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Section 1: 424B3 (424B3)

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-235409

  

   

 

PROXY STATEMENT FOR THE SPECIAL MEETING OF SHAREHOLDERS OF

PROGRESSIVE FINANCIAL GROUP INC.

AND PROSPECTUS OF SMARTFINANCIAL, INC.

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Shareholder:

 

The boards of directors of SmartFinancial, Inc., or SmartFinancial, and Progressive Financial Group, Inc, or PFG, have each unanimously approved the acquisition of PFG by SmartFinancial. The acquisition will be accomplished pursuant to the terms of an Agreement and Plan of Merger, dated as of October 29, 2019, which we refer to as the merger agreement, by and between SmartFinancial and PFG, whereby PFG will be merged with and into SmartFinancial, which we refer to as the merger. Immediately following the merger of PFG with and into SmartFinancial, Progressive Savings Bank, a Tennessee state-chartered bank and wholly-owned subsidiary of PFG, or Progressive Bank, will merge with and into SmartFinancial’s wholly-owned bank subsidiary, SmartBank, a Tennessee state-chartered bank, with SmartBank as the surviving bank, which we refer to as the bank merger.

 

If the merger is completed, each share of PFG common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive an amount of cash equal to the quotient obtained by dividing (A) the amount equal to $14,595,354.37, minus the amount of (i) certain allowable dividends declared by PFG prior to closing, as more fully described in this proxy statement / prospectus, and (ii) the loss, if in excess of $250,000, realized by PFG or its applicable subsidiary on sales of certain assets, by (B) the number of shares of PFG Common Stock issued and outstanding as of the effective time of the merger, plus a number of shares of SmartFinancial equal to the quotient obtained by dividing (A) 1,292,592.556 shares of SmartFinancial common stock by (B) the number of shares of PFG Common Stock issued and outstanding as of the effective time of the merger. Based on the closing sale price of SmartFinancial common stock on October 28, 2019 of $20.72 per share and assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own.

 

Although the number of shares of SmartFinancial common stock that PFG shareholders will receive is fixed (according to the ratio of 1,292,592.556 shares of SmartFinancial divided by the number of PFG shares issued and outstanding at the effective time), the market value of the merger consideration will fluctuate with the market price of SmartFinancial common stock. Additionally, the cash consideration component of the merger consideration of $14,595,354.37 will be reduced by the certain allowable dividends declared by PFG prior to closing and any loss in excess of $250,000 realized by PFG or its applicable Subsidiary on sales of certain assets prior to closing. Accordingly, the market value of the merger consideration will not be known at the time PFG shareholders vote on the merger. SmartFinancial common stock is currently quoted on the NASDAQ Capital Market under the symbol “SMBK.” On October 28, 2019, the last full trading day before the public announcement of the merger agreement, the last reported sale price of SmartFinancial common stock was $20.72 per share, which represented $26,782,518 in value for all shares of PFG common stock to be converted into SmartFinancial common stock, and up to $41,377,872.37 in total merger consideration when combined with the cash consideration component. Assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, the holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own, which, based on the closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, represents $2,159.10 in total merger consideration per share of PFG common stock. We urge you to obtain current market quotations for the price of SmartFinancial common stock (trading symbol “SMBK”).

 

 

 

 

PFG will hold a special meeting of its shareholders, referred to as the PFG special meeting, where PFG shareholders will be asked to consider and vote upon (1) a proposal to approve the merger agreement and (2) a proposal to adjourn the PFG special meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposal to approve the merger agreement.

 

The PFG special meeting will be held at PFG’s office located at 500 North Main Street, Jamestown, Tennessee 38556, on January 28, 2020, at 1:00 pm, Central Time, subject to any adjournment or postponement thereof.

 

Each of SmartFinancial and PFG expects that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, with the result that the PFG common stock exchanged for SmartFinancial common stock will generally be tax-free.

 

Your vote is important. Completion of the merger is subject to the approval of the merger agreement by the shareholders of PFG. Regardless of whether or not you plan to attend the PFG special meeting, please take the time to authorize a proxy to vote your shares in accordance with the instructions contained in this proxy statement/prospectus. Submitting a proxy now will not prevent you from being able to vote in person at the PFG special meeting.

 

The board of directors of PFG has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of the shareholders of PFG, has unanimously approved the merger agreement and the merger and unanimously recommends that the shareholders of PFG vote “FOR” the proposal to approve the merger agreement and “FOR” the proposal to adjourn the PFG special meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposal to approve the merger agreement.

 

This proxy statement/prospectus describes the PFG special meeting, the merger, the merger agreement, other documents related to the merger and other related matters. Please carefully read this entire proxy statement/prospectus, including “Risk Factors,” beginning on page 20, for a discussion of the risks relating to the proposed merger. You also can obtain information about SmartFinancial from documents that it has filed with the Securities and Exchange Commission.

 

SmartFinancial and PFG are excited about the opportunities the merger brings to the shareholders of both companies. Thank you for your consideration and continued support.

 

Sincerely,

 

 

   
W. Miller Welborn Ottis H. Phillips
Chairman President and CEO
SmartFinancial, Inc. Progressive Financial Group Inc.

 

 

Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, nor any state securities commission or any other bank regulatory agency has approved or disapproved the securities to be issued in the merger or determined if this proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

 

The securities to be issued in the merger are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of either SmartFinancial or PFG, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

 

The date of this proxy statement/prospectus is December 19, 2019, and it is first being mailed or otherwise delivered to the PFG shareholders on or about December 26, 2019.

 

 

 

 

Progressive Financial Group Inc.
500 North Main Street

Jamestown, Tennessee 38556
(931) 752-2178

 

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on January 28, 2020

 

To the Shareholders of Progressive Financial Group, Inc.:

 

A special meeting of the shareholders of Progressive Financial Group Inc., or PFG, will be held at PFG’s office located at 500 North Main Street, Jamestown, Tennessee, on January 28 2020, at 1:00 p.m., Central Time, subject to any adjournment or postponement thereof, for the following purposes:

 

1.To consider and vote upon a proposal, which we refer to as the merger proposal, to approve the Agreement and Plan of Merger, dated as of October 29, 2019, which we refer to as the merger agreement, by and between PFG and SmartFinancial, Inc., or SmartFinancial, which provides for the merger of PFG with and into SmartFinancial with SmartFinancial as the surviving company, which is referred to herein as the merger; and

 

2.To consider and vote upon a proposal to adjourn the special meeting, referred to herein as the PFG special meeting, to a later date or dates if the board of directors of PFG determines such an adjournment is necessary to permit solicitation of additional proxies if there are not sufficient votes at the time of the PFG special meeting to approve the merger, which we refer to as the adjournment proposal.

 

No other business may be conducted at the PFG special meeting. All holders of shares of common stock of PFG of record as of the close of business as of 5:00 p.m. Central Time on December 17, 2019 will be entitled to notice of and to vote at the PFG special meeting and any adjournments thereof. The PFG special meeting may be adjourned from time to time upon approval of holders of PFG common stock without any notice other than by announcement at the meeting of the adjournment thereof, and any and all business for which notice is hereby given may be transacted at such adjourned meeting.

 

PFG shareholders have the right to dissent from the Merger and obtain payment of the fair value of their shares as afforded by Chapter 23 of the Tennessee Business Corporation Act, or TBCA. Dissenters’ rights allow a shareholder to avoid the effects of the proposed corporate action described in this notice by selling the shareholder's shares to the corporation at their fair value, paid in cash. To retain the right to assert dissenter’s rights, a shareholder is required by law: (1) to deliver to the corporation, before the vote is taken on the action described in this notice, a written notice of the shareholder's intent to dissent if the corporate action proposed in this notice takes effect, and (2) not to vote, or cause or permit to be voted, in favor of the proposed corporate action any shares of the class or series for which the shareholder intends to assert dissenter’s rights. A shareholder who complies with notice requirements set forth in the previous sentence must then demand payment from the corporation by certifying that the shareholder acquired beneficial ownership of the shares prior to the record date set forth in the dissenters’ notice and depositing their shares in accordance with the terms of the notice. If a shareholder complies with these requirements, and the action proposed in this notice takes effect, the law requires the corporation to send to the shareholder the amount the corporation estimates to be the fair value of each dissenter’s shares, plus accrued interest, accompanied by: (i) the corporation’s balance sheet as of the end of a fiscal year ending not more than sixteen (16) months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; (ii) a statement of the corporation's estimate of the fair value of the shares, which estimate shall equal or exceed the corporation's estimate given pursuant to TN Code § 48-23-203(b)(2)(C); (iii) an explanation of how the interest was calculated; and (iv) a statement of the dissenter's right to demand payment under TN Code § 48-23-209. If the dissenter is dissatisfied with the corporation’s payment, such dissenter must, within one month of delivery of the corporation’s payment, notify the corporation in writing of the dissenter’s own estimate of the fair value of the dissenter’s shares and amount of interest due, and demand payment in accordance with TN Code § 48-23-209. A copy of the applicable statutory provisions of the TBCA is included as Annex C to the accompanying proxy statement/prospectus and a summary of these provisions can be found under the caption “The Merger—Dissenters’ Rights,” beginning on page 50 of the proxy statement/prospectus. The merger might not be completed if the holders of more than 7.5% of the outstanding shares of PFG common stock exercise dissenters’ rights.

 

 

 

 

If you have any questions concerning the merger agreement, the merger, the PFG special meeting or the proxy statement/prospectus, would like additional copies of the proxy statement/prospectus, need a proxy card or need help voting your shares of PFG common stock, please contact Ottis H. Phillips, President and CEO, at (931) 752-2178.

 

  By Order of the Board of Directors,
   
 
  Brandon Smith
  Corporate Secretary

  

Jamestown, Tennessee

December 19, 2019

 

The PFG board of directors unanimously recommends that holders of PFG common stock entitled to vote at the PFG special meeting vote “FOR” the merger proposal and “FOR” the adjournment proposal.

 

Your Vote is Very Important

 

A proxy card is enclosed. Whether or not you plan to attend the PFG special meeting, if you are a holder of shares of PFG common stock, please vote by completing, signing and dating the proxy card and promptly mailing it in the enclosed envelope. You may revoke your proxy in the manner described in the proxy statement/prospectus at any time before it is exercised. If you are a holder of shares of PFG common stock and attend the PFG special meeting, you may vote in person if you desire, even if you have previously returned your proxy card.

 

 

 

 

ADDITIONAL INFORMATION

 

This proxy statement/prospectus incorporates important business and financial information about SmartFinancial from documents filed with the Securities and Exchange Commission, or SEC, that are not included in or delivered with this proxy statement/prospectus. You can obtain any of the documents filed with or furnished to the SEC by SmartFinancial at no cost from the SEC’s website at http://www.sec.gov. You may also request copies of these documents, including documents incorporated by reference in this proxy statement/prospectus, at no cost by contacting SmartFinancial at the contact information set forth below:

 

SmartFinancial, Inc.

5401 Kingston Pike

Knoxville, Tennessee 37319

Attention: Ron Gorczynski, Chief Financial Officer

Telephone: (865) 467-5724

 

You will not be charged for any of these documents that you request. To obtain timely delivery of these documents, you must request them no later than five business days before the date of the special meeting, or January 21, 2020.

 

If you are a PFG shareholder and have any questions about the merger agreement, the merger, the PFG special meeting or the proxy statement/prospectus, would like additional copies of the proxy statement/prospectus, need a proxy card or need help voting your shares of PFG common stock, please contact Ottis H. Phillips, President and CEO, at (931) 752-2178.

 

You should rely only on the information contained in or incorporated by reference into this document. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this document. This document is dated December 19, 2019, and you should assume that the information in this document is accurate only as of such date. You should assume that the information incorporated by reference into this proxy statement/prospectus from another document is accurate as of the date of such other document. Neither the mailing of this document to PFG shareholders nor the issuance by SmartFinancial of shares of SmartFinancial common stock in connection with the merger will create any implication to the contrary.

 

This document does not constitute an offer to sell, or a solicitation of an offer to buy any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this document regarding PFG has been provided by PFG and information contained in this document regarding SmartFinancial has been provided by SmartFinancial. See “Where You Can Find More Information” for more details.

 

 

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS 1
   
SUMMARY 7
   
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 15
   
COMPARATIVE MARKET PRICES AND DIVIDENDS 17
   
RISK FACTORS 20
Risks Related to the Merger 20
Risks Related to the Combined Company Following the Merger 23
Risks Related to an Investment in the Combined Company’s Common Stock 24
Risks Related to Tax 25
Risks Related to SmartFinancial’s Business 26
   
THE PFG SPECIAL MEETING 27
General 27
Date, Time and Place 27
Purpose of the PFG Special Meeting 27
Proposal One: Merger Proposal 27
Proposal Two: Adjournment Proposal 27
Recommendation of the PFG Board of Directors 28
Record Date; Shareholders Entitled to Vote 28
Quorum and Adjournment 28
Vote Required for Approval; Abstentions; Failure to Vote 29
Voting by PFG Directors and Executive Officers 29
PFG Common Stock Subject to Voting Agreements 29
Voting on Proxies by Holders of Record; Incomplete Proxies 29
Shares Held in “Street Name” 29
Revocability of Proxies and Changes to an PFG Shareholder’s Vote 30
Solicitation of Proxies 30
Attending the PFG Special Meeting; Voting in Person 30
Assistance 30
   
THE MERGER 31
General 31
Purchase Price and Purchase Price Adjustments 31
Background of the Merger 31
SmartFinancial’s Reasons for the Merger 33
PFG’s Reasons for the Merger 34
Opinion of PFG’s Financial Advisor 35
Board Composition and Management of SmartFinancial after the Merger 42
Interests of PFG’s Directors and Executive Officers in the Merger 42
Beneficial Ownership of PFG Common Stock by Management and Principal Shareholders of PFG 43
Regulatory Approvals Required for the Merger 45
Material U.S. Federal Income Tax Consequences 46
Accounting Treatment 50
Dissenters’ Rights 50
Exchange of Shares in the Merger 51
Listing of SmartFinancial Common Stock 51

 

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THE MERGER AGREEMENT 52
Structure of the Merger 52
Closing and Effective Time of the Merger 52
Organizational Documents of the Surviving Company 52
Board Composition and Management of Surviving Company 52
Merger Consideration 53
Procedures for Converting Shares of PFG Common Stock into Merger Consideration 53
Surrender of PFG Stock Certificates 53
Representations and Warranties 56
Definition of “Material Adverse Effect” 56
Covenants and Agreements 57
Regulatory Matters 61
NASDAQ Listing 61
Employee Matters 61
Indemnification and Directors’ and Officers’ Insurance 62
No Solicitation 62
Conditions to Completion of the Merger 64
Termination 65
Termination Fee 66
Effect of Termination 66
Amendment; Waiver 66
Expenses 67
   
ANCILLARY AGREEMENTS 68
Voting Agreements 68
Non-Competition and Non-Disclosure Agreements 68
Claims Letters 69
   
THE COMPANIES 70
SmartFinancial, Inc. 70
Progressive Financial Group Inc. 71
   
DESCRIPTION OF CAPITAL STOCK 73
   
COMPARISON OF RIGHTS OF SMARTFINANCIAL SHAREHOLDERS AND PFG SHAREHOLDERS 77
   
LEGAL MATTERS 85
   
EXPERTS 85
   
WHERE YOU CAN FIND MORE INFORMATION 85
   
Annex A A-1
   
Annex B B-1
   
Annex C C-1

 

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QUESTIONS AND ANSWERS

 

The following are answers to some questions that PFG shareholders may have regarding the proposed transaction between SmartFinancial and PFG and the proposals being considered at the PFG special meeting. SmartFinancial and PFG urge you to read carefully this entire proxy statement/prospectus, including the annexes, and the documents incorporated by reference into this proxy statement/prospectus, because the information in this section does not provide all the information that might be important to you.

 

Unless the context otherwise requires, references in this proxy statement/prospectus to: (1) “SmartFinancial” refer to SmartFinancial, Inc., a Tennessee corporation, and its affiliates; (2) “SmartBank” refers to SmartBank, a Tennessee state-chartered bank and the wholly-owned bank subsidiary of SmartFinancial; (3) “PFG” refer to Progressive Financial Group Inc., a Tennessee corporation, and its affiliates; and (4) “Progressive Bank” refers to Progressive Savings Bank, a Tennessee state-chartered bank and the wholly-owned bank subsidiary of PFG.

 

Q: Why am I receiving this proxy statement/prospectus?
   
A: SmartFinancial and PFG have entered into an Agreement and Plan of Merger, dated as of October 29, 2019, which we refer to as the merger agreement. Pursuant to the merger agreement, PFG will merge with and into SmartFinancial, with SmartFinancial as the surviving company, which we refer to as the merger. Immediately after the merger, Progressive Bank, PFG’s wholly-owned bank subsidiary, will merge with and into SmartBank, SmartFinancial’s wholly owned bank subsidiary, with SmartBank as the surviving bank, which we refer to as the bank merger. A copy of the merger agreement is included in this proxy statement/prospectus as Annex A.
   
  The merger cannot be completed unless, among other things, the majority of the outstanding shares of PFG common stock entitled to vote at the PFG special meeting vote in favor of the proposal to approve the merger agreement, which we refer to as the merger proposal.
   
  In addition, PFG is soliciting proxies from its shareholders with respect to a proposal to approve one or more adjournments of the PFG special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of such adjournment to approve the merger proposal, which we refer to as the adjournment proposal.
   
  This proxy statement/prospectus contains important information about the merger agreement, the merger and the proposals being voted on at the PFG special meeting, and you should read it carefully. This is a proxy statement/prospectus because (1) PFG is soliciting proxies from the PFG shareholders and the proxy statement provides important information about the PFG special meeting to vote on the merger proposal and the adjournment proposal, and (2) SmartFinancial will issue shares of SmartFinancial common stock to holders of PFG common stock in connection with the merger, and the prospectus provides important information about such shares. The enclosed materials allow PFG shareholders to authorize a proxy to vote their shares without attending the PFG special meeting.
   
  Your vote is important. We encourage you to authorize your proxy as soon as possible.
   
Q: What will I receive in the merger?
   
A:

If the merger is completed, each share of PFG common stock issued and outstanding immediately prior to the effective will be converted into the right to receive  a pro rata portion (which is a ratio equal to one divided by the number of shares of PFG common stock issued and outstanding as of the closing) of (1) an aggregate amount of cash equal to $14,595,354.37 minus the amount of certain pre-closing distributions paid by PFG and minus any loss in excess of $250,000 realized by PFG or its applicable subsidiary on sales of certain assets prior to closing, and (2) 1,292,592.556 shares of SmartFinancial common stock.  We refer to the cash and shares of SmartFinancial common stock into which the PFG common stock will convert as the “merger consideration”. Assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, the holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own. Based on the closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, which, represents approximately $2,159.10 in total merger consideration per share of PFG common stock.

 

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  SmartFinancial will not issue any fractional shares of SmartFinancial common stock in the merger. PFG shareholders who would otherwise be entitled to a fractional share of SmartFinancial common stock upon the completion of the merger will instead receive an amount in cash (without interest and rounded to the nearest whole cent) determined by multiplying the fractional share interest in SmartFinancial common stock (rounded to the nearest one hundredth of a share) by the average closing price of SmartFinancial’s common stock on the NASDAQ Capital Market over the ten (10) trading days ending on the business days immediately prior to the closing date.
   
Q: Will the value of the merger consideration change between the date of this proxy statement/prospectus and the time the merger is completed?
   
A: Yes. In all likelihood, the value of the merger consideration received by PFG shareholders receiving SmartFinancial common stock will fluctuate between the date of this proxy statement/prospectus and the completion of the merger based upon the market value of SmartFinancial common stock. Any fluctuation in the market price of SmartFinancial common stock after the date of this proxy statement/prospectus will change the value of the SmartFinancial common stock that PFG shareholders will receive and the total value of the consideration received in the merger.
   
  In addition, PFG shareholders may receive a one-time dividend from PFG, which we refer to as the “AAA dividend” in the amount of the balance of its accumulated adjustment account accumulated adjustment account as of December 31, 2019. The AAA dividend will reduce the aggregate amount of the cash consideration paid to PFG’s shareholders in connection with the merger on a dollar-for-dollar basis.
   
Q: Will the shares of SmartFinancial common stock that I receive as stock consideration in the merger be freely tradable?
   
A: Yes, in most cases. The shares of SmartFinancial common stock to be issued as stock consideration will be registered under the Securities Act and listed for trading on the Nasdaq Capital Market. However, if there are any former shareholders of PFG who will be deemed to be “affiliates” of SmartFinancial under the Securities Act after the merger (generally, directors and executive officers of SmartFinancial and shareholders holding 10% or more of the outstanding shares of common stock of SmartFinancial), such persons must comply with certain transfer restrictions under the Securities Act.
   
