and diluted earnings per share computation (dollars in thousands, except for share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
5,963

 
$
4,324

 
$
19,815

 
$
11,670

 
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
13,955,859

 
12,718,861

 
13,949,325

 
12,049,151

Effect of dilutive securities
97,573

 
98,695

 
89,089

 
94,687

Weighted average dilutive shares outstanding
14,053,432

 
12,817,556

 
14,038,414

 
12,143,838

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.43

 
$
0.34

 
$
1.42

 
$
0.97

Diluted earnings per common share
$
0.42

 
$
0.34

 
$
1.41

 
$
0.96


There were no antidilutive shares for the three and nine month periods ended September 30, 2019 and 2018.


12

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 3. Securities
 
The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale are summarized as follows (in thousands): 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2019:
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises (GSEs)
 
$
19,023

 
$
42

 
$
(47
)
 
$
19,018

Municipal securities
 
59,272

 
816

 
(7
)
 
60,081

Other debt securities
 
3,480

 
12

 
(47
)
 
3,445

Mortgage-backed securities (GSEs)
 
88,998

 
323

 
(358
)
 
88,963

 
 
$
170,773

 
$
1,193

 
$
(459
)
 
$
171,507

December 31, 2018:
 
 
 
 
 
 
 
 
U.S. Government-sponsored enterprises (GSEs)
 
$
44,117

 
$
12

 
$
(626
)
 
$
43,503

Municipal securities
 
55,248

 
276

 
(363
)
 
55,161

Other debt securities
 
977

 

 
(67
)
 
910

Mortgage-backed securities (GSEs)
 
103,875

 
153

 
(1,914
)
 
102,114

 
 
$
204,217

 
$
441

 
$
(2,970
)
 
$
201,688

 
At September 30, 2019 and December 31, 2018, securities with a carrying value totaling approximately $96.4 million and $103.7 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

For the three months ended September 30, 2019, there were no available-for-sale securities sold. For the nine months ended September 30, 2019, approximately $16.5 million available-for-sale securities were sold which resulted in approximately $35 thousand gross gains and $1 thousand losses realized. For the three months ended September 30, 2018, there were no available-for-sale securities sold. For the nine months ended September 30, 2018, there were approximately $25 million available-for-sale securities sold which resulted in $1 thousand losses realized. For the three and nine months ended September 30, 2019, there were approximately $5 million and $16 million available-for-sale securities redeemed, respectively. For the three months ended September 30, 2018, there were no available-for-sale securities redeemed. For the nine months ended September 30, 2018, a security was called for less than the amortized cost resulting in a realized loss of $1 thousand.

The amortized cost and estimated fair value of securities at September 30, 2019, by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
3,293

 
$
3,283

Due from one year to five years
 
10,850

 
10,816

Due from five years to ten years
 
12,691

 
12,726

Due after ten years
 
54,941

 
55,719

 
 
81,775

 
82,544

Mortgage-backed securities
 
88,998

 
88,963

 
 
$
170,773

 
$
171,507


13

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 available-for-sale have been in a continuous unrealized loss position (in thousands): 
 
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government- sponsored enterprises (GSEs)
 
$
2,999

 
$
(24
)
 
$
5,977

 
$
(23
)
 
$
8,976

 
$
(47
)
Municipal securities
 
970

 
(3
)
 
527

 
(4
)
 
1,497

 
(7
)
Other debt securities
 

 

 
933

 
(47
)
 
933

 
(47
)
Mortgage-backed securities (GSEs)
 
11,732

 
(80
)
 
25,969

 
(278
)
 
37,701

 
(358
)
 
 
$
15,701

 
$
(107
)
 
$
33,406

 
$
(352
)
 
$
49,107

 
$
(459
)
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government- sponsored enterprises (GSEs)
 
$
14,763

 
$
(237
)
 
$
13,728

 
$
(389
)
 
$
28,491

 
$
(626
)
Municipal securities
 
16,455

 
(150
)
 
4,767

 
(213
)
 