Q: What are the dividends that PFG will be permitted to pay prior to the closing?
   
A: PFG will be permitted to pay a one-time dividend to its shareholders, which we refer to as the “AAA dividend” in the amount of the balance of its accumulated adjustment account accumulated adjustment account as of December 31, 2019. Additionally, PFG will be permitted to pay: (1) a one-time tax distribution payable on or before February 29, 2020 in an amount that will enable PFG’s shareholders to satisfy their respective tax obligations in connection with their pro rata share of the income of PFG for the tax period ending on December 31, 2019; and (2) a one-time tax distribution payable immediately prior to the closing in an amount sufficient for PFG’s shareholders to satisfy their respective tax obligations in connection with their pro rata share of the income of PFG for the tax period commencing on January 1, 2020 and ending on the closing date.
   
  The AAA dividend will reduce the aggregate amount of the cash consideration paid to PFG’s shareholders in connection with the merger on a dollar-for-dollar basis. However, the distributions paid to enable PFG’s shareholders to satisfy their respective tax obligations for their pro-rata share of PFG’s income will not reduce the merger consideration.
   
Q: How does PFG’s board of directors recommend that I vote at the special meeting?
   
A: PFG’s board of directors unanimously recommends that you vote “FOR” the merger proposal and “FOR” the adjournment proposal.
   
Q: When and where is the PFG special meeting?
   
A: The PFG special meeting will be held at PFG’s office located at 500 North Main Street, Jamestown, Tennessee, on January 28, 2020, at 1:00 p.m., Central Time.

 

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Q: What do I need to do now?
   
A: After you have carefully read this proxy statement/prospectus and have decided how you wish to vote your shares, please authorize a proxy to vote your shares by promptly completing and returning the enclosed proxy card so that your shares are represented and voted at the PFG special meeting. When complete, sign, date and mail your proxy card in the enclosed postage-paid return envelope as soon as possible. Submitting your proxy by mail or directing your bank or broker to vote your shares will ensure that your shares are represented and voted at the PFG special meeting. Your proxy card must be received prior to the special meeting on January 28, 2020, in order to be counted.
   
Q: What constitutes a quorum for the PFG special meeting?
   
A: Holders representing at least a majority of the issued and outstanding shares of PFG common stock entitled to vote at the PFG special meeting must be present, in person or represented by proxy, to constitute a quorum. Abstentions and broker non-votes, if any, will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum. If a quorum is not present, the PFG special meeting will be postponed until the holders of the number of shares of PFG common stock required to constitute a quorum attend. If you submit a properly executed proxy card, even if you abstain from voting, your shares of PFG common stock will be counted for purposes of determining whether a quorum is present at the PFG special meeting. If additional votes must be solicited to approve the merger proposal, it is expected that the PFG special meeting will be adjourned to solicit additional proxies.
   
Q: What is the vote required to approve each proposal?
   
A: The merger proposal requires the affirmative vote of a majority of the issued and outstanding shares of PFG common stock entitled to vote at the PFG special meeting. The adjournment proposal requires the affirmative vote of a majority of the votes cast on the matter.
   
Q: What would happen if the adjournment proposal does not get approved by PFG shareholders?
   
A: The completion of the merger is not conditioned upon shareholder approval of the adjournment proposal. If a quorum is present at the PFG special meeting and the adjournment proposal is not approved and there are not sufficient votes at the time of the PFG special meeting to approve the merger proposal, then the PFG board of directors will not have the ability to adjourn to solicit additional votes and the merger proposal will not be approved.
   
Q: Why is my vote important?
   
A: If you do not submit a proxy or vote in person, it may be more difficult for PFG to obtain the necessary quorum to hold the special meeting. In addition, your failure to submit a proxy or vote in person, or failure to instruct your bank or broker how to vote, or abstention will have the same effect as a vote against approval of the merger proposal. The merger proposal must be approved by the affirmative vote of the holders of at least a majority of the outstanding shares of PFG common stock. PFG’s board of directors unanimously recommends that you vote “FOR” the merger proposal.
   
Q: How many votes do I have?
   
A: PFG shareholders are entitled to one vote on each proposal to be considered at the special meeting for each share of PFG common stock owned as of the close of business on December 17, 2019, which is the record date for the PFG special meeting.
   
Q: How do I vote?
   
A: If you are a shareholder of record, you may have your shares of PFG common stock voted on the matters to be presented at the PFG special meeting in any of the following ways:
   
· You may vote by mail. You may vote by mail by completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

 

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· You may vote in person at the meeting. You may vote by attending the special meeting and casting your vote in person.
   
  If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Your bank, brokerage firm or other nominee cannot vote your shares without instructions from you. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must obtain a legal proxy from your bank, brokerage firm or other nominee.
   
Q: Do PFG directors and executive officers have interests in the merger that are different from, or in addition to, my interests?
   
A: Yes. In considering the recommendation of the PFG board of directors with respect to the merger agreement, you should be aware that PFG’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of PFG’s shareholders generally. Interests of officers and directors that may be different from or in addition to the interests of PFG’s shareholders include but are not limited to the receipt of continued indemnification and directors’ and officers’ insurance coverage under the merger agreement.
   
Q: What if I abstain from voting, fail to authorize a proxy or fail to vote in person?
   
A: If you mark “ABSTAIN” on your proxy with respect to the merger proposal, fail to authorize a proxy or fail to vote in person at the PFG special meeting, or fail to instruct your bank or broker how to vote, it will have the same effect as a vote “AGAINST” the merger proposal and no effect on the adjournment proposal. If you sign your proxy but do not indicate your vote, your proxy will be voted “FOR” each proposal.
   
Q: Can I attend the special meeting and vote my shares in person?
   
A: Yes. All PFG shareholders as of the record date, including shareholders of record and shareholders who hold their shares through any other holder of record, are invited to attend the PFG special meeting. Holders of record of PFG common stock can vote in person at the PFG special meeting. If you are not a shareholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the PFG special meeting. If you plan to attend the PFG special meeting, you must hold your shares in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. PFG reserves the right to refuse admittance to anyone without proper proof of share ownership or without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the PFG special meeting is prohibited without express written consent. Even if you plan to attend the special meeting, PFG encourages you to vote by proxy through the mail so your vote will be counted if you later decide not to attend the special meeting.
   
Q: Can I change my vote?
   
A: Yes. If you are a holder of record of PFG common stock, you may revoke your proxy at any time prior to the PFG special meeting by: (1) delivering written notice of revocation to Brandon Smith, Corporate Secretary, Progressive Financial Group Inc., 500 North Main Street, Jamestown, Tennessee 38556, (2) by returning a duly executed proxy card bearing a later date than the date with which your original proxy card was dated, or (3) by attending the PFG special meeting and voting in person. Your attendance at the PFG special meeting will not constitute automatic revocation of the proxy unless you deliver your ballot in person at the special meeting or deliver a written revocation to the PFG Corporate Secretary prior to the voting of such proxy.
   
Q: Will PFG be required to submit the merger proposal to its shareholders even if PFG’s board of directors has withdrawn, modified or qualified its recommendation?
   
A: Yes. Unless the merger agreement is terminated before the PFG special meeting, PFG is required to submit the merger proposal to its shareholders even if PFG’s board of directors has withdrawn, modified or qualified its recommendation.

 

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Q: What are the material U.S. federal income tax consequences of the pre-closing distributions to U.S. holders of shares of PFG common stock?
   
A: Generally, distributions to a shareholder from a corporation taxed under Subchapter S of the Internal Revenue Code are not taxable to the extent of a shareholder’s adjusted tax basis in the S corporation stock, with any distribution in excess of adjusted tax basis being treated as gain from the sale or exchange of property. To the extent that AAA dividend or the distributions to the PFG shareholders intended to cover their tax obligations in respect of their pro rata portion of PFG’s income are not taxable due to a U.S. holder’s tax basis prior to the distributions exceeding the amount received, the holder’s adjusted tax basis in its PFG common stock would decrease by the amount of the distributions paid and affect the amount of the holder’s gain or loss, if any, in the merger as well as the holder’s tax basis in the SmartFinancial common stock received in exchange for PFG common stock in the merger. For further information, see “The Merger—Material U.S. Federal Income Tax Consequences.”
   
Q: What are the material U.S. federal income tax consequences of the merger to U.S. holders of shares of PFG common stock?
   
A: Each of SmartFinancial and PFG expects the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and that the merger agreement will constitute a “plan or reorganization” as such term is used in Sections 354 and 361 of the Code. Accordingly, a U.S. holder (as defined below) of PFG common stock generally would not recognize gain or loss on the exchange of PFG common stock for SmartFinancial common stock in the merger. However, holders of PFG common stock will be subject to tax on cash consideration received as well as cash received in lieu of a fractional share of SmartFinancial common stock.
   
  For further information, see “The Merger—Material U.S. Federal Income Tax Consequences.”
   
  The U.S. federal income tax consequences described above may not apply to all holders of PFG common stock. Your particular tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.
   
Q: Are PFG shareholders entitled to exercise dissenters’ rights?
   
A: Yes. Under Tennessee law, record holders of shares of PFG common stock have the right to demand in writing to receive a payment in cash for the “fair value” of their shares as determined by an appraisal process. To exercise those dissenters’ rights, a PFG shareholder must follow exactly the procedures specified under Tennessee law. These procedures are summarized in this proxy statement/prospectus. In addition, the text of the applicable provisions of Tennessee law is included as Annex C to this document. Failure to strictly comply with these provisions may result in the loss of dissenters’ rights. The value determined in the appraisal process may be more or less than the value a PFG shareholder would receive in the merger under the terms of the merger agreement. Failure to strictly comply with the applicable Tennessee law provisions will result in the loss of the right of appraisal. For further information, see “The Merger—Dissenters’ Rights.”
   
  Pursuant to the merger agreement, the merger may not be completed if dissenters’ rights are properly asserted with respect to 7.5% or more of the outstanding shares of PFG common stock.
   
Q: Should I send my PFG stock certificates with my proxy card for the PFG special meeting?
   
A: No. You should NOT send your PFG stock certificates with your proxy card. SmartFinancial, through its appointed exchange agent, will send PFG shareholders separate instructions for exchanging PFG stock certificates and PFG common stock held in book-entry form for the merger consideration.
   
Q: What happens if I sell or transfer ownership of shares of PFG common stock after the record date for the PFG special meeting?
   
A: The record date for the PFG special meeting is earlier than the expected date of completion of the merger. Therefore, if you sell or transfer ownership of your shares of PFG common stock after the record date for the PFG special meeting, but prior to completion of the merger, you will retain the right to vote at the PFG special meeting, but the right to receive the merger consideration will transfer with the shares of PFG common stock.

 

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Q: Whom may I contact if I cannot locate my PFG stock certificate(s)?
   
A: If you are unable to locate your original PFG stock certificate(s), you should contact Ottis H. Phillips, President and CEO, at (931) 752-2178 . Generally, merger consideration for lost certificates cannot be delivered except upon the making of an affidavit claiming such certificate to be lost, stolen or destroyed and the posting of a bond in such amount as SmartFinancial or the exchange agent may determine is reasonably necessary as indemnity against any claim that may be made with respect to such lost certificate.
   
Q: When do you expect to complete the merger?
   
A: SmartFinancial and PFG expect to complete the merger in the first quarter of 2020. However, neither SmartFinancial nor PFG can assure you when or if the merger will occur. SmartFinancial and PFG must first obtain the approval of PFG shareholders for the merger proposal and any necessary regulatory approvals, as well as the satisfaction of other conditions to the closing.
   
Q: What happens if the merger is not completed?
   
A: If the merger is not completed, holders of PFG common stock will not receive any consideration for their shares of PFG common stock that otherwise would have been received in connection with the merger. Instead, PFG will remain an independent private company. If the merger is completed but, for any reason, the bank merger is not completed, it will have no impact on the consideration to be received by holders of PFG common stock.
   
Q: Whom should I call with questions?
   
A: If you have any questions concerning the merger agreement, the merger or this proxy statement/prospectus, would like additional copies of this proxy statement/prospectus or need help voting your shares of PFG common stock, please contact: Ottis H. Phillips, President and CEO, at (931) 752-2178.

 

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SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus. It may not contain all of the information that is important to you. We urge you to read carefully the entire proxy statement/prospectus, including the annexes, and the other documents to which we refer in order to fully understand the merger. See “Where You Can Find More Information.” Each item in this summary refers to the page of this proxy statement/prospectus on which that subject is discussed in more detail.

 

The Companies (page 70)

 

SmartFinancial, Inc.
5401 Kingston Pike
Knoxville, Tennessee 37319
(865) 868-0613

 

SmartFinancial is a Knoxville, Tennessee-based corporation and bank holding company registered under the Bank Holding Company Act of 1956, as amended (which we refer to as the “Bank Holding Company Act”). SmartFinancial is the publicly traded bank holding company for SmartBank, which operates offices across Tennessee, Alabama, and the Florida Panhandle.

 

As of September 30, 2019, SmartFinancial had total assets of approximately $2.39 billion. Shares of SmartFinancial common stock are traded on the Nasdaq Capital Market under the symbol “SMBK.” Additional information about SmartFinancial and its subsidiaries can be found under the heading “SmartFinancial, Inc.” beginning on page 70.

 

Progressive Financial Group Inc.
500 North Main Street

Jamestown, TN 38556

(931) 752-2178

 

PFG is a Tennessee-based corporation and bank holding company registered under the Bank Holding Company Act. PFG is the bank holding company for Progressive Savings Bank, a Tennessee chartered commercial bank headquartered in Jamestown, Tennessee, with five (5) branches in Cookeville, Crossville, and Wartburg, Tennessee. As of September 30, 2019, Progressive Savings Bank had total assets of approximately $296 million, total deposits of $258 million, and total shareholders’ equity of approximately $30 million.

 

Additional information about PFG and its subsidiaries is included below under “The Companies” beginning on page 70.

 

The Merger

 

The Merger Agreement (page 52)

 

SmartFinancial and PFG entered into an Agreement and Plan of Merger, dated as of October 29, 2019, which we refer to as the merger agreement. The merger agreement governs the merger. The merger agreement is included in this proxy statement/prospectus as Annex A. All descriptions in this summary and elsewhere in this proxy statement/prospectus of the terms and conditions of the merger are qualified by reference to the merger agreement. Please read the merger agreement carefully for a more complete understanding of the merger.

 

The Merger (page 31)

 

Pursuant to the merger agreement, PFG will merge with and into SmartFinancial, with SmartFinancial as the surviving company, which we refer to as the merger. Immediately after the merger, Progressive Savings Bank, a wholly owned bank subsidiary of PFG, will merge with and into SmartFinancial’s wholly owned bank subsidiary, SmartBank, with SmartBank as the surviving bank, which we refer to as the bank merger.

 

 

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The Merger Consideration (page 53)

 

At the effective time of the merger, each share of PFG common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive  a pro rata portion (which is a ratio equal to one divided by the number of shares of PFG common stock issued and outstanding as of the closing) of (1) an aggregate amount of cash equal to $14,595,354.37 minus the amount of any pre-closing dividend paid by PFG and any loss in excess of $250,000 realized by PFG or its applicable subsidiary on sales of certain assets prior to closing, and (2) 1,292,592.556 shares of SmartFinancial common stock. We refer to the cash and shares of SmartFinancial common stock into which the PFG common stock will convert as the “merger consideration”. Assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, the holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own. Based on the closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, which, represents approximately $2,159.10 in total merger consideration per share of PFG common stock.

 

On October 28, 2019, the last full trading day before the public announcement of the merger agreement, the last reported sale price of SmartFinancial common stock was $20.72 per share, which represented $26,782,518 in value for all shares of PFG common stock to be converted into SmartFinancial common stock. Based on the most recent reported closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, the exchange of stock would represent approximately $30,143,258.41 in total value for all shares of PFG common stock to be converted into SmartFinancial common stock.

 

SmartFinancial will not issue any fractional shares of SmartFinancial common stock in the merger. PFG shareholders who would otherwise be entitled to a fractional share of SmartFinancial common stock upon the completion of the merger will instead receive an amount in cash (without interest and rounded to the nearest whole cent) determined by multiplying the fractional share interest in SmartFinancial common stock (rounded to the nearest one hundredth of a share) by the average closing price of SmartFinancial’s common stock on the NASDAQ Capital Market over the ten (10) trading days ending on the business days immediately prior to the closing date.

 

Exchange Procedures (page 53)

 

Promptly after the effective time of the merger, SmartFinancial’s exchange agent will mail to each holder of record of PFG common stock that is converted into the right to receive the merger consideration a letter of transmittal and instructions for the surrender of the holder’s PFG stock certificate(s) for the merger consideration (including cash in lieu of any fractional PFG shares), and any dividends or distributions to which such holder is entitled to pursuant to the merger agreement.

 

Please do not send in your certificates until you receive these instructions.

 

Ancillary Agreements

 

Voting Agreements (page 68)

 

As a condition to SmartFinancial entering into the merger agreement, all directors of PFG and Progressive Bank who have voting power over shares of PFG common stock and holders of 10% or more of PFG’s issued and outstanding shares of common stock entered into voting agreements in the form attached as Exhibit A to the merger agreement attached as Annex A to this document, pursuant to which each such person agreed, among other things, to vote the shares of PFG common stock held of record by such person (1) to approve the merger agreement and the merger (or any adjournment or postponement necessary to solicit additional proxies to approve the merger agreement and the merger) and (2) against any acquisition proposals or any actions that would result in a breach of any covenant, representation or warranty of PFG in the merger agreement.

 

Non-Competition and Non-Disclosure Agreements (page 68)

 

In addition, as a condition to SmartFinancial entering into the merger agreement, each director of PFG and Progressive Bank, entered into non-competition and non-disclosure agreements with SmartFinancial in the form attached as Exhibit C to the merger agreement attached as Annex A to this document, pursuant to which each such person agreed to, among other things, (1) not disclose or use any confidential information or trade secrets of PFG for any purpose for so long as such information remains confidential information or a trade secret, (2) for a period of two years following the closing of the merger, not engage in certain competitive activities with SmartFinancial, including not soliciting employees and customers of PFG (provided that one director will only be bound to a covenant regarding non-solicitation of employees and customers), and (3) for a period of two years following the closing of the merger, not serve as a director or management official of another financial institution in the counties in Tennessee in which Progressive Bank operates a banking office as of the closing of the merger and each county contiguous to each of such counties (subject to exceptions for directorships already held by one member of PFG’s board of directors).

 

 

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Claims Letters (page 69)

 

At the time of the execution of the merger agreement, each director of PFG and Progressive Bank executed a letter agreement with SmartFinancial in the form attached as Exhibit D to the merger agreement attached as Annex A to this document, pursuant to which each such director released and discharged, effective upon the consummation of the merger, PFG and its subsidiaries, their respective directors and officers (in their capacities as such), and their respective successors and assigns (including SmartFinancial and SmartBank), from any and all liabilities or claims that the director has or claims to have as of the effective time of the merger, with certain exceptions.

 

Risk Factors Related to the Merger (page 20)

 

Before voting at the PFG special meeting, you should carefully consider all the information contained in or incorporated by reference into this proxy statement/prospectus in deciding how to vote for the proposals presented in the proxy statement/prospectus.

 

The PFG Special Meeting (page 27)

 

The special meeting will be held on January 28, 2020 at 1 p.m., Central Time, at the main office of Progressive Savings Bank at 500 N. Main Street Jamestown, Tennessee 38556.

 

At the special meeting, PFG shareholders will be asked to:

 

·approve the merger proposal; and

 

·approve the adjournment proposal.

 

All shareholders of record of PFG common stock as of the close of business on December 17, 2019, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting, or any adjournment or postponement thereof, in accordance with Tennessee law. The presence at the special meeting, in person or by proxy, of holders of a majority of the outstanding shares of PFG common stock entitled to vote at the special meeting will constitute a quorum. Abstentions, if any, will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum.

 

Recommendation of the PFG Board (page 28)

 

The PFG board of directors has determined unanimously that the merger agreement and the other transactions contemplated by the merger agreement are advisable and in the best interests of PFG and its shareholders and has approved and adopted unanimously the merger agreement. The PFG board of directors unanimously recommends that holders of shares of PFG common stock vote “FOR” the merger proposal and “FOR” the adjournment proposal. For the factors considered by the PFG board of directors in reaching its decision to approve and adopt the merger agreement, see “The Merger — PFG’s Reasons for the Merger.”

 

Board Composition and Management of SmartFinancial after the Merger (page 42)

 

Each of the officers and directors of SmartFinancial immediately prior to the effective time of the merger will be the officers and directors of the surviving company from and after the effective time of the merger, until their respective successors have been duly elected, appointed or qualified or until their earlier death, resignation or removal in accordance with the charter and bylaws of SmartFinancial. Following the effective time of the merger, the board of directors of the surviving company will also be expanded by one member, and the new vacancy will be filled by Ottis H. Phillips, who will remain a member of the board of directors of the surviving corporation until his successor has been duly elected, appointed or qualified or until their earlier death, resignation or removal in accordance with the charter and bylaws of SmartFinancial

 

 

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Interests of PFG Directors and Executive Officers in the Merger (page 42)

 

In considering the recommendation of the PFG board of directors, shareholders should be aware that the directors and executive officers of PFG have certain interests in the merger that may be different from, or in addition to, the interests of PFG shareholders generally. The PFG board of directors was aware of these interests and considered them, among other matters, in making its recommendation that PFG shareholders vote to approve the merger proposal. These interests are described in further detail below.

 

These interests include:

 

Pursuant to the terms of the merger agreement, for a period of six years from and after the effective time, SmartFinancial must indemnify certain persons, including PFG’s directors and executive officers. In addition, the merger agreement requires that for a period of six years from the effective time, subject to a cap on the amount of premiums, SmartFinancial must maintain an insurance policy for the benefit of certain persons, including PFG’s directors and executive officers. For additional information, see “The Merger Agreement — Covenants and Agreements; Indemnification and Insurance.”

 

·Some members of the Progressive Bank management team will continue to receive employment benefits that are consistent with those of other similarly situated SmartBank employees after the closing of the merger.

 

·Ottis H. Phillips will be appointed to the board of directors of SmartFinancial and SmartBank.

 

·All participants in the Jo Ann Rains Employee Stock Ownership Plan and the Progressive Savings Bank F.S.B. 401(k) Plan, including any directors or executive officers participating in such plans, will become 100% vested as of each plan’s termination date (the day of the merger and the day immediately prior to the merger, respectively).

 

·PFG’s directors and executive officers are entitled to continued indemnification and insurance coverage under the merger agreement for a period of six years.

 

For a more complete description of these interests, see “The Merger — Interests of PFG Directors and Executive Officers in the Merger.”

 

Dissenters’ Rights in the Merger (page 50)

 

Tennessee law permits holders of PFG common stock to dissent from the merger and to have the fair value of their PFG common stock paid in cash. To do this, a PFG shareholder must follow certain procedures, including filing certain notices with PFG and refraining from voting the shareholder’s shares of PFG common stock in favor of the merger proposal. If a PFG shareholder properly dissents from the merger proposal, that shareholder’s shares of PFG common stock will not be exchanged for the merger consideration, but rather, that shareholder’s only right will be to receive the appraised value of the shareholder’s shares in cash.

 

For a complete description of these dissenters’ rights, see page 50 and Annex C to this proxy statement/prospectus where the full text of those sections of the Tennessee Business Corporation Act applicable to dissenters’ rights is set out.

 

A dissenting shareholder will be entitled to payment only if written notice of intent to demand payment is delivered to PFG before the vote is taken and the shareholder does not vote in favor of merger proposal.

 

Conditions to Completion of the Merger (page 64)

 

Currently, SmartFinancial and PFG expect to complete the merger in the first quarter of 2020. As more fully described in this proxy statement/prospectus and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include:

 

·approval of the merger agreement by the holders of at least a majority of the outstanding shares of PFG common stock entitled to vote at the PFG special meeting;

 

·the receipt of all required regulatory approvals for the merger, without the imposition of any burdensome condition, and the expiration of all regulatory waiting periods;

 

 

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·the absence of any legal restraint (such as an injunction or restraining order) that would prevent the consummation of the merger;

 

·the effectiveness of the registration statement of which this proxy statement/prospectus forms a part;

 

·each party’s receipt of a U.S. federal income tax opinion from its outside legal counsel, dated the closing date of the merger, confirming that the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code;

 

·the approval of the listing of the shares of SmartFinancial common to be issued as merger consideration on the NASDAQ;

 

·the Plan of Bank Merger in the form attached as Exhibit B to the merger agreement attached as Annex A to this document being executed and delivered;

 

·the absence of 7.5% or more of the outstanding shares of PFG’s common stock exercising their dissenters’ rights;

 

·the accuracy, subject to varying degrees of materiality, of SmartFinancial’s and PFG’s respective representations and warranties in the merger agreement on the date of the merger agreement and as of the effective time of the merger (or such other date specified in the merger agreement);

 

·the receipt of any consents or approvals necessary to effect the Merger;

 

·the entry of certain employees of PFG or is subsidiaries into new employment agreements with PFG and / or SmartFinancial (or their respective subsidiaries, as applicable);

 

·performance in all material respects by SmartFinancial and PFG of their respective obligations under the merger agreement;

 

·the sale by PFG of its equity holdings in Upper Cumberland Bancshares, Inc. (which occurred on November 19, 2019), and

 

·the absence of the occurrence of a material adverse effect on PFG or SmartFinancial.

 

Neither SmartFinancial nor PFG can be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

 

Regulatory Approvals Required for the Merger (page 45)

 

Both SmartFinancial and PFG have agreed to use their reasonable best efforts to obtain all regulatory approvals (or waivers) required or advisable to complete the transactions contemplated by the merger agreement. These approvals include, among others, approval from the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, the Tennessee Department of Financial Institutions, or the TDFI, and various securities and other regulatory authorities. The U.S. Department of Justice may also review the impact of the merger on competition. SmartFinancial and PFG have submitted all applications, waiver requests and notifications to obtain the required regulatory approvals. Although neither SmartFinancial nor PFG knows of any reason why these regulatory approvals cannot be obtained, SmartFinancial and PFG cannot be certain when or if they will be obtained, as the length of the review process may vary based on, among other things, requests by regulators for additional information or materials.

 

No Solicitation (page 62)

 

Under the merger agreement, PFG  has agreed that it will not, and will cause its representatives not to, directly or indirectly, (1) initiate, solicit, induce or knowingly encourage, or take any action to facilitate the making of, any inquiry, offer or proposal which constitutes, or could reasonably be expected to lead to, an acquisition proposal, (2) participate in any discussions or negotiations regarding any acquisition proposal or furnish, or otherwise afford access, to any person (other than SmartFinancial) any information or data with respect to PFG or any of its subsidiaries or otherwise relating to an acquisition proposal, (3) release any person from, waive any provisions of, or fail to enforce any confidentiality agreement or standstill agreement to which PFG is a party, or (4) enter into any agreement, confidentiality agreement, agreement in principle or letter of intent with respect to any acquisition proposal or approve or resolve to approve any acquisition proposal or any agreement, agreement in principle or letter of intent relating to an acquisition proposal.

 

However, prior to obtaining PFG’s required shareholder approval, PFG may, under certain specified circumstances, participate in negotiations or discussions with any third-party acquiring proposal and provide confidential information to such third party (subject to a confidentiality agreement). PFG must notify SmartFinancial promptly (but in no event later than one business day) after the receipt of such acquisition proposal.

 

 

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Additionally, prior to obtaining PFG’s required shareholder approval, PFG may, under certain specified circumstances, withdraw its recommendation to its shareholders with respect to the merger and/or terminate the merger agreement in order to enter into an acquisition agreement with respect to a superior acquisition proposal if it determines in good faith, after consultation with and having considered the advice of outside legal counsel and financial advisors, that such acquisition proposal is a superior proposal and that failure to take such actions more likely than not would cause it to violate its fiduciary duties to PFG’s shareholders under applicable law. However, PFG cannot take any of those actions in response to a superior proposal unless it provides SmartFinancial with a five-business day period to negotiate in good faith to enable SmartFinancial to adjust the terms and conditions of the merger agreement such that it would cause the superior proposal to no longer constitute a superior proposal.

 

Termination of the Merger Agreement (page 65)

 

The merger agreement can be terminated at any time prior to completion of the merger by mutual consent, or by either party in the following circumstances:

 

·if the merger is not consummated on or before June 30, 2020, subject to automatic extension to September 30, 2020 if the only outstanding condition to closing is the receipt of regulatory approvals;

 

·if any regulatory approval required for consummation of the transactions contemplated by the merger agreement has been denied by final non-appealable action by the relevant governmental authority or any application for such regulatory approval shall have been permanently withdrawn at the request of a governmental authority;

 

·in the event that approval by the shareholders of PFG is not obtained at a meeting at which a vote was taken; or

 

·in the event of a material breach by the other party of any representation, warranty or covenant contained in the merger agreement and such breach is not cured within 30 days.

 

In addition, SmartFinancial may terminate the merger agreement in the following circumstances:

 

·if PFG fails to comply in all material respects with its obligations pursuant to the non-solicitation covenants;

 

·if PFG withdraws, qualifies, amends, modifies or withholds its recommendation to its shareholders to approve the merger and the merger agreement, or makes any statement, filing or release, in connection with the shareholder meeting or otherwise, inconsistent with its recommendation (it being understood that taking a neutral position or no position with respect to an acquisition proposal shall be considered an adverse modification of its recommendation);

 

·if PFG materially breaches its obligation to call, give notice of, and commence a meeting of shareholders to vote on the merger agreement;

 

·if PFG approves or recommends an acquisition proposal (other than the merger agreement proposal);

 

·if PFG fails to publicly recommend against a publicly announced acquisition proposal within three business days of being requested to do so by SmartFinancial or fails to publicly reconfirm its recommendation to its shareholders within three business days of being requested to do so by SmartFinancial; or

 

·if PFG resolves or otherwise determines to take, or announces an intention to take, any of the foregoing actions.

 

In addition, PFG may terminate the merger agreement if PFG’s board of directors determines to enter into a definitive agreement with respect to a superior proposal in accordance with the terms of the merger agreement but only if PFG pays to SmartFinancial a $2,000,000 termination fee.

 

Termination Fee (page 66)

 

If the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by PFG’s board of directors, PFG may be required to pay SmartFinancial a termination fee of $2,000,000. The termination fee could discourage other companies from seeking to acquire or merge with PFG.

 

Expenses (page 67)

 

Each party will bear all expenses incurred in connection with the merger and the transactions contemplated by the merger agreement.

 

 

 

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Material U.S. Federal Income Tax Consequences (page 46)

 

The merger is expected to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to the respective obligations of SmartFinancial and PFG to complete the merger that each of SmartFinancial and PFG receives a tax opinion from its respective outside legal counsel, dated the closing date of the merger, to that effect. Based upon the qualification of the merger as a “reorganization” within the meaning of Section 368(a) of the Code, a U.S. holder (as defined below) of PFG common stock will not recognize gain or loss with respect to the receipt of SmartFinancial common stock in the merger. However, holders of PFG common stock will be subject to tax on the receipt of cash consideration received as well as cash received in lieu of a fractional share of SmartFinancial common stock. For further information, see “The Merger—Material U.S. Federal Income Tax Consequences.”

 

The U.S. federal income tax consequences described above may not apply to all holders of PFG common stock. Your particular tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.

 

Accounting Treatment of the Merger (page 46)

 

SmartFinancial will account for the merger under the acquisition method of accounting for business combinations under U.S. generally accepted accounting principles, or GAAP.

 

The Rights of Holders of PFG Common Stock Will Change as a Result of the Merger (see page 77)

 

The rights of holders of PFG common stock are governed by Tennessee law, as well as PFG’s Charter (which we refer to as the PFG Charter), and PFG’s Bylaws, as amended (which we refer to as the PFG Bylaws). After completion of the merger, the rights of former PFG shareholders will be governed by Tennessee law and by SmartFinancial’s Amended and Restated Charter, as amended (which we refer to as the SmartFinancial Charter), and SmartFinancial’s Amended and Restated Bylaws (which we refer to as the SmartFinancial Bylaws).

 

There are differences between the rights of shareholders of PFG and shareholders of SmartFinancial, including differences regarding restrictions on transfer of shares and limitations on the liability of directors and executive officers. The differences between the organizational documents and the rights of shareholders of PFG and shareholders of SmartFinancial are explained in more detail under the section “Comparison of Rights of SmartFinancial Shareholders and PFG Shareholders” beginning on page 77.

 

Opinion of PFG’s Financial Advisor (page 35 and Annex B)

 

Olsen Palmer LLC (which we refer to as “Olsen Palmer”), PFG’s financial advisor, delivered its opinion, dated October 29, 2019, to PFG’s board of directors to the effect that, as of the date of the opinion and subject to factors, qualifications, limitations and assumptions set forth in the opinion, the merger consideration is fair, from a financial point of view, to PFG.

 

The full text of the written opinion of Olsen Palmer, which sets forth the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Olsen Palmer in connection with its opinion, is attached as Annex B to this proxy statement/prospectus. Olsen Palmer’s opinion was for the information of, and directed to, PFG’s board of directors (in its capacity as such) in connection with its consideration of the financial terms of the merger. Olsen Palmer’s opinion is not a recommendation as to how any holder of PFG’s common stock should vote with respect to the proposal to approve the merger agreement or any other matter. It does not address the underlying business decision of PFG to engage in the merger, the relative merits of the merger as compared to any other alternative business strategies that might exist for PFG or the effect of any other transaction in which PFG might engage.

 

For further information, please see the section entitled “The Merger—Opinion of PFG’s Financial Advisor” beginning on page 35.

 

Closing and Effective Time of the Merger (see page 52)

 

The closing date is currently expected to occur in the first quarter of 2020. Simultaneously with the closing of the merger, SmartFinancial will file the articles of merger with the Secretary of State of the State of Tennessee. The merger will become effective at the later of the time the articles of merger are filed, or such other time as may be specified in the articles of merger. Neither SmartFinancial nor PFG can predict, however, the actual date on which the merger will be completed because it is subject to factors beyond each company’s control, including whether or when the required regulatory approvals and PFG’s shareholder approvals will be received and whether or when the other conditions to closing are satisfied.

 

 

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Market Prices and Share Information (see page 17)

 

SmartFinancial common stock is listed on the NASDAQ Capital Market under the symbol “SMBK.” The following table sets forth the closing sale prices of SmartFinancial common stock as reported on the NASDAQ Capital Market on October 28, 2019, the last full trading day before the public announcement of the merger agreement, and on December 18, 2019, the latest practicable trading date before the date of this proxy statement/prospectus.

 

   SmartFinancial
Common
Stock
   Implied Value of
One Share of
PFG
Common Stock to
be Converted
to Merger Consideration1
 
October 28, 2019  $20.72   $1,996.91 
December 18, 2019  $23.32   $2,159.10 

 

1 Based on 20,721 shares of PFG common stock outstanding and assuming the maximum amount of the cash component of the Merger Consideration is paid to PFG shareholders.

 

 

 14 

 

 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Some of the statements contained or incorporated by reference in this proxy statement/prospectus contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements about the financial condition, results of operations, earnings outlook and business plans, goals, expectations and prospects of SmartFinancial, PFG and the combined company following the proposed merger and statements for the period after the merger. Words such as “anticipate,” “believe,” “feel,” “expect,” “estimate,” “indicate,” “seek,” “strive,” “plan,” “intend,” “outlook,” “forecast,” “project,” “position,” “target,” “mission,” “contemplate,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “aspiration,” “outcome,” “continue,” “remain,” “maintain,” “trend,” “objective” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, as they relate to SmartFinancial, PFG, the proposed merger or the combined company following the merger often identify forward-looking statements, although not all forward-looking statements contain such words.

 

These forward-looking statements are predicated on the beliefs and assumptions of management based on information known to management as of the date of this proxy statement/prospectus and do not purport to speak as of any other date. Forward-looking statements may include descriptions of the expected benefits and costs of the transaction; forecasts of revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries; management plans relating to the merger; the expected timing of the completion of the merger; the ability to complete the merger; the ability to obtain any required regulatory, shareholder or other approvals; any statements of the plans and objectives of management for future or past operations, including the execution of integration plans; any statements of expectation or belief and any statements of assumptions underlying any of the foregoing.

 

The forward-looking statements contained or incorporated by reference in this proxy statement/prospectus reflect the view of management as of this date with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, actual results could differ materially from those anticipated by the forward-looking statements or historical results. Such risks and uncertainties include, among others, the following possibilities:

 

·the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require PFG to pay a termination fee to SmartFinancial;

 

·the inability to complete the merger contemplated by the merger agreement due to the failure to satisfy conditions necessary to close the merger, including the receipt of the requisite approvals of PFG shareholders;

 

·the risk that a regulatory approval that may be required for the merger is not obtained or is obtained subject to conditions that are not anticipated;

 

·risks associated with the timing of the completion of the merger;

 

·management time and effort may be diverted to the resolution of merger-related issues;

 

·the risk that the businesses of SmartFinancial and PFG will not be integrated successfully, or such integration may be more difficult, time-consuming or costly than expected;

 

·SmartFinancial’s ability to achieve the synergies and value creation contemplated by the proposed merger with PFG;

 

·the expected growth opportunities or costs savings from the merger with PFG may not be fully realized or may take longer to realize than expected;

 

·revenues following the transaction may be lower than expected as a result of losses of customers or other reasons;

 

·potential deposit attrition, higher than expected costs, customer loss and business disruption associated with SmartFinancial’s integration of PFG, including, without limitation, potential difficulties in maintaining relationships with key personnel;

 

·the outcome of any legal proceedings that may be instituted against SmartFinancial or PFG or their respective boards of directors;

 

·general economic conditions, either globally, nationally, in the State of Tennessee, or in the specific markets in which SmartFinancial or PFG operate;

 

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·limitations placed on the ability of SmartFinancial and PFG to operate their respective businesses by the merger agreement;

 

·the effect of the announcement of the merger on SmartFinancial’s and PFG’s business relationships, employees, customers, suppliers, vendors, other partners, standing with regulators, operating results and businesses generally;

 

·customer acceptance of the combined company’s products and services;

 

·the amount of any costs, fees, expenses, impairments and charges related to the merger;

 

·fluctuations in the market price of SmartFinancial common stock and the related effect on the market value of the merger consideration that PFG shareholders will receive upon completion of the merger;

 

·the introduction, withdrawal, success and timing of business initiatives;

 

·significant increases in competition in the banking and financial services industry;

 

·legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which SmartFinancial or PFG are engaged, including potential changes resulting from currently proposed legislation;

 

·credit risk of borrowers, including any increase in those risks due to changing economic conditions;

 

·changes in consumer spending, borrowing, and savings habits;

 

·competition among depository and other financial institutions;

 

·liquidity risk affecting SmartFinancial’s or PFG’s ability to meet their respective obligations when they become due;

 

·interest rate risk involving the effect of a change in interest rates;

 

·compliance risk resulting from violations of, or nonconformance with, laws, rules, regulations, prescribed practices or ethical standards;

 

·strategic risk resulting from adverse business decisions or improper implementation of business decisions;

 

·reputational risk that adversely affects earnings or capital arising from negative public opinion;

 

·terrorist activities risk that results in loss of consumer confidence and economic disruptions; and

 

·other risks and uncertainties detailed from time to time in SmartFinancial’s SEC filings.

 

Any forward-looking statements made in this proxy statement/prospectus or in any documents incorporated by reference into this proxy statement/prospectus, are subject to the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this proxy statement/prospectus or the date of any document incorporated by reference in this proxy statement/prospectus. SmartFinancial and PFG do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made, unless and only to the extent otherwise required by law. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement/prospectus and attributable to SmartFinancial, PFG or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this proxy statement/prospectus.

 

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COMPARATIVE MARKET PRICES AND DIVIDENDS

SmartFinancial

 

SmartFinancial common stock is listed on the NASDAQ Capital Market under the symbol “SMBK.” There is no established public trading market for PFG common stock and shares of PFG common stock are traded solely in individually-arranged transactions between buyers and sellers. As of December 18, 2019, the latest practicable date prior to this proxy statement/prospectus, there were 14,002,68 shares of SmartFinancial common stock outstanding (inclusive of 34,000 unvested shares of restricted stock having voting rights), which were held by approximately 1,063 holders of record. As of the record date for the PFG special meeting, there were 20,721 shares of PFG common stock outstanding, which were held by approximately 36 holders of record. The following table sets forth the high and low reported intra-day sales prices per share of SmartFinancial common stock, and the cash dividends declared per share for the periods indicated.

 

   SmartFinancial Common Stock 
   Sales Price   Dividends
Declared Per
 
   High   Low   Share 
2017               
First Quarter  $23.20   $17.17   $0.00 
Second Quarter  $26.26   $20.35   $0.00 
Third Quarter  $25.95   $22.31   $0.00 
Fourth Quarter  $24.98   $21.10   $0.00 
                
2018               
First Quarter  $23.90   $20.50   $0.00 
Second Quarter  $27.50   $22.94   $0.00 
Third Quarter  $27.69   $19.49   $0.00 
Fourth Quarter  $23.99   $16.17   $0.00 
                
2019               
First Quarter  $20.49   $17.15   $0.00 
Second Quarter  $21.91   $18.99   $0.00 
Third Quarter  $22.75   $18.73   $0.00 
Fourth Quarter (through December 18, 2019)  $23.99   $19.73   $0.05 

 

On October 28, 2019, the last full trading day before the public announcement of the merger agreement, the closing sale price per share of SmartFinancial common stock was $20.72, and on December 18, 2019, the latest practicable date before the date of this proxy statement/prospectus, the closing sale price per share of SmartFinancial common stock was $23.32.