21,222

 
(363
)
Other debt securities
 

 

 
910

 
(67
)
 
910

 
(67
)
Mortgage-backed securities (GSEs)
 
10,516

 
(155
)
 
69,884

 
(1,759
)
 
80,400

 
(1,914
)
 
 
$
41,734

 
$
(542
)
 
$
89,289

 
$
(2,428
)
 
$
131,023

 
$
(2,970
)

At September 30, 2019, the categories of temporarily impaired securities in an unrealized loss position twelve months or greater are as follows (dollars in thousands):
 
 
Gross Unrealized Loss
 
Number of Securities
U.S. Government-sponsored enterprises (GSEs)
 
$
(23
)
 
2

Municipal securities
 
(4
)
 
1

Other debt securities
 
(47
)
 
1

Mortgage-backed securities (GSEs)
 
(278
)
 
36

 
 
$
(352
)
 
40


The Company reviews the securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, financial condition and near-term prospects of the issuer, as well as security and industry specific economic conditions.

Based on this evaluation, the Company concluded that any unrealized losses at September 30, 2019 represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of September 30, 2019, the Company does not intend to sell any of the securities, does not expect to be required to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.

The following is the amortized cost and carrying value of other investments (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Federal Reserve Bank stock
$
7,917

 
$
7,010

Federal Home Loan Bank stock
4,646

 
4,139

First National Bankers Bank stock
350

 
350

 
$
12,913

 
$
11,499

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


14

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 4. Loans and Allowance for Loan Losses
 
Portfolio Segmentation:
 
Major categories of loans are summarized as follows (in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
PCI Loans1
 
All Other
Loans
2
 
Total
 
PCI Loans1
 
All Other
Loans
2
 
Total
Commercial real estate
 
$
17,880

 
$
872,582

 
$
890,462

 
$
17,682

 
$
842,345

 
$
860,027

Consumer real estate
 
7,169

 
398,362

 
405,531

 
8,712

 
398,542

 
407,254

Construction and land development
 
4,629

 
215,122

 
219,751

 
4,602

 
183,293

 
187,895

Commercial and industrial
 
434

 
340,773

 
341,207

 
2,557

 
305,697

 
308,254

Consumer and other
 
359

 
10,437

 
10,796

 
605

 
13,204

 
13,809

  Total loans
 
30,471

 
1,837,276

 
1,867,747

 
34,158

 
1,743,081

 
1,777,239

Less:  Allowance for loan losses
 
(116
)
 
(9,676
)
 
(9,792
)
 

 
(8,275
)
 
(8,275
)
  Loans, net
 
$
30,355

 
$
1,827,600

 
$
1,857,955

 
$
34,158

 
$
1,734,806

 
$
1,768,964

1 Purchased Credit Impaired loans (“PCI loans”) are loans with evidence of credit deterioration at purchase.
2 Includes loans held for sale.

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

The composition of loans by loan classification for impaired and performing loan status is summarized in the tables below (in thousands):
 
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 
Total
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
872,325

 
$
397,217

 
$
214,422

 
$
340,322

 
$
10,437

 
$
1,834,723

Impaired loans
 
257

 
1,145

 
700

 
451

 

 
2,553

 
 
872,582

 
398,362

 
215,122

 
340,773

 
10,437

 
1,837,276

PCI loans
 
17,880

 
7,169

 
4,629

 
434

 
359

 
30,471

  Total loans
 
$
890,462

 
$
405,531

 
$
219,751

 
$
341,207

 
$
10,796

 
$
1,867,747

December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
841,709

 
$
397,306

 
$
182,746

 
$
304,673

 
$
13,088

 
$
1,739,522

Impaired loans
 
636

 
1,236

 
547

 
1,024

 
116

 
3,559

 
 
842,345

 
398,542

 
183,293

 
305,697

 
13,204

 
1,743,081

PCI loans
 
17,682

 
8,712

 
4,602

 
2,557

 
605

 
34,158

  Total loans
 
$
860,027

 
$
407,254

 
$
187,895

 
$
308,254

 
$
13,809

 
$
1,777,239
















15

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans (in thousands):
 