 

PFG shareholders are advised to obtain current market quotations for SmartFinancial common stock. The market price of SmartFinancial common stock will fluctuate between the date of this proxy statement/prospectus and the date of completion of the merger. No assurance can be given concerning the market price of SmartFinancial common stock before or after the effective date of the merger. Changes in the market price of SmartFinancial common stock prior to the completion of the merger may affect the market value of the merger consideration that PFG shareholders will receive.

 

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The principal sources of funds to SmartFinancial to pay dividends are the dividends received from SmartBank. Consequently, dividends are dependent upon SmartBank’s earnings, capital needs, regulatory policies, as well as statutory and regulatory limitations. Federal and state banking laws and regulations restrict the number of dividends and loans a bank may make to its parent company. Approval by SmartFinancial’s regulators is required if the total of all dividends declared in any calendar year exceed the total of its net income for that year combined with its retained net income of the preceding two years.

 

PFG

 

There is no established public trading market for the shares of PFG common stock, and no market for PFG common stock is expected to develop if the merger does not occur. No registered broker/dealer makes a market in the PFG common stock, and no shares of such stock are listed for trading or quoted on any stock exchange or automated quotation system. PFG acts as the transfer agent and registrar for its own shares. The following table sets forth the known private sales or purchases of PFG’s common stock during 2017, 2018 and 2019:

 

   PFG Common Stock 
   Shares Sold   Purchase
Price Per
Share
 
July 2017   50   $1,390.45 
September 2017   60   $1,500.00 
December 2017   200   $1,490.86 
January 2018   50   $1,495.44 
May 2018   60   $1,500.00 
July 2018   25   $1,486.72 
October 2018   100   $1,513.70 
March 2019   160   $1,390.45 

 

PFG’s general dividend policy is to pay cash dividends once or twice per year. During 2017, PFG declared dividends of  $28.96 per share and paid dividends of  $28.96 per share. During 2018, PFG declared dividends of  $26.06 per share and paid dividends of  $26.06 per share. For the nine months ended September 30, 2019, PFG declared dividends of  $44.40 per share and paid dividends of  $44.40 per share. Under the terms of the merger agreement, PFG is permitted to pay a dividend to its shareholders on or before February 29, 2020 in an amount that would be sufficient for the PFG shareholders to satisfy their respective tax obligations in connection with their pro rata share of the income of PFG for the 2019 tax year, and will also be permitted to make a one-time dividend to its shareholders immediately prior to closing for purposes of satisfying PFG’s shareholders’ tax obligations in connection with their pro rata share of the income of PFG for the 2020 tax year. Additionally, PFG will be permitted to pay a one-time dividend immediately prior to closing in the amount of the balance of PFG’s accumulated adjustment account.

 

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The following table sets forth the PFG cash dividends declared per share for the periods indicated.

 

   PFG Common Stock 
   Dividends Declared
Per Share
 
2017     
First Quarter  $0.00 
Second Quarter  $0.00 
Third Quarter  $28.96 
Fourth Quarter  $0.00 
      
2018     
First Quarter  $26.06 
Second Quarter  $0.00 
Third Quarter  $0.00 
Fourth Quarter  $0.00 
      
2019     
First Quarter  $0.00 
Second Quarter  $44.40 
Third Quarter  $0.00 
Fourth Quarter (through December 18, 2019)  $0.00 

 

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RISK FACTORS

 

In addition to general investment risks and the other information contained in or incorporated by reference into this proxy statement/prospectus, including the matters addressed under the section “Cautionary Statement Concerning Forward-Looking Statements,” you should carefully consider the following risk factors in deciding how to vote for the proposals presented in this proxy statement/prospectus. You should also consider the other information in this proxy statement/prospectus and the other documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information.”

 

Risks Related to the Merger

 

Because of the fluctuation of the market price of SmartFinancial common stock, PFG shareholders will not know at the time of the special meeting the market value of the merger consideration they will receive at the effective time of the merger.

 

At the effective time of the merger, each share of PFG common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive  a pro rata portion (which is a ratio equal to one divided by the number of shares of PFG common stock issued and outstanding as of the closing) of (1) an aggregate amount of cash equal to $14,595,354.37 minus the amount of any pre-closing dividend paid by PFG and any loss in excess of $250,000 realized by PFG or its applicable subsidiary on sales of certain assets prior to closing, and (2) 1,292,592.556 shares of SmartFinancial common stock. Assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, the holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own. Based on the closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, which, represents, approximately $2,159.10 in total merger consideration per share of PFG common stock.

 

The market value of the shares of SmartFinancial common stock as merger consideration may vary from the market value on the date PFG and SmartFinancial announced the merger, on the date that this proxy statement/prospectus is mailed, on the date of the PFG special meeting and on the date the merger is completed and thereafter due to fluctuations in the market price of SmartFinancial common stock. Any fluctuation in the market price of SmartFinancial common stock after the date of this proxy statement/prospectus will change the value of the shares of SmartFinancial common stock that PFG shareholders may receive. Stock price changes may result from a variety of factors that are beyond the control of SmartFinancial and PFG, including but not limited to general market and economic conditions, changes in their respective businesses, operations and prospects and regulatory considerations. Therefore, at the time of the PFG special meeting, PFG shareholders will not know the precise market value of the merger consideration they may receive at the effective time of the merger. In addition, PFG shareholders will not know the exact exchange ratio at the time of the PFG special meeting, as it may be adjusted as a result of the measurement price. PFG shareholders should obtain current sale prices for shares of SmartFinancial common stock and PFG common stock before voting their shares at the PFG special meeting.

 

The merger and related transactions are subject to approval by PFG shareholders.

 

The merger cannot be completed unless the PFG shareholders approve the merger agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of PFG’s common stock entitled to vote at the PFG special meeting.

 

Failure to complete the merger could negatively affect the value of the shares and the future business and financial results of PFG.

 

If the merger is not completed, the ongoing business of PFG could be adversely affected and PFG will be subject to a variety of risks associated with the failure to complete the merger, including the following:

 

·PFG being required, under certain circumstances, to pay to SmartFinancial a termination fee equal to $2,000,000;

 

·substantial costs incurred by PFG in connection with the proposed merger, such as legal, accounting, financial advisor, printing and mailing fees;

 

·the loss of key employees and customers;

 

·the disruption of operations and business;

 

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·deposit attrition, customer loss and revenue loss;

 

·unexpected problems with costs, operations, personnel, technology and credit;

 

·diversion of management focus and resources from operational matters and other strategic opportunities while working to implement the merger; and

 

·reputational harm due to the adverse perception of any failure to successfully complete the merger.

 

If the merger is not completed, these risks could materially affect the business, financial results and the value of PFG common stock.

 

PFG will be subject to business uncertainties and contractual restrictions while the merger is pending.

 

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on PFG. These uncertainties may impair PFG’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with PFG to seek to change existing business relationships with PFG. Retention of certain employees by PFG may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with PFG or SmartFinancial. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with PFG or SmartFinancial, PFG’s business or the business assumed by SmartFinancial following the merger could be harmed. In addition, PFG has agreed to certain contractual restrictions on the operation of its business prior to closing. See “The Merger Agreement—Covenants and Agreements” for a description of the restrictive covenants applicable to PFG.

 

The merger agreement limits PFG’s ability to pursue an alternative acquisition proposal and requires PFG to pay a termination fee of $2,000,000 under limited circumstances relating to alternative acquisition proposals.

 

Under the merger agreement, PFG has agreed not to initiate, solicit, induce or knowingly encourage, or take any action to facilitate any alternative business combination transaction or, subject to certain exceptions, participate in discussions or negotiations regarding, or furnish any non-public information relating to, any alternative business combination transaction. See “The Merger Agreement—No Solicitation” on page 62. The merger agreement also provides for PFG to pay to SmartFinancial a termination fee in the amount of $2,000,000 in the event that the merger agreement is terminated for certain reasons. See “The Merger Agreement—Termination Fee” on page 66. These provisions could discourage a potential competing acquirer that might have an interest in acquiring PFG from considering or making a competing acquisition proposal, even if the potential competing acquirer was prepared to pay consideration with a higher per share cash value than the market value proposed to be received or realized in the merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the merger agreement.

 

The merger agreement contains provisions granting both PFG and SmartFinancial the right to terminate the merger agreement in certain circumstances.

 

The merger agreement contains certain termination rights, including the right, subject to certain exceptions, of either party to terminate the merger agreement if the merger is not completed on or prior to June 30, 2020 (subject to automatic extension to September 30, 2020 if the only outstanding condition to closing is the receipt of regulatory approvals) and the right of PFG to terminate the merger agreement, subject to certain conditions, to accept a business combination transaction deemed to be superior to the merger by the PFG board of directors. If the merger is not completed, the ongoing business of PFG could be adversely affected and PFG will be subject to several risks, including the risks described elsewhere in this “Risk Factors” section.

 

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The merger is subject to a number of conditions which, if not satisfied or waived in a timely manner, would delay the merger or adversely impact the companies’ ability to complete the transactions.

 

The completion of the merger is subject to certain conditions, including, among others, the (1) approval of the merger agreement by the holders of at least a majority of the outstanding shares of PFG common stock entitled to vote at the PFG special meeting; (2) the receipt of all required regulatory approvals for the merger, without the imposition of any material on-going conditions or restrictions, and the expiration of all regulatory waiting periods; (3) the absence of any legal restraint (such as an injunction or restraining order) that would prevent the consummation of the merger; (4) the effectiveness of the registration statement of which this proxy statement/prospectus forms a part; (5) each party’s receipt of a tax opinion from its respective outside legal counsel, dated the closing date of the merger, confirming the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code; (6) the Plan of Bank Merger in the form attached as Exhibit B to the merger agreement attached as Annex A to this document being executed and delivered; (7) the absence of 7.5% or more of the outstanding shares of PFG’s common stock exercising their dissenters’ rights; (8) the absence of the occurrence of a material adverse effect on PFG or SmartFinancial; (9) receipt of all consents necessary for the consummation of the merger; (10) entry of certain employees of PFG and its subsidiaries into new employment arrangements; and (11) other customary closing conditions set forth in the merger agreement. See “The Merger Agreement—Conditions to Completion of the Merger” on page 64. While it is currently anticipated that the merger will be completed during the first quarter of 2020, there can be no assurance that such conditions will be satisfied in a timely manner or at all, or that an effect, event, development or change will not transpire that could delay or prevent these conditions from being satisfied. Accordingly, there can be no guarantee with respect to the timing of the closing of the merger, whether the merger will be completed at all and when PFG shareholders will receive the merger consideration, if at all.

 

SmartFinancial and PFG may waive one or more of the conditions to the merger without re-soliciting shareholder approval for the merger.

 

Each of the conditions to the obligations of SmartFinancial and PFG to complete the merger may be waived, in whole or in part, to the extent permitted by applicable law, by agreement of SmartFinancial and PFG, if the condition is a condition to both parties’ obligation to complete the merger, or by the party for which such condition is a condition of its obligation to complete the merger. The boards of directors of SmartFinancial and PFG may evaluate the materiality of any such waiver to determine whether amendment of this proxy statement/prospectus and re-solicitation of proxies are necessary. SmartFinancial and PFG, however, generally do not expect any such waiver to be significant enough to require re-solicitation of shareholders. In the event that any such waiver is not determined to be significant enough to require re-solicitation of shareholders, the companies will have the discretion to complete the merger without seeking further shareholder approval.

 

Regulatory approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.

 

Before the transactions contemplated by the merger agreement may be completed, approvals or waivers must be obtained from various regulatory authorities, which include the Federal Reserve Board, the TDFI, and other securities and regulatory authorities. These governmental entities may request additional information or materials regarding the regulatory applications and notices submitted by SmartFinancial and PFG or may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying the completion of the merger or of imposing additional costs or limitations on the combined company following the merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions on the completion of the merger that are not anticipated or cannot be met. There can be no assurance as to whether these and other regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed. See “The Merger—Regulatory Approvals Required for the Merger” on page 45.

 

The directors and executive officers of PFG have interests in seeing the merger completed that are different from, or in addition to, those of the other PFG shareholders.

 

The directors and executive officers of PFG have arrangements that provide them with interests in the merger that are different from, or in addition to, those of the shareholders of PFG generally. These interests and arrangements may create potential conflicts of interest and may influence or may have influenced the directors and executive officers of PFG to support or approve the merger and the merger agreement. See “The Merger—Interests of PFG’s Directors and Executive Officers in the Merger” beginning on page 42.

 

The opinion of PFG’s financial advisor does not reflect changes in circumstances between the date of such opinion and the completion of the merger.

 

PFG’s board of directors received an opinion from its financial advisor to the effect that, as of October 29, 2019, and subject to the qualifications, assumptions and limitations set forth therein, the exchange ratio was fair, from a financial point of view, to the holders of PFG common stock. Subsequent changes in the operations and prospects of PFG or SmartFinancial, general market and economic conditions and other factors that may be beyond the control of PFG or SmartFinancial, may significantly alter the value of PFG or SmartFinancial or the price of the shares of SmartFinancial common stock by the time the merger is completed. The opinion does not address the fairness of the exchange ratio from a financial point of view at the time the merger is completed, or as of any other date other than the date of such opinion. The opinion of PFG’s financial advisor is attached as Annex B to this proxy statement/prospectus. For a description of the opinion, see “The Merger—Opinion of PFG’s Financial Advisor” on page 35.

 

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The merger may be completed even if SmartFinancial or PFG experiences adverse changes in its business.

 

In general, either SmartFinancial or PFG may refuse to complete the merger if the other party suffers a material adverse effect on its business prior to the closing of the merger. However, certain types of changes or occurrences with respect to SmartFinancial or PFG would not prevent the merger from going forward, even if the change or occurrence would have adverse effects on SmartFinancial or PFG, including the following:

 

·changes in laws and regulations affecting financial institutions and their holding companies generally, or interpretations thereof by courts or governmental entities, if such changes do not have a disproportionate impact on the affected company;

 

·changes in GAAP or regulatory accounting requirements generally applicable to financial institutions and their holding companies, if such changes do not have a disproportionate impact on the affected company;

 

·changes in global, national or regional political conditions including the outbreak of war or acts of terrorism, or in economic or market conditions affecting the financial services industry generally, if such changes do not have a disproportionate impact on the affected company;

 

·changes or effects from the announcement of the merger agreement and the transactions contemplated thereby, and compliance by the parties with the merger agreement on the business, financial condition or results of operations of the parties;

 

·any failure by PFG of SmartFinancial to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period (but not including the underlying causes thereof);

 

·changes in the trading price or trading volume of SmartFinancial common stock (but not including the underlying causes thereof unless otherwise specifically excluded); and

 

·the impact of the merger agreement and the transactions contemplated thereby on relationships with customers or employees, including the loss of personnel subsequent to the date of the merger agreement.

 

Litigation in transactions of this type are sometimes filed against the board of directors of either party that could prevent or delay the completion of the merger or result in the payment of damages following completion of the merger.

 

In connection with the merger, it is possible that PFG shareholders may file putative class action lawsuits against the boards of directors of SmartFinancial and/or PFG. Among other remedies, these shareholders could seek to enjoin the merger. The outcome of any such litigation would be uncertain. If a dismissal is not granted or a settlement is not reached, such potential lawsuits could prevent or delay completion of the merger and result in substantial costs to SmartFinancial and PFG. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is consummated may adversely affect the combined company’s business, financial condition, results of operations, cash flows and market price.

 

Risks Related to the Combined Company Following the Merger

 

The combined company expects to incur substantial expenses related to the merger.

 

The combined company expects to incur substantial expenses in connection with completing the merger and integrating the business and operations of PFG and SmartFinancial. Although SmartFinancial and PFG have assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with the merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the integration of the businesses following the completion of the merger.

 

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Following the merger, the combined company may be unable to integrate PFG’s business with SmartFinancial successfully and realize the anticipated synergies and other benefits of the merger or do so within the anticipated timeframe.

 

The merger involves the combination of two companies that currently operate as independent companies, as well as the companies’ subsidiaries. Although the combined company is expected to benefit from certain synergies, including cost savings, the combined company may encounter potential difficulties in the integration process, including:

 

·the inability to successfully combine PFG’s business with SmartFinancial in a manner that permits the combined company to achieve the cost savings anticipated to result from the merger, which would result in the anticipated benefits of the merger not being realized in the timeframe currently anticipated or at all;

 

·the risk of not realizing all of the anticipated operational efficiencies or other anticipated strategic and financial benefits of the merger within the expected timeframe or at all;

 

·potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and

 

·performance shortfalls as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.

 

For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s operations, any of which could adversely affect the ability of the combined company to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company.

 

Following the merger, the combined company may be unable to retain key employees.

 

The success of the combined company after the merger will depend in part upon its ability to retain key employees. Key employees may depart either before or after the merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the merger. Accordingly, no assurance can be given that PFG or SmartFinancial or, following the merger, the combined company will be able to retain key employees.

 

The voting power of PFG shareholders will be diluted by the merger.

 

The merger will result in PFG shareholders having an ownership stake in the combined company that is smaller than their current stake in PFG.  Upon completion of the merger of PFG with SmartFinancial, we estimate that PFG shareholders will own approximately 8.45% of the issued and outstanding shares of common stock of the combined company. Consequently, PFG shareholders, as a general matter, will have less influence over the management and policies of the combined company after the effective time of the merger than they currently exercise over the management and policies of PFG.

 

Future capital needs could result in dilution of shareholder investment.

 

SmartFinancial’s board of directors may determine from time to time there is a need to obtain additional capital through the issuance of additional shares of its common stock or other securities. These issuances would dilute the ownership interests of its shareholders and may dilute the per share book value of SmartFinancial common stock. New investors may also have rights, preferences and privileges senior to SmartFinancial’s shareholders which may adversely impact its shareholders.

 

Risks Related to an Investment in the Combined Company’s Common Stock

 

The market price of the shares of common stock of the combined company may be affected by factors different from those affecting the price of shares of SmartFinancial common stock before the merger.

 

The results of operations of the combined company, as well as the market price of shares of the common stock of the combined company after the merger, may be affected by factors in addition to those currently affecting SmartFinancial’s or PFG’s results of operations and the market prices of shares of SmartFinancial common stock. Accordingly, the historical financial results of SmartFinancial and PFG and the historical market prices of shares of SmartFinancial common stock may not be indicative of these matters for the combined company after the merger. For a discussion of the businesses of SmartFinancial and PFG and certain risks to consider in connection with evaluating the proposals to be considered at the PFG special meeting, see the documents incorporated by reference by SmartFinancial into this proxy statement/prospectus referred to under “Where You Can Find More Information” beginning on page 85.

 

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The market price of the combined company’s common stock may decline as a result of the merger.

 

The market price of the combined company’s common stock may decline as a result of the merger if the combined company does not achieve the perceived benefits of the merger or the effect of the merger on the combined company’s financial results is not consistent with the expectations of financial or industry analysts. In addition, upon completion of the merger, SmartFinancial and PFG shareholders will own interests in a combined company operating an expanded business with a different mix of assets, risks and liabilities. Current SmartFinancial and PFG shareholders may not wish to continue to invest in the combined company, or for other reasons may wish to dispose of some or all of their shares of the combined company.

 

After the merger is completed, PFG shareholders who receive shares of SmartFinancial common stock in the merger will have different rights that may be less favorable than their current rights as PFG shareholders.

 

After the closing of the merger, PFG shareholders who receive shares of SmartFinancial common stock in the merger will have different rights than they currently have as PFG shareholders, which may be less favorable than their current rights as PFG shareholders. For a detailed discussion of the significant differences between the current rights of a shareholder of PFG and the rights of a shareholder of the combined company following the merger, see “Comparison of Rights of SmartFinancial Shareholders and PFG Shareholders” beginning on page 77.

 

Risks Related to Tax

 

The merger may have adverse tax consequences.

 

Each of SmartFinancial and PFG expects the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to the respective obligations of SmartFinancial and PFG to complete the merger that each of SmartFinancial and PFG receives a tax opinion from its respective outside legal counsel, dated the closing date of the merger, to the effect that the merger will so qualify. A legal opinion represents the judgment of counsel rendering the opinion and is not binding on the Internal Revenue Service or the courts. If the merger were to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code, then each holder of PFG common stock generally would recognize gain or loss, as applicable, equal to the difference between (1) the sum of the fair market value of the shares of SmartFinancial common stock received by such holder in the merger and the amount of cash received by such U.S. holder in the merger and (2) its adjusted tax basis in the shares of PFG common stock surrendered in exchange therefor. The consequences of the merger to any particular shareholder will depend on that shareholder’s individual situation. We strongly urge you to consult your own tax advisor to determine the particular tax consequences of the merger to you.

 

The PFG pre-closing distributions may have adverse tax consequences.

 

Each of SmartFinancial and PFG expects the pre-closing distributions by PFG to its shareholders (inclusive of the AAA dividend, the 2019 tax distribution and the 2020 tax distribution) to be respected as distributions and not treated as merger consideration. There can be no assurance that the Internal Revenue Service will not take a different position concerning the tax consequences of the pre-closing distributions or that any such position would not be sustained. If the IRS were to take the position that the pre-closing distributions should be treated as merger consideration then the PFG shareholders will generally recognize capital gain (but not loss) equal to the lesser of (i) the excess, if any, of the amount of cash plus the fair market value of any SmartFinancial common stock received in the merger over the U.S. holder’s tax basis in the shares of PFG common stock surrendered in exchange therefor and (ii) the amount of cash received by the PFG shareholder in the merger (other than cash received in lieu of a fractional shares).

 

For further information on the tax consequences of cash received as merger consideration, see “The Merger—Material U.S. Federal Income Tax Consequences beginning on page 46.”

 

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Risks Related to SmartFinancial’s Business

 

There are certain risks relating to SmartFinancial’s business.

 

You should read and consider risk factors specific to SmartFinancial’s business that will also affect the combined company after the merger. These risks are described in the section entitled “Risk Factors” in SmartFinancial’s Annual Report on Form 10-K for the year ended December 31, 2018 and in other documents incorporated by reference into this proxy statement/prospectus. See “Where You Can Find More Information” on page 85 for the location of information incorporated by reference into this proxy statement/prospectus.

 

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THE PFG SPECIAL MEETING

 

This proxy statement/prospectus is being provided to the holders of PFG common stock as part of a solicitation of proxies by the PFG board of directors for use at the PFG special meeting to be held at the time and place specified below and at any properly convened meeting following an adjournment thereof. This proxy statement/prospectus provides the holders of PFG common stock with information they need to know to be able to vote or instruct their vote to be cast at the PFG special meeting.

 

General

 

With respect to PFG shareholders, this document constitutes a proxy statement of PFG in connection with its solicitation of proxies from its shareholders for the vote on the merger proposal, on approval and adoption of the merger agreement, and on the adjournment proposal. The proxy statement/prospectus is being mailed to PFG shareholders of record on or about December 26, 2019, together with the notice of the special meeting and a proxy solicited by PFG’s board of directors for use at the special meeting and at any adjournments or postponements of the special meeting.

 

Date, Time and Place

 

The special meeting will be held on January 28, 2020 at 1:00 p.m., Central Time, at the main office of Progressive Savings Bank at 500 N. Main Street, Jamestown, Tennessee 38556.

 

Purpose of the PFG Special Meeting

 

At the special meeting, PFG shareholders will be asked to:

 

approve the merger proposal; and

 

approve the adjournment proposal.

 

Each copy of this proxy statement/prospectus mailed to PFG shareholders is accompanied by a proxy form for use at the special meeting.

 

Completion of the merger is conditioned on, among other things, the approval of the merger by the PFG shareholders.

 

No other matter can be brought up or voted upon at the PFG special meeting.

 

Proposal One: Merger Proposal

 

PFG is asking its shareholders to approve the merger proposal. After careful consideration, PFG’s board of directors determined that the merger agreement and the transactions contemplated thereby, including the merger, were advisable and in the best interests of PFG and PFG’s shareholders.

 

PFG shareholders should carefully read this document in its entirety, including the annexes and the documents incorporated by reference, for more detailed information concerning the merger agreement and the merger. For a detailed discussion of the merger, including the terms and conditions of the merger agreement, see “The Merger Agreement,” beginning on page 52. In addition, PFG shareholders are directed to the merger agreement, a copy of which is attached as Annex A to this document and incorporated in this document by reference.

 

Proposal Two: Adjournment Proposal

 

If, at the PFG special meeting, the number of shares of PFG common stock present or represented and voting in favor of the merger proposal is insufficient to approve the merger proposal, PFG may move to adjourn the PFG special meeting in order to enable the PFG board of directors to solicit additional proxies for approval of the merger proposal. In that event, PFG’s shareholders will be asked to vote upon the adjournment proposal and not the merger proposal.

 

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In the adjournment proposal, PFG is asking its shareholders to authorize the holder of any proxy solicited by its board of directors to vote in favor of granting discretionary authority to the PFG board of directors to adjourn the PFG special meeting to another time and place for the purpose of soliciting additional proxies. If PFG’s shareholders approve the adjournment proposal, PFG could adjourn the PFG special meeting and any adjourned session of the PFG special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from PFG shareholders who have previously voted. If a quorum is not present at the meeting, the meeting will not be convened to conduct business and neither the merger proposal nor the adjournment proposal will be considered. In the absence of a quorum, PFG may adjourn the meeting to a later date or time to solicit additional proxies.

 

Recommendation of the PFG Board of Directors

 

The PFG board of directors has determined that transactions contemplated by the merger agreement, including the merger and the bank merger, each on the terms and conditions set forth in the merger agreement, are in the best interests of PFG and its shareholders and has approved and adopted the merger agreement. The PFG board of directors unanimously recommends that PFG shareholders vote “FOR” the merger proposal and “FOR” the adjournment proposal. See “The Merger- PFG’s Reasons for the Merger” for a more detailed discussion of the PFG board of directors’ recommendation.

 

In the course of reaching its decision to approve the merger agreement and the merger, PFG’s board of directors, among other things, consulted with its legal advisors, Baker, Donelson, Bearman, Caldwell, & Berkowitz, a Professional Corporation, or Baker Donelson, regarding the legal terms of the merger agreement, and with its financial advisor, Olsen Palmer, as to the fairness, from a financial point of view and as of the date of the opinion, to the PFG shareholders of the merger consideration. For a discussion of the factors considered by PFG’s board of directors in reaching its conclusion, see “The Merger- PFG’s Reasons for the Merger.”

 

Record Date; Shareholders Entitled to Vote

 

The PFG board of directors has fixed the close of business on December 17, 2019 as the record date for determining the PFG shareholders entitled to receive notice of and to vote at the special meeting. As of the record date, there were 20,721 shares of PFG common stock outstanding and entitled to vote at the special meeting held by approximately 36 holders of record. Each share of PFG common stock entitles the holder to one vote at the special meeting on each proposal to be considered at the special meeting.

 

The presence at the special meeting, in person or by proxy, of holders of a majority of the outstanding shares of PFG common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business. All shares of PFG common stock present in person or represented by proxy, including abstentions and broker non-votes, if any, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the special meeting, including any adjournment thereof (unless a new record date is or must be set for the adjourned meeting).

 

Quorum and Adjournment

 

No business may be transacted at the PFG special meeting unless a quorum is present. Holders representing at least a majority of the issued and outstanding shares of PFG common stock entitled to vote at the PFG special meeting must be present, in person or represented by proxy, to constitute a quorum.

 

Approval of the adjournment proposal requires the affirmative vote of a majority of the votes cast on the matter. No notice of an adjourned PFG special meeting need be given if the new date, time, and place are announced at the special meeting before adjournment, and no new record date is required to be set. If the meeting is adjourned to a date more than four (4) months after the date fixed for the original meeting, a new record date must be set, and a new notice must be given to the shareholders as of the new record date. At any adjourned PFG special meeting, all proxies will be voted in the same manner as they would have been voted at the original convening of the PFG special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the adjourned PFG special meeting.

 

All shares of PFG common stock represented at the PFG special meeting, including shares that are represented but that vote to abstain, will be treated as present for purposes of determining the presence or absence of a quorum.

 

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Vote Required for Approval; Abstentions; Failure to Vote

 

The merger proposal: Approval of the merger proposal requires the affirmative vote of a majority of all the votes entitled to be cast by the holders of the outstanding shares of PFG common stock. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the special meeting, or fail to instruct your bank, broker, or other nominee how to vote with respect to the merger proposal, it will have the same effect as a vote “AGAINST” the proposal.

 

The adjournment proposal: Whether or not a quorum is present, approval of the adjournment proposal requires that the votes cast in favor of the proposal exceed the votes cast opposing the proposal at the special meeting. If you mark “ABSTAIN” on your proxy card, fail to submit a proxy card or vote in person at the special meeting, or fail to instruct your bank, broker, or other nominee how to vote with respect to the adjournment proposal it will have no effect on the proposal.

 

Voting by PFG Directors and Executive Officers

 

As of the record date, the 10% shareholder (which have signed voting agreements - see below), directors, and executive officers of PFG and their affiliates collectively beneficially owned and were entitled to vote 13,136 shares of PFG common stock, representing approximately 63.39% of the outstanding shares of PFG common stock. In connection with the execution of the merger agreement, directors of PFG and certain family members who collectively beneficially own and have the power to vote approximately 58.8% of PFG common stock have entered into agreements with SMBK in which they have agreed, among other things, to vote their shares of PFG common stock for the approval of the merger proposal. As of the record date, excluding shares held in fiduciary or agency capacity, SMBK and its subsidiaries did not own any shares of PFG common stock.

 

PFG Common Stock Subject to Voting Agreements

 

All directors of PFG who hold shares of PFG common stock and Emily Phillips Rains, solely in their capacity as shareholders of PFG, have entered into voting agreements with SMBK pursuant to which they have agreed to vote their shares of PFG common stock in favor of the approval of the merger proposal and against the approval or adoption of any proposal made in opposition to the merger. As of the PFG record date, 12,177,161 shares of PFG common stock, or approximately 58.8% of the outstanding shares of PFG common stock entitled to vote at the PFG special meeting, are bound by the voting agreements.

 

Voting on Proxies by Holders of Record; Incomplete Proxies

 

Each copy of this proxy statement/prospectus mailed to PFG shareholders is accompanied by a proxy card with instructions for voting. If you hold stock in your name as a shareholder of record, you should complete, sign, date, and return the proxy card accompanying this proxy statement/prospectus, regardless of whether you plan to attend the special meeting. If you hold your stock in “street name” through a bank, broker, or other nominee, you must direct your bank, broker, or nominee how to vote in accordance with the instructions you have received from your bank, broker, or nominee.

 

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES OF PFG COMMON STOCK YOU OWN. Accordingly, please sign, date, and return the enclosed proxy card whether or not you plan to attend the special meeting in person.

 

All shares represented by valid proxies that PFG receives through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted “FOR” the merger proposal and “FOR” the adjournment proposal. No matters other than the matters described in this proxy statement/prospectus are anticipated to be presented for action at the special meeting or at any adjournment or postponement of the special meeting. However, if other business properly comes before the special meeting, the proxy agents will, in their discretion, vote upon such matters in their best judgment.

 

Shares Held in “Street Name”

 

Under stock exchange rules, banks, brokers, and other nominees who hold shares of stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokers, and other nominees are not allowed to exercise their voting discretion with respect to the approval of matters determined to be “non-routine,” without specific instructions from the beneficial owner. Broker non-votes are shares held by a bank, broker, or other nominee that are represented at the special meeting, but with respect to which the bank, broker, or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and the bank, broker, or other nominee does not have discretionary voting power on such proposal. If your bank, broker, or other nominee holds your shares of PFG common stock in “street name,” your bank, broker, or other nominee will vote your shares only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your bank, broker, or other nominee with this proxy statement/prospectus. PFG believes that all of the proposals to be presented at the special meeting are “non-routine” proposals, and your bank, broker, or other nominee may not vote your shares without your specific voting instructions. Therefore, if you are a PFG shareholder and you fail to direct your bank, broker, or other nominee to vote your shares, it could have the same effect as voting against the merger proposal and no effect on the adjournment proposal.

 

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Revocability of Proxies and Changes to an PFG Shareholder’s Vote

 

If you hold your shares of PFG common stock in your name as a shareholder of record, you may revoke any proxy at any time before it is voted by (1) signing and returning a proxy card with a later date, (2) delivering a written revocation letter to PFG’s President, or (3) attending the special meeting in person, notifying the President, and voting by ballot at the special meeting. Any shareholder entitled to vote in person at the special meeting may vote in person regardless of whether a proxy has been previously given, but the mere presence (without notifying PFG’s President) of a shareholder at the special meeting will not constitute revocation of a previously given proxy. Written notices of revocation and other communications about revoking your proxy card should be addressed to:

 

Progressive Financial Group Inc.

Attention: Ottis H. Phillips, President and CEO

500 N. Main Street

Jamestown, TN 38556

 

If your shares of PFG common stock are held in “street name” by a bank, broker, or other nominee, you should follow the instructions of your bank, broker, or nominee regarding the revocation of proxies.

 

Solicitation of Proxies

 

PFG, on behalf of PFG’s board of directors, is soliciting your proxy in connection with the merger. PFG will pay all of the costs of soliciting proxies in connection with the special meeting. In addition to solicitation of proxies by mail, PFG will request that banks, brokers, nominees and other record holders send proxies and proxy material to the beneficial owners of PFG common stock and secure their voting instructions. However, PFG’s directors, officers and employees will not be paid any special or extra compensation for soliciting such proxies.

 

No person is authorized to give any information or to make any representation not contained in this proxy statement/prospectus and, if given or made, such information or representation should not be relied upon as having been authorized by SMBK, SmartBank, PFG, Progressive Savings Bank or any other person.

 

Attending the PFG Special Meeting; Voting in Person

 

All holders of PFG common stock, including holders of record and shareholders who hold their shares through banks, brokers, nominees, or any other shareholder of record, are invited to attend the special meeting. Shareholders of record of PFG common stock can vote in person at the special meeting. If you are not a shareholder of record, you must obtain a legal proxy executed in your favor from the record holder of your shares, such as a bank, broker, or other nominee, to be able to vote in person at the special meeting.

 

Assistance

 

If you have any questions concerning the merger or this proxy statement/prospectus, would like additional copies of this proxy statement/prospectus, or need help voting your shares of PFG common stock, please contact Ottis H. Phillips, at (931) 752-2178.

 

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THE MERGER

 

The following discussion contains certain information about the merger. The discussion is subject, and qualified in its entirety by reference, to the merger agreement attached as Annex A to this proxy statement/prospectus. We urge you to read carefully this entire proxy statement/prospectus, including the merger agreement attached as Annex A, for a more complete understanding of the merger.

 

General

 

Each of SmartFinancial’s and PFG’s respective boards of directors has unanimously approved the merger agreement and the transactions contemplated by the merger agreement. The merger agreement provides for the acquisition of PFG by SmartFinancial pursuant to the merger of PFG with and into SmartFinancial, with SmartFinancial as the surviving company, which we refer to as the merger. Immediately after the merger, Progressive Bank, a wholly owned bank subsidiary of PFG, will be merged with and into SmartBank, a wholly owned bank subsidiary of SmartFinancial, with SmartBank as the surviving bank, which we refer to as the bank merger.

 

Purchase Price and Purchase Price Adjustments

 

At the effective time of the merger, each share of PFG common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive  a pro rata portion (which is a ratio equal to one divided by the number of shares of PFG common stock issued and outstanding as of the closing) of (1) an aggregate amount of cash equal to $14,595,354.37 minus the amount of any pre-closing dividend paid by PFG and any loss in excess of $250,000 realized by PFG or its applicable subsidiary on sales of certain assets prior to closing, and (2) 1,292,592.556 shares of SmartFinancial common stock. Assuming that PFG does not pay any dividends from its accumulated adjustment account prior to the merger, the holders of PFG common stock would receive approximately $704.375 and 62.3808 shares of SmartFinancial common stock (plus cash in lieu of fractional shares) for each share of PFG common stock they own, which, based on the closing sale price of SmartFinancial common stock on December 18, 2019 of $23.32 per share, represents approximately $2,159.10 in total merger consideration per share of PFG common stock.

 

PFG will be required to sell its holdings of Upper Cumberland Bancshares, Inc. prior to the closing, and will also be required to dissolve four wholly-owned subsidiaries -- The Cove at Little Island, LLC, Horse Creek Holdings LLC, Progressive Funding, Inc., and Cumberland Mountain Preserve/East First Street, LLC – and transfer any assets held by those subsidiaries to Progressive Savings Bank. Additionally, PFG is required to coordinate with SmartFinancial regarding the potential sale of Progressive Accounting and Tax LLC and Cravens & Company Advisors, LLC. If the transactions described in this paragraph result in losses to PFG or its applicable subsidiaries in excess of $250,000, then the aggregate cash portion of the merger consideration will be reduced by the amount of such excess on a dollar-for-dollar basis. On November 19, 2019, PFG completed the sale of its holdings in Upper Cumberland Bancshares, Inc. common stock, resulting in an aggregate loss of $27,160.00.

 

SmartFinancial will not issue any fractional shares of SmartFinancial common stock in the merger. PFG shareholders who would otherwise be entitled to a fractional share of SmartFinancial common stock upon the completion of the merger will instead receive an amount in cash (without interest and rounded to the nearest whole cent) determined by multiplying the fractional share interest in SmartFinancial common stock (rounded to the nearest one hundredth of a share) by the average closing price of SmartFinancial’s common stock on the NASDAQ Capital Market over the ten (10) trading days ending on the business days immediately prior to the closing date.

 

PFG shareholders are being asked to approve the merger agreement. See “The Merger Agreement” for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the completion of the merger and the provisions for terminating or amending the merger agreement.

 

Background of the Merger

 

Progressive Bank opened for business in 1980, as a state-chartered savings and loan institution serving Jamestown, Tennessee, and surrounding communities. Through the following years, Progressive Bank experienced good growth and financial performance as it grew to six offices in Cumberland, Fentress, Morgan, and Putnam Counties and over $296 million in total assets. In 2010, the charter was converted to a commercial bank, and in 2016, PFG was formed to be the bank holding company for Progressive Savings Bank. Since its founding, the board of directors of Progressive Bank, and later PFG, has considered various strategic alternatives to enhance and maximize shareholder value. These strategic alternatives have included continuing as an independent institution; acquiring other banks, bank branches, or other financial services related businesses; or a sale or merger.

 

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In late 2017 and early 2018, family members of the Rains and Phillips families, who owned approximately 45% of the outstanding shares of PFG, were approached by at least two other banking organizations to discuss whether PFG might have an interest in selling PFG. One additional financial institution reached out in the summer of 2018, so that Ottis H. Phillips, President, and CEO of PFG and Progressive Savings Bank, as well as being the representative of the Rains and Phillips families decided to hold meetings with some of the interested parties who had expressed an interest in a merger. By August 2018, these discussions were narrowed down to one potential acquirer, and a Nondisclosure Agreement was executed with that acquirer so that it could proceed with a due diligence review of the books and records of PFG and its subsidiaries.

 

After discussions with legal counsel about valuation metrics in late August, Mr. Phillips presented the possibility of a merger to the board of directors of PFG in September 2018. He indicated that various parties had expressed an interest, and he was authorized by the board to proceed with further discussions.

 

In October 2018, after further discussions with legal counsel about the merger process and conversations with the potential acquirer identified by Mr. Phillips in August, the potential acquirer presented a letter of interest to acquire PFG. By November 2018, a separate party approached Mr. Phillips about making a capital contribution into PFG and becoming significant shareholders. As a result, Mr. Phillips presented the Board with information about the letter of interest and other discussions, and also asked legal counsel to present to the board the legal process for addressing merger proposals.

 

In December 2018, further discussions were held between the potential acquiror that had presented the letter of interest, and a counter proposal was presented by Mr. Phillips. In the meantime, in January 2019, Christopher Olsen of Olsen Palmer LLC met with Mr. Phillips in Cookeville and agreed to provide him some valuation information to consider in making a decision whether to sell PFG. After additional discussions and counter offers exchanged, in February 2019, the potential acquirer presented a revised letter of interest. Mr. Phillips decided that the terms included in the revised letter of interest would not be acceptable to the board or the majority shareholders of PFG, and this letter of interest was rejected.