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and
Other
 
Total
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
4,225

 
$
1,983

 
$
1,043

 
$
1,725

 
$
71

 
$
9,047

Impaired loans
 

 
206

 

 
423

 

 
629

 
 
4,225

 
2,189

 
1,043

 
2,148

 
71

 
9,676

PCI loans
 
35

 
81

 

 

 

 
116

  Total loans
 
$
4,260

 
$
2,270

 
$
1,043

 
$
2,148

 
$
71

 
$
9,792

December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans
 
$
3,639

 
$
1,763

 
$
795

 
$
1,304

 
$
240

 
$
7,741

Impaired loans
 

 
26

 

 
442

 
66

 
534

 
 
3,639

 
1,789

 
795

 
1,746

 
306

 
8,275

PCI loans
 

 

 

 

 

 

  Total loans
 
$
3,639

 
$
1,789

 
$
795

 
$
1,746

 
$
306

 
$
8,275

 

16

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The following tables detail the changes in the allowance for loan losses by loan classification (in thousands):
 
 
Commercial
Real Estate
 
Consumer
Real
Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 
Total
Three Months Ended September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
4,102

 
$
2,189

 
$
946

 
$
1,746

 
$
114

 
$
9,097

Charged off loans
 
(36
)
 
(1
)
 

 
(20
)
 
(50
)
 
(107
)
Recoveries of charge-offs
 
39

 
17

 
3

 
12

 
7

 
78

Provision (reallocation) charged to expense
 
155

 
65

 
94

 
410

 

 
724

Ending balance
 
$
4,260

 
$
2,270

 
$
1,043

 
$
2,148

 
$
71

 
$
9,792

Three Months Ended September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,135

 
$
1,528

 
$
744

 
$
1,367

 
$
300

 
$
7,074

Charged off loans
 

 
(2
)
 

 
(100
)
 
(156
)
 
(258
)
Recoveries of charge-offs
 

 
5

 
2

 
9

 
22

 
38

Provision (reallocation) charged to expense
 
110

 
67

 
(37
)
 
86

 
76

 
302

Ending balance
 
$
3,245

 
$
1,598

 
$
709

 
$
1,362

 
$
242

 
$
7,156



 
 
Commercial
Real Estate
 
Consumer
Real
Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 
Total
Nine Months Ended September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
3,639

 
$
1,789

 
$
795

 
$
1,746

 
$
306

 
$
8,275

Charged off loans
 
(36
)
 
(3
)
 

 
(353
)
 
(260
)
 
(652
)
Recoveries of charge-offs
 
63

 
37

 
7

 
66

 
82

 
255

Provision (reallocation) charged to expense
 
594

 
447

 
241

 
689

 
(57
)
 
1,914

Ending balance
 
$
4,260

 
$
2,270

 
$
1,043

 
$
2,148

 
$
71

 
$
9,792

Nine Months Ended September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
2,465

 
$
1,596

 
$
521

 
$
1,062

 
$
216

 
$
5,860

Charged off loans
 
(38
)
 
(27
)
 

 
(178
)
 
(257
)
 
(500
)
Recoveries of charge-offs
 

 
55

 
7

 
65

 
62

 
189

Provision (reallocation) charged to expense
 
818

 
(26
)
 
181

 
413

 
221

 
1,607

Ending balance
 
$
3,245

 
$
1,598

 
$
709

 
$
1,362

 
$
242

 
$
7,156



17

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


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

 
 
September 30, 2019
Non PCI Loans:
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Construction
and Land
Development
 
Commercial
and
Industrial
 
Consumer
and Other
 
Total
Pass
 
$
856,238

 
$
394,525

 
$
209,029

 
$
332,165

 
$
10,273

 
$
1,802,230

Watch
 
15,488

 
2,503

 
5,164

 
7,433

 
42

 
30,630

Special mention
 
489

 
9

 
155

 
612

 
1

 
1,266

Substandard