 

Over the next few months, Mr. Olsen discussed various alternatives with Mr. Phillips as well as a number of potential acquirors they might want to contact. In May 2019, Mr. Olsen met with the Billy Carroll, CEO of SmartFinancial, at a conference during which Mr. Olsen and Mr. Carroll discussed SmartFinancial’s strategic priorities and interest in acquisitions. Mr. Carroll provided an update on SmartFinancial’s bank acquisition strategies including markets that may be of interest as well as sizes and types of banking institutions that would meet SmartFinancial’s acquisition criteria. Based on that meeting, Mr. Olsen suggested to Mr. Phillips that a meeting be held with the management of SmartFinancial in order to discuss a potential combination. Such a meeting was held in Knoxville in June 2019, which was attended by various parties from both PFG and SmartFinancial as well as Mr. Olsen. A confidentiality agreement was subsequently executed by SmartFinancial on June 14, 2019, so each party could share further information. From June to August 2019, Mr. Olsen and Mr. Phillips continued to discuss strategic alternatives and other potential acquirors to contact, and on August 3, 2019, PFG engaged Olsen Palmer. In August 2019, further meetings also were held between PFG and SmartFinancial representatives, and on August 20, 2019, SmartFinancial submitted a written presentation to Mr. Phillips and Mr. Olsen describing potential terms of a merger transaction as well as how the cultures of the organizations would combine including an offer valuing PFG at between $40 - $41 million with shareholders of PFG receiving 30% in cash and 70% in SmartFinancial common stock. After discussions with legal counsel and with Olsen Palmer, Mr. Phillips instructed Mr. Olsen to ask SmartFinancial to revise the terms of the proposed offer including increasing the purchase price and increasing the percentage of cash consideration, and to make such an offer on a more formal offer basis in the form of a nonbinding indication of interest. SmartFinancial submitted such an indication on August 29, 2019, the terms of which included SmartFinancial valuing PFG at between $41.4-42.0 million, based on SmartFinancial’s stock price at the time, with shareholders of PFG receiving 35% of the consideration in cash and 65% in SmartFinancial common stock pursuant to a fixed exchange ratio.

 

On September 10, 2019, Mr. Phillips formally accepted SmartFinancial's nonbinding indication of interest, subject to satisfactory completion of the due diligence of both PFG and SmartFinancial, negotiation of a merger agreement, and an exclusivity period of 60 days, among other conditions. Olsen set up an electronic data room so the parties could more easily exchange more detailed information. After submission and review from the document exchange, a draft merger agreement was presented by the attorneys for SmartFinancial to the attorneys for PFG on October 11, 2019. The specific pricing terms were added to the draft on October 18, 2019, reflecting SmartFinancial’s submission of a further-revised indication of interest which was submitted on the same date, which included the current consideration described in this proxy statement/prospectus. On October 21, 2019, PFG representatives, including representatives from Olsen Palmer and PFG's legal counsel met with management of SmartFinancial in Knoxville to interview SmartFinancial's management about the future of SmartFinancial and ask questions derived from PFG's due diligence review. Also, additional terms of the merger agreement were negotiated and decided in order to proceed with the execution of the merger agreement.

 

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On October 22, 2019, PFG's board met to discuss the details of the proposed merger of PFG with SmartFinancial. Mr. Olsen and PFG's legal counsel presented valuation and legal information and analysis to the Board, which authorized Mr. Phillips to continue negotiating a final merger agreement to bring back to the board for final review. Over the following week, final negotiations and exchanges of revised drafts of the merger agreement and related documents took place.

 

On October 25, 2019, SmartFinancial’s board of directors met at its regularly scheduled meeting to review and discuss the proposed merger and the merger agreement. At this meeting, SmartFinancial’s board of directors received presentations from its legal counsel, Alston & Bird LLP and its financial advisor, Keefe, Bruyette & Woods. Following this discussion, SmartFinancial’s board of directors unanimously voted to approve the merger agreement and the other transactions contemplated by the merger agreement, including the merger, and authorized SmartFinancial’s executives to execute the merger agreement.

 

On October 29, 2019, PFG's and Progressive Savings Bank's boards of directors at a jointly held specially called meeting, which was attended by Mr. Olsen of Olsen Palmer and representatives of Baker Donelson, reviewed the proposed merger agreement and related documents; discussed its legal obligations and fiduciary obligations as directors in considering the proposed merger agreement with Baker Donelson; and received Olsen Palmer’s summary analyses and opinion that the merger consideration to be received by the shareholders of PFG was fair, from a financial point of view, which was subsequently confirmed in writing (the full text of which is attached to this joint proxy statement/prospectus as Annex B). Based upon this review and discussion of the legal terms of the merger agreement, the analyses and opinion of Olsen Palmer, and other relevant factors, including consideration of the factors described under “The Merger — PFG’s Reasons for the Merger,” the PFG board voted unanimously to approve the merger with SmartFinancial and to approve the merger agreement and Progressive Bank board approved a merger agreement to be merged with SmartBank.

 

On October 29, 2019, the merger agreement and related documents were executed and delivered by the parties. On the evening of October 29, 2019, SmartFinancial and PFG jointly issued a press release announcing the signing of the merger agreement.

 

SmartFinancial’s Reasons for the Merger

 

In reaching its decision to approve and adopt the merger agreement, the merger and the other transactions contemplated by the merger agreement, including the issuance of SmartFinancial common stock as the merger consideration, the SmartFinancial board of directors considered a number of factors, including the following material factors:

 

·each of SmartFinancial’s and PFG’s business, operations, financial condition, asset quality, earnings and prospects;

 

·the strategic fit of the businesses of the two companies, including their complementary markets, business lines and loan and deposit profiles;

 

·the opportunity to strategically expand in complementary Tennessee markets;

 

·the anticipated pro forma impact of the transaction on the combined company, including the expected impact on financial metrics including earnings and tangible book value and regulatory capital levels, as well as the potential efficiencies of scale resulting from the increased size of SmartFinancial following the merger;

 

·its understanding of the current and prospective environment in which SmartFinancial and PFG operate, including national, state and local economic conditions, the competitive environment for financial institutions generally, and the likely effect of these factors on SmartFinancial both with and without the proposed transaction;

 

·its review and discussions with SmartFinancial’s management concerning the due diligence investigation of PFG, including its review of PFG’s financial condition, results of operation, asset quality, market areas, growth potential (projected potential accretion to earnings per share and the projected payback period of the estimated decrease in tangible book value) and quality of senior management;

 

·the perceived compatibility of the corporate cultures of the two companies, which management believes should facilitate integration and implementation of the transaction;

 

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·the structure of the transaction as a combination in which the combined company would operate under the SmartFinancial brand and SmartFinancial’s board of directors and management would have substantial participation in the combined company;

 

·the regulatory and other approvals required in connection with the merger and the expectation that such regulatory approvals will be received in a timely manner and without the imposition of unacceptable conditions; and

 

·the financial and other terms of the merger agreement, including the merger consideration, expected tax treatment, the deal protection and termination fee provisions, and restrictions on the conduct of PFG’s business between the date of the merger agreement and the date of completion of the merger.

 

SmartFinancial’s board of directors also considered potential risks relating to the merger including the following:

 

·SmartFinancial management’s attention and SmartFinancial resources may be diverted from the operation of SmartFinancial’s business and towards the completion of the merger;

 

·SmartFinancial may not realize all of the anticipated benefits of the merger, including cost savings, maintenance of existing customer and employee relationships, and minimal disruption in the integration of PFG’s operations with SmartFinancial;

 

·the nature and amount of payments and other benefits to be received by PFG management in connection with the merger pursuant to existing PFG plans and compensation arrangements and the merger agreement;

 

·the substantial costs that SmartFinancial will incur in connection with the merger even if it is not consummated;

 

·approvals from regulatory authorities could impose conditions that could have the effect of delaying completion of the merger or imposing additional costs; and

 

·the possibility of litigation in connection with the merger.

 

The foregoing discussion of the factors considered by the SmartFinancial board of directors is not intended to be exhaustive, but, rather, includes the material factors considered by the SmartFinancial board of directors. In reaching its decision to approve and adopt the merger agreement, the merger and the other transactions contemplated by the merger agreement, including the issuance of SmartFinancial common stock as the merger consideration, the SmartFinancial board of directors did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The SmartFinancial board of directors considered all these factors as a whole and overall considered the factors to be favorable to, and to support, its determination.

 

PFG’s Reasons for the Merger

 

After careful consideration, PFG’s board of directors determined that it was advisable and in the best interests of PFG and its shareholders for PFG to enter into the merger agreement with SmartFinancial. Accordingly, PFG’s board unanimously recommends that PFG’s shareholders vote “FOR” the approval of the merger agreement.

 

PFG's board of directors reviewed and discussed the proposed merger with management and its financial and legal advisors in determining that the proposed merger is in the best interest of PFG and its shareholders. In reaching its conclusion to approve the merger agreement and the other transactions contemplated by the merger agreement and to recommend to its shareholder to approve the merger proposal, the PFG board of directors considered a number of factors, including the following:

 

·the Board’s familiarity with PFG’s consolidated business, operations, earnings, and financial conditions;

 

·the Board’s review, based in part by the presentation by management and PFG's legal and financial advisors, of the proposal, including a review of the business, operations, earnings, financial conditions, and community service and involvement of SmartFinancial, as well as the potential results from a sale to SmartFinancial;

 

·the Board’s review of possible affiliation partners other than SmartFinancial, the prospects of such other possible affiliation partners, and the likelihood of any such affiliation;

 

·the Board’s review of alternatives to such a transaction (including the alternatives of remaining independent and growing internally, remaining independent for a period of time and then selling, and remaining independent and growing through future acquisitions);

 

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·the recent business combinations involving financial institutions either announced or completed during the past few years in the State of Tennessee and the southeastern United States, and the effect of such combinations on competitive conditions in the PFG’s market area;

 

·a comparison of the proposal from SmartFinancial to such recent business combinations involving financial institutions;

 

·increasing regulatory and statutory burdens (including costs, time commitments, and difficulty executing earnings opportunities) on PFG and its subsidiaries as a community banking organization in general and as a result of the particular status of PFG;

 

·management succession alternatives for PFG;

 

·the opportunity for PFG shareholders to exchange their shares of PFG partially for shares of SmartFinancial resulting in the ownership of a publicly traded stock and the liquidity provided;

 

·the increasing information technology costs and requirements for PFG as well as the costs and risks of cybersecurity;

 

·enhancing the ability of a merged organization to provide PFG' customers with additional resources and the best banking options available;

 

·the limited opportunities for PFG to continue to grow organically long term in consideration of capital, regulatory, competitive, and other factors; and

 

·a fairness opinion presented by Olsen Palmer.

 

The discussion of the information and factors considered by the PFG board of directors is not exhaustive but includes material factors considered and discussed by the PFG board of directors. In view of the wide variety of factors considered and discussed by the PFG board of directors in connection with its evaluation of the merger and the complexity of these matters, the board of directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. The PFG’s board of directors evaluated the factors described above, including asking questions of management and its legal and financial advisors, and reached consensus that the merger was in the best interests of PFG and its shareholders. In considering the factors described above, individual members of the PFG’s board of directors may have assigned different weights to different factors. The PFG board of directors considered these factors as a whole, and overall considered them to be favorable to, and to support its determination. It should be noted that this explanation of the reasoning of PFG’s board of directors and other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements.”

 

For the reasons set forth above, the PFG’s board of directors determined that the merger, the merger agreement, and the transactions contemplated thereby are advisable and in the best interests of PFG and its shareholders. Accordingly, the board of directors unanimously approved the merger agreement and the transactions contemplated thereby and unanimously recommends that the PFG shareholders vote “FOR” the PFG merger proposal and “FOR” the PFG adjournment proposal, if necessary or appropriate to solicit additional proxies.

 

THE PFG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE MERGER AGREEMENT.

 

Opinion of PFG’s Financial Advisor

 

PFG retained Olsen Palmer to render financial advisory and investment banking services and to act as the exclusive financial advisor to PFG in connection with a potential strategic combination. Olsen Palmer is an investment banking firm specializing in community bank mergers and acquisitions. PFG selected Olsen Palmer as its financial advisors on the basis of its experience and expertise in representing community banks in similar transactions and its familiarity with PFG and the Tennessee banking market. Olsen Palmer, as part of its investment banking services, is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions.

 

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In its capacity as financial advisor, Olsen Palmer provided a fairness opinion to the board of directors of PFG in connection with the merger. At the meeting of the PFG board on October 29, 2019, Olsen Palmer provided an oral opinion to the PFG board (which was subsequently confirmed in writing by delivery of Olsen Palmer’s written opinion dated October 29, 2019) that, based upon and subject to the various factors, assumptions and limitations set forth in such opinion, Olsen Palmer representatives’ experience as investment bankers, Olsen Palmer’s work as described in such opinion and other factors Olsen Palmer deemed relevant, as of such date, the merger consideration to be received by PFG shareholders in the proposed merger with SmartFinancial was fair, from a financial point of view, to PFG shareholders. The Olsen Palmer written opinion, dated October 29, 2019, is sometimes referred to as the “Olsen Palmer opinion.” The full text of the Olsen Palmer opinion, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Olsen Palmer in rendering its opinion, is attached to this proxy statement/prospectus as Annex B. The summary of the Olsen Palmer opinion set forth herein is qualified in its entirety by reference to the full text of the opinion. PFG shareholders should read the full text of the opinion carefully and in its entirety.

 

The Olsen Palmer opinion is addressed to the PFG board, is directed only to the fairness, from a financial point of view, of the merger consideration to be received by PFG shareholders in the merger with SmartFinancial, and does not constitute a recommendation to any shareholder as to how such shareholder should vote or act on any matters relating to the merger. Olsen Palmer expressed no opinion as to the fairness of the merger consideration to the creditors or other constituencies of PFG. Olsen Palmer’s opinion is directed only to the fairness, from a financial point of view, of the merger consideration to the shareholders of PFG and does not address the underlying business decision of PFG to engage in the merger or the relative merits of the merger as compared to any other alternative business strategies that might exist for PFG. Olsen Palmer did not express any opinion as to the fairness of the amount or nature of the compensation to be received in the merger by any officer, director, or employee, or class of such persons, relative to the compensation to be received in the merger by any other shareholder. Olsen Palmer’s opinion should not be construed as creating any fiduciary duty on the part of Olsen Palmer to any party or person. Olsen Palmer’s opinion was not reviewed or issued by a fairness opinion committee. Olsen Palmer has not been requested to opine as to, and Olsen Palmer’s opinion does not express an opinion as to or otherwise address, among other things: (i) the fairness of any portion or aspect of the merger to any one class or group of PFG or any other party’s security holders or other constituents vis-à-vis any other class or group of PFG’s or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), or (ii) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the merger, any class of such persons or any other party, relative to the merger consideration or otherwise. Olsen Palmer expressed no opinion as to the actual value of SmartFinancial common stock when issued in the merger or the prices at which PFG common stock or SmartFinancial common stock will trade following announcement of the merger or at any future time.

 

In performing its review, and for purposes of rendering its opinion, Olsen Palmer relied upon the accuracy and completeness of all of the financial and other information that was available to it from public sources, that was provided to Olsen Palmer by PFG and SmartFinancial or their representatives or that was otherwise reviewed by Olsen Palmer and has assumed, without independent verification, such accuracy and completeness of all such information. Olsen Palmer further relied on the assurances of the management of PFG and SmartFinancial that they are not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Olsen Palmer has not been asked to and has not undertaken an independent verification of any of such information and does not assume any responsibility or liability for the accuracy or completeness thereof. With PFG’s consent, Olsen Palmer relied upon the advice PFG has received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the merger that is contemplated by the merger agreement and Olsen Palmer assumed that all such advice is correct. In connection with its Opinion, Olsen Palmer made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Olsen Palmer reviewed:

 

a draft version dated October 25, 2019 of the Agreement;

 

certain financial statements and other historical financial information of PFG and SmartFinancial that Olsen Palmer deemed relevant;

 

publicly available median analyst earnings estimates for SmartFinancial for the years ending December 31, 2019, December 31, 2020 and December 31, 2021;

 

internal financial projections for PFG for the year ending December 31, 2019 and estimated long-term annual earnings and balance sheet growth rates for the years ending December 31, 2020, December 31, 2021, December 31, 2022, December 31, 2023, December 31, 2024, and December 31, 2025 as provided by PFG;

 

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a comparison of certain financial information for PFG with similar institutions for which publicly available information is available;

 

the financial terms of certain recent business combinations in the commercial banking industry, to the extent publicly available;

 

an estimated range of the intrinsic value of PFG based on assumptions relating to transaction expenses, purchase accounting adjustments, cost savings, and future profitability;

 

the current and historical reported prices and trading activity of SmartFinancial Common Stock;

 

the proforma financial impact of the Merger on SmartFinancial based on certain assumptions relating to purchase accounting adjustments, cost savings, transaction expenses and the anticipated regulatory impact of the Merger on SBMK;

 

the current market environment generally and the banking industry in particular; and

 

such other information, financial studies, analyses and investigations and financial, economic and market criteria as Olsen Palmer considered relevant.

 

Olsen Palmer also discussed with certain members of senior management of PFG and its representatives the business, financial condition, results of operations and prospects of PFG. Olsen Palmer held similar discussions with certain members of senior management of SmartFinancial regarding the business, financial condition, results of operations, and prospects of SmartFinancial.

 

Olsen Palmer’s opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of October 29, 2019. Events occurring after October 29, 2019 could materially affect Olsen Palmer’s opinion. Olsen Palmer has not undertaken to update, revise, reaffirm or withdraw its opinion or otherwise comment upon events occurring after October 29, 2019.

 

Several analytical methodologies have been employed and no one method of analysis should be regarded as critical to the overall conclusion reached by Olsen Palmer. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The overall conclusions Olsen Palmer reached are based on all the analysis and factors presented, taken as a whole, and also on application of Olsen Palmer’s own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. Olsen Palmer therefore gives no opinion as to the value or merit standing alone of any one or more parts of the analyses.

 

The following summarizes the material financial analyses that were considered by Olsen Palmer in rendering its opinion. The summary below is not a complete description of the analyses underlying Olsen Palmer’s opinion or the presentation made by Olsen Palmer to PFG’s board of directors, but is a summary of all material analyses performed and presented by Olsen Palmer. No company or transaction used in the analyses described below is identical or directly comparable PFG, SmartFinancial, or the contemplated merger.

 

Summary of Financial Terms of Merger Agreement. The financial terms of the merger agreement provide that PFG shareholders shall be entitled to receive in exchange for all shares of PFG common stock, $14,595,354.37 aggregate cash consideration, without interest, and 1,292,592.556 shares of SmartFinancial’s common stock. Based on 20,721 common shares of PFG outstanding as of October 29, 2019 and SmartFinancial’s closing price on October 28, 2019 of $20.72, the implied deal value per share equaled $1,996.91 and the aggregate transaction value approximated $41.4 million. Olsen Palmer calculated that the aggregate transaction value of $41.4 million represented:

 

125 percent of PFG’s June 30, 2019 tangible book value;

 

18.0 times PFG’s June 30, 2019 last twelve months earnings;

 

13.7 percent of PFG’s June 30, 2019 total assets; and

 

3.4 percent premium to PFG’s June 30, 2019 core deposits.

 

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PFG’s last twelve months earnings adjusted at an assumed 21% tax rate.

 

SmartFinancial Selected Companies Analysis. As part of its analysis, Olsen Palmer reviewed publicly available information to compare selected financial and market trading information for SmartFinancial and a group of 8 financial institutions which (i) were banks with common stock listed on the NASDAQ or NYSE; (ii) were headquartered in the United States; (iii) had total assets as of September 30, 2019 between $2.0 billion and $3.0 billion; (iv) had return on average assets over the twelve months ended September 30, 2019 between 0.50% and 1.50%; and (v) nonperforming assets as a percentage of total assets as of September 30, 2019 of less than 0.75%. These 8 financial institutions were as follows:

 

CapStar Financial Holdings, Inc. Peoples Financial Services Corp.
       
MutualFirst Financial, Inc. Sierra Bancorp
       
Old Second Bancorp, Inc. Southern First Bancshares, Inc.
       
Orrstown Financial Services, Inc. West Bancorporation, Inc.

 

Olsen Palmer noted the following selected financial measures, in each case as of and for the relevant period ended September 30, 2019:

 

  

Total Assets 

($billions)

   Last Twelve
Months Return on
Average Assets
   Nonperforming
Assets to Total Assets
 
Low  $2.0    0.65%   0.02%
High  $2.6    1.47%   0.69%
Median  $2.3    1.20%   0.45%
Mean  $2.3    1.14%   0.43%
SmartFinancial  $2.4    1.15%   0.20%

 

 

Olsen Palmer analyzed various financial multiples for each company as calculated by S&P Global Market Intelligence, based on trading prices as of October 28, 2019 and financial metrics for the relevant period ended September 30, 2019, including trading price per share to last twelve months’ earnings per share, trading price per share to tangible common equity per share, and trading price per share to total assets. Olsen Palmer reviewed the mean, median, high, low, 25th percentile, and 75th percentile values for each metric of the selected companies. The results of the selected companies analysis are summarized below:

 

   Price to Last Twelve
Months Earnings
per Share
   Price to Tangible
Common Equity per
Share
   Price to Total
Assets
 
Low   9.8x   126%   10.7%
High   19.5x   189%   15.9%
Median   13.1x   152%   14.8%
Mean   13.7x   151%   14.3%
25th Percentile   12.1x   141%   13.7%
75th Percentile   14.3x   156%   15.4%
SmartFinancial   11.0x   127%   12.1%

 

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Selected Companies Analysis. Olsen Palmer analyzed the relative valuation multiples as calculated by S&P Global Market Intelligence of 8 publicly-traded banks (including banks traded over-the-counter) which (i) were headquartered in the U.S.; (ii) had total assets as of June 30, 2019 between $150 million and $500 million; (iii) had a return on average assets over the twelve months ended June 30, 2019 between 0.50% to 1.25%; and (iv) nonperforming assets as a percentage of total assets as of June 30, 219 between 1.50% and 3.00%. These 8 financial institutions were as follows:

 

Citizens Financial Corp. Home Federal Bancorp, Inc. of Louisiana
       
Community Investors Bancorp, Inc. Jefferson Security Bank
       
First Ottawa Bancshares, Inc. Oxford Bank Corporation
       
Harford Bank Peoples Bancorp, Inc.

 

Olsen Palmer noted the following selected financial measures, in each case as of and for the relevant period ended June 30, 2019:

 

  

Total Assets

($millions)

   Twelve Months
Return on Average
Assets
   Nonperforming
Assets to Total
Assets
 
Low  $169    0.65%   1.52%
High  $461    1.19%   2.18%
Median  $341    0.93%   1.77%
Mean  $332    0.94%   1.78%
PFG (1)  $301    0.77%   2.29%

 

(1) PFG’s twelve months return on average assets adjusted at an assumed 21.0% tax rate.

 

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Olsen Palmer analyzed various financial multiples for each company as calculated by S&P Global Market Intelligence, based on trading prices as of October 28, 2019 and financial metrics for the relevant period ended June 30, 2019, including trading price per share to last twelve months’ earnings per share, trading price per share to tangible common equity per share, trading price per share to total assets, and the core deposit premium implied by the market capitalization. Olsen Palmer reviewed the mean, median, high, low, 25th percentile, and 75th percentile values for each metric of the selected companies. The results of the selected companies analysis are summarized below:

 

   Price to Last
Twelve Months
Earnings per
Share
   Price to Tangible
Common Equity
per Share
   Price to Total
Assets
   Core Deposit
Premium Implied
by Market
Capitalization
 
Low   8.9x   94.4%   7.9%   -1.8%
High   14.4x   121.2%   13.8%   2.0%
Median   11.6x   104.7%   10.2%   0.4%
Mean   11.7x   105.2%   10.3%   0.2%
25th Percentile   10.9x   98.4%   9.0%   -0.4%
75th Percentile   12.9x   108.7%   10.7%   0.9%

 

Selected Transactions Analysis. Olsen Palmer analyzed publicly available information relating to 8 acquisitions of banks that satisfied the following selected search criteria: transactions which (i) were announced between January 1, 2015 and October 28, 2019; (ii) where targets were headquartered in the Southeast U.S. (Southeast is defined as the following states: AL, AR, FL, GA, MS, NC, SC, TN, VA, and WV); (iii) where targets had total assets between $175 million and $500 million; (iv) where targets had a return on average assets over the twelve months prior to the transaction announcement between 0.5% and 1.5%; (v) where targets had nonperforming assets as a percentage of total assets between 1.75% and 3.25%; and (vi) where targets had tangible common equity as a percentage of tangible assets between 9.0% and 12.5%. The selected transactions consisted of the following (buyer / seller):

 

BancorpSouth Bank/Merchants Trust, Inc.

 

Premier Financial Bancorp, Inc./First Bank of Charleston, Inc.

 

Bay Banks of Virginia, Inc./Virginia BanCorp, Inc.

 

Equity Bancshares, Inc./Community First Bancshares, Inc.

 

Summit Financial Group, Inc./First Century Bankshares, Inc.

 

Seacoast Banking Corporation of Florida/Floridian Financial Group, Inc.

 

CenterState Banks, Inc./Hometown of Homestead Banking Company

 

Ameris Bancorp/Merchants & Southern Banks of Florida, Inc.

 

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Olsen Palmer noted the following selected financial measures of the targets, in each case as of prior to the transaction announcement and for PFG as of June 30, 2019:

 

  

Total Assets

($millions)

   Twelve Months
Return on Average
Assets
   Nonperforming
Assets to Total
Assets
   Tangible
Common Equity
to Tangible
Assets
 
Low  $189    0.51%   1.78%   9.3%
High  $484    1.45%   3.02%   12.1%
Median  $379    0.71%   2.17%   11.2%
Mean  $359    0.85%   2.29%   10.8%
PFG (1)  $301    0.77%   2.29%   11.0%

 

(1) PFG’s twelve months return on average assets adjusted at an assumed 21.0% tax rate.

 

Olsen Palmer analyzed various financial multiples for each transaction as calculated by S&P Global Market Intelligence including deal value to last twelve months’ earnings prior to transaction announcement, deal value to tangible common equity, deal value to total assets, and the core deposit premium implied by the deal value. Olsen Palmer reviewed the mean, median, high, low, 25th percentile, and 75th percentile values for each such metric of the acquired institution in each such transaction. The results of the selected transactions analysis are summarized below:

 

   Deal Value to Last
Twelve Months
Earnings
   Deal Value to
Tangible Common
Equity
   Deal Value to
Total Assets
   Core Deposit
Premium Implied
by the Deal Value
 
Low   10.8x   90.0%   5.3%   -1.5%
High   33.9x   163.9%   18.5%   11.4%
Median   16.1x   129.3%   12.3%   3.9%
Mean   18.6x   129.0%   12.6%   4.7%
25th Percentile   12.8x   114.4%   10.0%   2.3%
75th Percentile   23.0x   146.9%   15.6%   7.4%

 

Discounted Cash Flow Analysis. Olsen Palmer analyzed the discounted present value of PFG projected free cash flows for the years ending December 31, 2019 through December 31, 2025. Olsen Palmer estimated fair value accounting adjustments, cost savings and other acquisition adjustments based on discussions with management of PFG and SmartFinancial and their representatives. Olsen Palmer estimated cash flows based on dividendable common equity, defined as Tier 1 Capital in excess of a minimum Tier 1 Capital ratio of 10.0%. Olsen Palmer applied a range of price to earnings multiples of 11.0x to 13.0x, based on review of price/last twelve months earnings multiples for relevant indices of publicly traded bank stocks, to PFG estimated calendar year 2025 net income to derive a terminal value.

 

The projected cash flows and terminal values were discounted using an estimated cost of equity capital for PFG derived by the Duff & Phelps discount rate build-up method consisting of the sum of a risk-free rate, equity risk premium, size premium, and industry risk premium. Olsen Palmer applied a range of discount rates of 12.0% to 14.0%.

 

The calculations resulted in a rage of implied values of $1,737.21 to $2,171.92 per PFG share.

 

The discounted cash flow analysis is a widely used valuation methodology that relies on numerous assumptions, including asset growth rates, earnings growth rates, discount rates, and terminal multiples, and the results of such methodology are highly dependent on these assumptions. The financial forecasts from 2019 – 2025 were provided by PFG management.

 

Conclusion. Based upon and subject to the foregoing, and in reliance thereon, it is our opinion that, as of October 29, 2019, the merger consideration to be received by the shareholders of PFG for all of the shares of PFG common stock in the merger pursuant to the agreement is fair, from a financial point of view, to such holders.

 

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Olsen Palmer’s Compensation and Other Relationships with PFG and SmartFinancial.

 

No limitations were imposed by PFG’s board of directors on Olsen Palmer with respect to the investigations made or procedures followed in rendering its opinion. Neither Olsen Palmer nor the individuals involved in providing Olsen Palmer’s opinion has any present or contemplated future ownership interest in PFG. Olsen Palmer is acting as PFG’s financial advisor in connection with the merger and will receive a fee for such advisory services (“advisory fee”) with such fee determined by multiplying a certain percentage by the total merger consideration, with such advisory fee contingent upon the closing of the merger. Given that the merger consideration will fluctuate between the signing of the merger agreement and the effective time, the amount of the advisory fee will likewise fluctuate. At the time of announcement of the transaction, Olsen Palmer’s advisory fee was approximately $517,000. Olsen Palmer also received a $100,000 fee from PFG upon rendering its opinion (“opinion fee”) and a progress fee of $50,000 (“progress fee”) at the time of the signing of the agreement. PFG has also agreed to indemnify Olsen Palmer against certain claims and liabilities arising out of Olsen Palmer’s engagement and to reimburse Olsen Palmer for certain of its out-of-pocket expenses incurred in connection with Olsen Palmer’s engagement.

 

Olsen Palmer has not provided investment banking and financial advisory services to PFG or SmartFinancial during the two-year period prior to October 29, 2019, except with respect to the transaction. Olsen Palmer may provide investment banking, financial advisory and other financial services to PFG and/or SmartFinancial in the future, for which Olsen Palmer may receive compensation.

 

Board Composition and Management of SmartFinancial after the Merger

 

Each of the officers and directors of SmartFinancial immediately prior to the effective time of the merger will be the officers and directors of the surviving company from and after the effective time of the merger, until their respective successors have been duly elected, appointed or qualified or until their earlier death, resignation or removal in accordance with the SmartFinancial Charter and SmartFinancial Bylaws. Additionally, at the effective time of the merger, the board of directors of SmartFinancial will be expanded to add an additional member, and the vacancy caused by such expansion will be filled with Ottis H. Phillips.

 

Ottis Phillips, age 68, is the Chairman of the Board, President, and CEO of PFG and Progressive Savings Bank.  He has served on both Boards since 2016 and as President/CEO since 2018.  For 20 years, Mr. Phillips was the sole owner and President of SEC Enterprises, Inc., a beverage distribution company, located in Cookeville, Tennessee, which merged in 2013 with RMG, Inc. b/d/a Mid-South Distributing located in Tullahoma, Tennessee, where Mr. Phillips continued as President.  In 2016, he sold this company and formed and serves as the managing partner of Phillips Properties Partnership in Cookeville, Tennessee, purchasing several residential rental properties.  He has been a volunteer on numerous boards including the Cookeville-Putnam County Chamber of Commerce, the Blue Cross Bowl Steering Committee, the Tennessee Malt Beverage Association, the Tennessee Tech Athletic Hall of Fame selection committee, and the Tennessee Tech University Foundation Board of Directors.  Born and raised in the Upper Cumberland, Tennessee, Mr. Phillips graduated from Tennessee Technological University in Cookeville, Tennessee, with a bachelor’s degree in Mechanical Engineering and a master’s degree in Business Administration.

  

Interests of PFG’s Directors and Executive Officers in the Merger

 

In considering the recommendation of the PFG board of directors, shareholders should be aware that the directors and executive officers of PFG have certain interests in the merger that may be different from, or in addition to, the interests of PFG shareholders generally. The PFG board of directors was aware of these interests and considered them, among other matters, in making its recommendation that PFG shareholders vote to approve the merger proposal. These interests are described in further detail below.

 

Appointment to the Board of Directors of SmartFinancial and SmartBank

 

Pursuant to the Merger Agreement, Ottis H. Phillips, President and CEO of PFG, will become a member of the board of directors of each of Smart Financial and SmartBank following the Effective Time.

 

Employment Arrangement

 

Some members of the Progressive Bank management team will continue to receive employment benefits that are consistent with those of other similarly situated SmartBank employees after the closing of the merger.

 

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Other

 

All participants in the Jo Ann Rains Employee Stock Ownership Plan and the Progressive Savings Bank F.S.B. 401(k) Plan, including any directors or executive officers participating in such plans, will become 100% vested as of each plan’s termination date (the day of the merger and the day immediately prior to the merger, respectively.

 

Indemnification; Directors’ and Officers’ Insurance

 

Pursuant to the terms of the merger agreement, for a period of six years from and after the effective time, SmartFinancial must indemnify certain persons, including PFG’s directors and executive officers. In addition, the merger agreement requires that for a period of six years from the effective time, subject to a cap on the amount of premiums, SmartFinancial must maintain an insurance policy for the benefit of certain persons, including PFG’s directors and executive officers. For additional information, see “The Merger Agreement — Covenants and Agreements; Indemnification and Insurance.”

 

Beneficial Ownership of PFG Common Stock by Management and Principal Shareholders of PFG

 

As of the Record Date, PFG had issued and outstanding 20,721 shares of common stock. The following table sets forth information as of the Record Date with respect to the beneficial ownership of PFG common stock by (i) each person who is the beneficial owner of more than 10% of the outstanding shares of PFG common stock, (ii) each director of Progressive Savings Bank and PFG, (iii) each of the executive officers of Progressive Savings Bank, PFG, and their significant subsidiaries, and (iv) all of the above as a group. Management of PFG knows of no other persons, other than those set forth in the following table, who own beneficially more than 10% of the outstanding shares of PFG common stock as of the date of this Proxy Statement/Prospectus.

 

Name, City, State  Age  Office
in Bank
  Office in
PFG
  Principal
Occupation
  Shares and % of
Common Stock1
                
Matt Daugherty
Crossville, TN
  54  EVP of Retail  N/A  Banker  0 (0%)
                
Dustin Davis
Jamestown, TN
  32  CFO  N/A  Banker  2.295 (.01%)
                
Robert Dowell
Knoxville, TN
  71  Director  Director  Pharmacist  593 (2.86%)
                
T. Scott Edwards
Allardt, TN
  56  Director  Director  Manufacturing  1,949 (9.41%)
                
Gary L. Hicks2
Jamestown, TN
  54  Director  Director  Banker  10.946 (0.05%)
                
Mark Justice
Jamestown, TN
  49  EVP  N/A  Banker  9.83 (0.05%)
                
Mark Norman
Jamestown, TN
  59  EVP  N/A  Banker  8.955 (0.04%)
                
Ottis H. Phillips
Cookeville, TN
  68  Chairman, CEO, President  Chairman, CEO, President  Retired Beverage Distr.  935 (4.51%)
                
Mike Porten
Silver Point, TN
  64  EVP, Chief Banking Officer  N/A  Banker  0 (0%)
                
Emily Phillips Rains3
Cookeville, TN
  36  NA  NA  Homemaker  8,564.215 (41.33%)
                
Paul Roberts
Cookeville, TN
  46  Director  Director  CPA  0 (0%)
                
Brandon Smith
Jamestown, TN
  44  Director, Secretary  Director  Home centers operations  125 (0.60%)
                
Executives of Other Subsidiaries               
                
Wayne H. Cravens
Cookeville, TN
     Financial Services Director of Cravens & Company Advisors, LLC        403.711 (1.95%)
                
G. Sam Sandlin
Cookeville, TN
     CPA,  Progressive Accounting & Tax LLC        0 (0%)
                

John Cook
Jamestown, TN

     President of Rains Agency Inc.       11.657 (0.06%)
                
10% Shareholders, Directors, and Executive Officers as a Group             12,613.609 (60.87%)

 

 

1 20,721 share are outstanding. Share counts include, in some circumstances, shares allocated to each individual through the ESOP.

2 Resigned as President and Chief Executive Officer on September 21, 2018 and as a director but agreed to serve as a until a replacement can be elected.

3 Daughter of Ottis Phillips.

 

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PFG maintains an employee stock ownership plan for the benefit of its employees known as the Jo Ann Rains Employee Stock Ownership Plan (the “ESOP”). Participants and/or beneficiaries of the ESOP are entitled to direct the trustee of the ESOP as to the voting of any voting shares of PFG common stock allocated to their PFG common stock accounts under the ESOP with respect to any vote requirement for the approval or disapproval of any corporate merger. In accordance with instructions from the ESOP plan committee, the trustee shall vote any unallocated shares held by the ESOP trust as well as any allocated shares for which a participant and/or beneficiary has failed to give timely voting direction. Currently, there are 385.769 shares of PFG stock allocated to specific employees under the ESOP, with the remaining 432.231 shares being unallocated. The trustee of the ESOP is Matt Curtis, an employee of Progressive Savings Bank. The ESOP Plan Committee is made up of Terri Buchanan, Brittany Rose, Jessica Parrott, Lisa Wills, John Davis, Karen Cole, Tyler Atkinson, and Jerry Ward, who are also employees of Progressive Savings Bank.

 

Limitation of Director's Liability

 

PFG's charter provides that the personal liability of a director of PFG to PFG or its stockholders for damages for breach of fiduciary duty of the director is limited to the extent permitted by the Tennessee Business Corporation Act and applicable federal law. There is no such limitation with respect to a director's liability for any breach of the director's duty of loyalty to PFG or its stockholders or for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. In addition, certain provisions are provided in the charter and bylaws of PFG to indemnify officers and directors for certain acts. Such limitation of liability also does not limit a director's liability for violation of, or otherwise relieve PFG or its directors from the necessity of complying with, federal or state securities laws, or affect the availability of equitable remedies such as injunctive relief or rescission.

 

PFG believes this provision will assist in securing the services of directors who are not employees of PFG. As a result of the inclusion of such a provision, stockholders may be unable to recover monetary damages against directors for actions taken by them which constitute negligence or gross negligence or which are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct.

 

Certain Transactions

 

The officers and directors are required to devote only so much of their time to the business of Progressive Savings Bank and PFG as in their judgment is reasonably required. The officers and directors, and their affiliates, may engage, and are presently engaging, for their own accounts in other business ventures, including management and the formation of other corporations or ventures. Such activities may result in conflicts of interest.

 

Progressive Savings Bank has in the past and will continue to have in the future banking transactions in the ordinary course of business with directors, officers, and 5% stockholders and "related interests" of such persons. As used in this connection, "related interests" includes any entities, such as corporations in which directors have a 10% or greater ownership; corporations in which directors or officers of Progressive Savings Bank also serve as officers; other organizations, partnerships, and entities in which such persons are interested; and certain relatives of directors and officers. It is management's opinion that the direct and indirect extensions of credit described above have been and will continue to be (i) evidenced by a promissory note naming the lender as payee, and contain an annual percentage rate which is reasonably comparable to that normally charged to non-affiliates by other commercial lenders for similar loans made in the lender's locale; (ii) repaid pursuant to appropriate amortization schedules and contain default provisions comparable to those normally used by other commercial lenders for similar loans made in the lender's locale; (iii) made only if credit reports and financial statements, or other reasonable investigation appropriate in light of the nature and terms of the loan and which meet the loan policies normally used by other commercial lenders for similar loans made to non-affiliates in the lender's locale, show the borrower to be collectible and a satisfactory credit risk; and (iv) relative to the purpose of the loan and the disbursement of proceeds, reviewed and monitored in a manner comparable to that normally used by other commercial lenders for similar loans made in the lender's locale on the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions with unrelated persons and have not, and will not in the future, involve more than normal risk of uncollectibility or present other unfavorable features. At September 30, 2019, direct and indirect loans to officers and directors by Progressive Savings Bank aggregated approximately $2,806,000.

 

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In addition, the directors of PFG and shareholders owning more than 10% of PFG who collectively beneficially own and have the power to vote approximately 58.8% of PFG common stock have entered into agreements with SmartFinancial in which they have agreed, among other things, to vote their shares of PFG common stock in favor of the merger proposal and the adjournment proposal. The voting agreements automatically terminate upon the earlier to occur of (i) the approval by PFG’s stockholders of the merger proposal or (ii) the termination of the merger agreement.

 

Regulatory Approvals Required for the Merger

 

Completion of the merger is subject to prior receipt of all approvals required to be obtained from applicable governmental and regulatory authorities. Subject to the terms and conditions of the merger agreement, PFG and SmartFinancial have agreed to use their reasonable best efforts and cooperate to prepare and file, as promptly as possible, all necessary documentation and to obtain as promptly as practicable all regulatory approvals or waivers required or advisable to complete the transactions contemplated by the merger agreement. These approvals and waivers include, among others, a waiver from the Federal Reserve Board and an approval from the TDFI. SmartFinancial and/or PFG have filed applications, waiver requests and notifications to obtain the required regulatory approvals or waivers.

 

Federal Reserve Board

 

The merger of PFG with SmartFinancial must be approved by the Federal Reserve Board under Section 3 of the Bank Holding Company Act of 1956, or the BHC Act, and its implementing regulations, unless the Federal Reserve Board waives the application requirements of the BHC Act. In considering the approval of a transaction such as the merger, the BHC Act and related laws require the Federal Reserve Board to review, with respect to the parent holding companies and the bank concerned: (1) the competitive impact of the transaction; (2) financial, managerial and other supervisory considerations, including capital positions and managerial resources of the subject entities; (3) the record of the insured depository institution subsidiaries of the bank holding companies under the Community Reinvestment Act and fair lending laws; (4) the extent to which the proposal would result in greater or more concentrated risks to the stability of the U.S. banking or financial system; and (5) additional public benefits of the proposal, such as the benefits to the customers of the subject entities. In connection with its review, the Federal Reserve Board will provide an opportunity for public comment on the application and is authorized to hold a public meeting or other proceeding if it determines that would be appropriate.

 

SmartFinancial filed a written request that the Federal Reserve Board waive the application requirements of the BHC Act with regard to its acquisition of PFG on November 27, 2019.

 

The merger of Progressive Savings Bank with and into SmartBank will be subject to approval by the Federal Reserve Board under Section 18(c) of the Federal Deposit Insurance Act (which we refer to as the “Bank Merger Act”). In evaluating an application filed under the Bank Merger Act, the Federal Reserve Board considers: (1) the competitive impact of the transaction, (2) the financial and managerial resources of the depository institutions party to the bank merger and future prospects of the resulting institution, (3) the convenience and needs of the communities to be served, (4) the depository institutions’ effectiveness in combating money-laundering activities and (5) the risk to the stability of the United States banking and financial system. SmartBank’s establishment and operation of branches at Progressive Savings Bank’s existing branch locations is also subject to approval under Section 9 of the Federal Reserve Act. In considering an application under Bank Merger Act, the Federal Reserve Board also reviews the records of performance of the relevant insured depository institutions under the CRA.

 

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SmartBank filed an application with the Federal Reserve Board under the Bank Merger Act requesting approval of the bank merger on November 27, 2019.

 

Tennessee Department of Financial Institutions

 

The merger of Progressive Savings Bank with and into SmartBank must also be approved by the Tennessee Department of Financial Institutions (the “TDFI”) under Tennessee Code Annotated Section 45-2-1304. In considering an application under Section 45-2-1304, the TDFI reviews certain factors, including the compliance of the resulting state bank with state laws, the adequacy of the capital structure of the surviving bank, the fairness of the transaction, and whether the transaction is contrary to the public interest.

 

SmartBank filed an application with the TDFI pursuant to Tennessee Code Annotated Section 45-2-1304 requesting approval of the bank merger on November 27, 2019.

 

SmartFinancial and PFG believe that the merger does not raise substantial antitrust or other significant regulatory concerns and that we will be able to obtain all requisite regulatory approvals. However, neither SmartFinancial nor PFG can assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. The parties have agreed that SmartFinancial will not be required, and PFG and its subsidiaries will not be permitted, to take any action or commit to take any action or agree to any condition or restrictions in connection with the regulatory approvals that, individually or in the aggregate, would have or would be reasonably likely to have a material adverse effect on SmartFinancial and its subsidiaries or PFG and its subsidiaries as of and following the completion of the merger.

 

The parties’ obligation to complete the merger is conditioned upon the receipt of all required regulatory approvals. SmartFinancial and PFG will use their respective commercially reasonable efforts to resolve any objections that may be asserted by any regulatory authority with respect to the merger agreement or the merger or the other transactions contemplated by the merger agreement.

 

Neither SmartFinancial nor PFG is aware of any material governmental approvals or actions that are required for completion of the merger other than those described above. It is presently contemplated that if any such additional governmental approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.

 

Material U.S. Federal Income Tax Consequences

 

The following is a general discussion of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) of PFG common stock that exchange their shares of PFG stock for shares of SmartFinancial common stock and cash in the merger. This discussion is based upon the Code, its legislative history, the Treasury Regulations promulgated under the Code, and court and administrative rulings and decisions, all as in effect on the date of this proxy statement/prospectus, and all of which are subject to change, potentially retroactively, which could affect the accuracy of the statements and conclusions set forth in this discussion.

 

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of PFG common stock that is for U.S. federal income tax purposes: (a) an individual citizen or resident of the United States; (b) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof or the District of Columbia; (c) a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) such trust has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes; or (d) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source.

  

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This discussion addresses only those U.S. holders of PFG common stock that hold their shares of PFG common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). Importantly, this discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder in light of that U.S. holder’s individual circumstances or to a U.S. holder that is subject to special treatment under the U.S. federal income tax laws, including, without limitation, a U.S. holder that is:

 

·a bank or other financial institution;

 

·a tax-exempt organization;

 

·a regulated investment company;

 

·a real estate investment trust;

 

·a mutual fund;

 

·an S corporation, partnership or other pass-through entity (or an investor in an S corporation, partnership or other pass-through entity);

 

·a retirement plan, individual retirement account or other tax-deferred account;

 

·an insurance company;

 

·a dealer or broker in stocks and securities, or currencies;

 

·a trader in securities that elects to use the mark-to-market method of accounting;

 

·a holder of PFG common stock subject to the alternative minimum tax provisions of the Code;

 

·a holder of PFG common stock that received PFG common stock through the exercise of an employee stock option, through a tax-qualified retirement plan or otherwise as compensation;

 

·a holder of PFG common stock that has a functional currency other than the U.S. dollar;

 

·a holder of PFG common stock that holds such stock as part of a hedge, straddle, constructive sale, conversion or other integrated transaction;

 

·a person that is not a U.S. holder; or

 

·a U.S. expatriate or former citizen or resident of the United States.

 

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds PFG common stock, the tax treatment of a partner in the partnership will generally depend on the status of such partner and the activities of the partnership. Partnerships holding PFG common stock and partners in such partnerships should consult their tax advisors.

 

This discussion does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any U.S. federal laws other than those pertaining to the income tax, nor does it address any considerations in respect of any withholding required pursuant to the Foreign Account Tax Compliance Act of 2010 (including the U.S. Treasury regulations issued thereunder and intergovernmental agreements entered into pursuant thereto). Determining the actual tax consequences of the merger to a U.S. holder is complex and can depend, in part, on the U.S. holder’s specific situation. Each U.S. holder should consult its own independent tax advisor as to the tax consequences of the merger in its particular circumstance, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws.

 

Tax Consequences of the Merger Generally

 

In connection with the filing with the SEC of the registration statement on Form S-4 of which this proxy statement/prospectus is a part, Alston & Bird LLP, tax counsel to SmartFinancial, has rendered its tax opinion to SmartFinancial and Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, tax counsel to PFG, has rendered its tax opinion to PFG, in each case to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Copies of the tax opinions are attached as Exhibits 8.1 and 8.2 to the registration statement on Form S-4.

 

The obligations of the parties to complete the merger are conditioned on, among other things, the receipt by SmartFinancial and PFG of opinions from Alston & Bird LLP and Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, respectively, dated the closing date of the merger, to the effect that for U.S. federal income tax purposes the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. The conditions relating to receipt of such closing opinions may be waived by both SmartFinancial and PFG. Neither SmartFinancial nor PFG currently intends to waive the conditions related to the receipt of the closing opinions. If receipt of the closing opinions were to be waived, the vote of the holders of PFG stock to approve the merger agreement would be resolicited.

 

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These opinions of Alston & Bird LLP and Baker, Donelson, Bearman, Caldwell & Berkowitz, PC provided to SmartFinancial and PFG, respectively, are and will be subject to customary qualifications and assumptions, including assumptions regarding the absence of changes in existing facts and the completion of the merger strictly in accordance with the merger agreement and the registration statement of which this proxy statement/prospectus forms a part. In rendering their legal opinions, Alston & Bird LLP and Baker, Donelson, Bearman, Caldwell & Berkowitz, PC will rely upon representations and covenants of SmartFinancial and PFG, including those representations contained in certificates of officers of SmartFinancial and PFG, reasonably satisfactory in form and substance to each such counsel, and will assume that such representations are true, correct and complete without regard to any knowledge limitation and that such covenants will be complied with. If any of these assumptions or representations are inaccurate in any way, or any of the covenants are not complied with, these opinions could be adversely affected. The opinions represent each counsel’s best legal judgment, but have no binding effect or official status of any kind, and no assurance can be given that contrary positions will not be taken by the Internal Revenue Service or a court considering the issues. In addition, neither PFG nor SmartFinancial has requested nor does either of them intend to request a ruling from the Internal Revenue Service as to the U.S. federal income tax consequences of the merger. Accordingly, there can be no assurances that the Internal Revenue Service will not assert, or that a court will not sustain, a position contrary to any of the tax consequences set forth below or described in the tax opinions.

 

The following discussion assumes that the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code.

 

Tax Consequences to U.S. Holders

 

Subject to the discussion below relating to the receipt of cash in lieu of a fractional share, a U.S. holder that exchanges PFG common stock for a combination of SmartFinancial common stock and cash:

 

·will generally recognize capital gain (but not loss) equal to the lesser of (i) the excess, if any, of the amount of cash plus the fair market value of any SmartFinancial common stock received in the merger over the U.S. holder’s tax basis in the shares of PFG common stock surrendered in exchange therefor and (ii) the amount of cash received by the U.S. holder in the merger (other than cash received in lieu of a fractional share);

 

·will generally have a tax basis in the SmartFinancial common stock received in the merger (including any fractional share deemed received and redeemed for cash as described below) equal to the tax basis of the PFG common stock surrendered in exchange therefor, increased by the amount of taxable gain, if any, recognized by the U.S. holder in the merger (other than with respect to cash received in lieu of a fractional share), and decreased by the amount of cash received by the U.S. holder in the merger (other than cash received in lieu of a fractional share); and

 

·will generally have a holding period for shares of SmartFinancial common stock received in the merger that includes its holding period for its shares of PFG common stock surrendered in exchange therefor.

 

Such capital gain will generally be long-term capital gain if, as of the effective date of the merger, the U.S. holder’s holding period for such shares of PFG common stock exceeds one year. Long-term capital gain of non-corporate taxpayers, including individuals, is generally taxed at preferential rates.

 

In the case of any U.S. holder that acquired different blocks of PFG common stock at different times and at different prices, any realized gain or loss will generally be determined separately for each identifiable block of PFG shares exchanged in the merger. Such U.S. holder should consult its own tax advisor regarding the manner in which gain or loss should be determined for each identifiable block of PFG shares.

 

Treatment of Pre-Closing Distributions

 

Generally, distributions to a shareholder from a corporation taxed under Subchapter S of the Internal Revenue Code are not taxable to the extent of a shareholder’s adjusted tax basis in the S corporation stock, with any distribution in excess of adjusted tax basis being treated as gain from the sale or exchange of property. However, if an S corporation has C corporation earnings and profits from prior C corporation years, distributions by the S corporation to its shareholders may be taxable as dividends under certain limited circumstances.

 

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Pursuant to the Merger Agreement, PFG is permitted to make the following distributions to its shareholders prior to closing: (1) dividend in an amount equal to the balance of PFG’s accumulated adjustment account as of December 31, 2019, less the tax distributions as described below, subject to a maximum of $14,595,354.37, less any adjustments to the aggregate cash consideration pursuant to the merger agreement, (2) a one-time tax distribution payable on or before February 29, 2020 in an amount that will enable PFG’s shareholders to satisfy their respective tax obligations in connection with their pro rata share of the income of PFG for the tax period ending on December 31, 2019; and (3) a one-time tax distribution payable immediately prior to the closing in an amount sufficient for PFG’s shareholders to satisfy their respective tax obligations in connection with their pro rata share of the income of PFG for the tax period commencing on January 1, 2020 and ending on the closing date. We collectively refer to these distributions as the “pre-closing distributions”.

 

U.S. holders generally will not be taxed on the Pre-Closing Distributions to the extent of their tax basis in their PFG common stock immediately prior to the distribution. To the extent that pre-closing distributions are not taxable due to a U.S. holder’s tax basis prior to the distributions exceeding the amount received, the holder’s tax basis in its PFG common stock would decrease (but not below zero) by the amount of the distributions paid. A U.S. holder’s adjusted tax basis in PFG common stock, after taking into account the pre-closing distributions, would affect the amount of the holder’s gain or loss, if any, in the merger as well as the holder’s carryover tax basis in the SmartFinancial common stock received in the merger.

 

As described above, to the extent that any such distribution exceeds the shareholder’s adjusted tax basis in his or her S corporation stock, the excess portion would be taxable as a gain from the sale or exchange of property. That gain generally would be a capital gain and would be long-term capital gain if, at the time that the distribution is made, the holder’s holding period for its PFG common stock exceeds one year. Long-term capital gain of non-corporate taxpayers, including individuals, is generally taxed at preferential rates.

 

Generally, distributions made by corporations before a merger are disregarded in determining whether the merger is treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and are not treated as cash received in the merger (which could result in the recognition of gain by the shareholders as a result of the merger), unless the source of funds for such distributions can be traced to the acquiring entity. PFG intends to make the pre-closing distributions described above out of its own funds and does not expect that such distributions would cause the merger to fail to be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code or that such distributions would be treated as cash received in the merger, but there can be no assurances that the Internal Revenue Service or a court would not adopt a contrary position.

 

A U.S. holder who recognizes gain to the extent pre-closing distributions exceed the holder’s tax basis in the PFG shares may also be subject to net investment income tax, backup withholding, and reporting in the same manner as described below.

 

Shareholders Exercising Dissenters’ Rights

 

Upon its exercise of dissenters’ rights, a U.S. holder of PFG common stock will exchange all of its PFG common stock for cash. A U.S. holder that receives only cash in exchange for its PFG common stock in the merger will generally recognize gain or loss equal to the difference between the amount of cash received and such U.S. holder’s tax basis in its PFG common stock. This gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the U.S. holder’s holding period for its shares of PFG common stock surrendered exceeds one year. Long-term capital gain of non-corporate taxpayers, including individuals, is generally taxed at preferential rates. The deductibility of capital losses may be subject to limitations.

 

Cash In Lieu of a Fractional Share

 

If a U.S. holder receives cash in lieu of a fractional share of SmartFinancial common stock, the U.S. holder will generally be treated as having received the fractional share of SmartFinancial common stock in the merger and then as having exchanged the fractional share of SmartFinancial common stock for cash. As a result, the U.S. holder generally will recognize gain or loss equal to the difference between the amount of cash received and the portion of the U.S. holder’s aggregate tax basis allocable to the fractional share of SmartFinancial common stock. This gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, as of the effective date of the merger, the U.S. holder’s holding period for the PFG common stock deemed surrendered in exchange for the fractional share of SmartFinancial common stock exceeds one year. Long-term capital gain of non-corporate taxpayers, including individuals, is generally taxed at preferential rates. The deductibility of capital losses may be subject to limitations.

 

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Net Investment Income Tax

 

A. non-corporate U.S. holder of PFG common stock is generally subject to a 3.8% tax on the lesser of (i) his or her “net investment income” for the relevant taxable year or (ii) the excess of his or her modified adjusted gross income for the taxable year over a certain threshold which depends on the holder’s U.S. federal income tax filing status. Net investment income generally would include any gain recognized in connection with the merger, as well as, among other items, other interest, dividends, capital gains and rental or royalty income received. U.S. holders of PFG common stock should consult their own tax advisors as to the application of this additional tax to their circumstances.

 

Backup Withholding

 

Backup withholding at the applicable rate (currently 24%) may apply with respect to certain cash payments to holders of PFG common stock unless the holder:

 

·furnishes a correct taxpayer identification number, certifies that it is not subject to backup withholding on IRS Form W-9 or successor form included in the letter of transmittal that the U.S. holder will receive, and otherwise complies with all the applicable requirements of the backup withholding rules; or

 

·provides proof that it is otherwise exempt from backup withholding.

 

Any amounts withheld under the backup withholding rules are not an additional tax and will generally be allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability, provided the U.S. holder timely furnishes the required information to the Internal Revenue Service.

 

Certain Reporting Requirements

 

If a U.S. holder that receives SmartFinancial common stock in the merger is considered a “significant holder,” such U.S. holder will generally be required (a) to file a statement with its U.S. federal income tax return providing certain facts pertinent to the merger, including such U.S. holder’s tax basis in, and the fair market value of, the PFG common stock surrendered by such U.S. holder, and (b) to retain permanent records of these facts relating to the merger. A “significant holder” is any PFG shareholder that, immediately before the merger, (y) owned at least 1% (by vote or value) of the outstanding stock of PFG or (z) owned PFG securities with a tax basis of $1.0 million or more.

 

This discussion of material U.S. federal income tax consequences does not purport to be a complete analysis or discussion of all the potential tax consequences of the merger. It is for general information only purposes and is not tax advice. Holders of PFG common stock are urged to consult their own independent tax advisors as to the U.S. federal income tax consequences, in light of their particular situations, of the merger (or exercise of dissenters’ rights), as well as the applicability of any other U.S. federal tax laws and any state, local, and foreign tax laws.

 

Accounting Treatment

 

The merger will be accounted for under the acquisition method of accounting for business combinations under GAAP. Under this method, PFG’s assets and liabilities as of the date of the merger will be recorded at their respective fair values. Any difference between the purchase price for PFG and the fair value of the identifiable net assets acquired (including core deposit intangibles) will be recorded as goodwill. In accordance with ASC Topic 805, “Business Combinations,” the goodwill resulting from the merger will not be amortized to expense, but instead will be reviewed for impairment at least annually and to the extent goodwill is impaired, its carrying value will be written down to its implied fair value and a charge will be made to earnings. Core deposit and other intangibles with definite useful lives recorded by SmartFinancial in connection with the merger will be amortized to expense in accordance with such rules. The consolidated financial statements of SmartFinancial issued after the merger will reflect the results attributable to the acquired operations of PFG beginning on the date of completion of the merger.

 

Dissenters’ Rights

 

Under Tennessee law, holders of shares of PFG common stock who deliver written notice of their intent to dissent and do not vote in favor of the merger proposal have the right to dissent and receive the fair value of their PFG common stock in cash. PFG shareholders electing to exercise dissenters’ rights must comply with the provisions of Chapter 23 of the Tennessee Business Corporation Act in order to perfect their rights. A copy of Chapter 23 of the Tennessee Business Corporation Act is attached to as Annex C to this proxy statement/prospectus.

 

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The following is intended as a brief summary of the material provisions of the Tennessee statutory procedures required to be followed by a holder of PFG common stock in order to properly dissent from the merger and perfect the shareholder’s dissenters’ rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Chapter 23 of the Tennessee Business Corporation Act, the full text of which appears as Annex C of this proxy statement/prospectus.

 

Holders of PFG common stock who do not vote in favor of (or who abstain from voting on) the merger proposal, and who perfect their dissenters’ rights by complying with the provisions of Chapter 23 of the Tennessee Business Corporation Act, will have the right to receive cash payment for the “fair value” of their PFG common stock as determined in accordance with Chapter 23 of the Tennessee Business Corporation Act.

 

In order to perfect dissenters’ rights with respect to the merger, a holder of PFG common stock must (1) deliver to PFG, before the vote to approve the merger proposal is taken, written notice of his or her intent to demand payment for his or her shares of PFG common stock if the merger is consummated; and (2) not vote, or cause or permit to be voted, any of his shares of PFG common stock in favor of the merger proposal. Within 10 days after consummation of the merger, PFG must send to each of the PFG shareholders who has perfected dissenters’ rights in accordance with the steps disclosed above, a written dissenters’ notice and form setting forth instructions for receipt and payment of their shares of PFG common stock. Upon receipt of such notice and form, dissenting PFG shareholders will become entitled to receive payment of their shares of PFG common stock when they: (1) demand payment; (2) certify that they received their shares prior to the date of the first public announcement of SmartFinancial’s and PFG’s intention to merge; and (3) deposit with SmartFinancial certificates representing their shares of PFG common stock in accordance with the instructions set forth in the notice.

 

Any holder of PFG common stock contemplating the exercise of his or her dissenters’ rights should carefully review Chapter 23 of the Tennessee Business Corporation Act, a copy of which is attached to this proxy statement/prospectus as Annex C. A holder of PFG common stock who fails to comply with all requirements of such Chapter 23 will forfeit his or her dissenters’ rights and, upon consummation of the merger, that holder’s shares of PFG common stock will be converted into the right to receive the merger consideration to which the shareholder is entitled under the merger agreement.

 

In general, any dissenting shareholder who perfects his or her right to be paid the “fair value” of the holder’s PFG common stock in cash will recognize taxable gain or loss for federal income tax purposes upon receipt of any cash.

 

Exchange of Shares in the Merger

 

The conversion of PFG common stock into the right to receive the merger consideration will occur automatically at the effective time of the merger. After completion of the merger, the exchange agent will exchange certificates representing shares of PFG common stock for the merger consideration to be received pursuant to the terms of the merger agreement. For more information regarding the procedures for exchanging your shares of PFG common stock for the merger consideration, see “The Merger Agreement – Procedures for Converting Shares of PFG Common Stock into Merger Consideration” below.

 

Listing of SmartFinancial Common Stock

 

SmartFinancial has agreed to use its commercially reasonable efforts to cause the shares of SmartFinancial common stock issuable in connection with the merger be approved for listing on the NASDAQ Capital Market, subject to official notice of issuance, prior to the effective time of the merger.

 

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THE MERGER AGREEMENT

 

The following describes certain aspects of the merger, including certain material provisions of the merger agreement. The following description of the merger agreement is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached to this proxy statement/prospectus as Annex A and is incorporated by reference into this proxy statement/prospectus. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.

 

Structure of the Merger

 

The boards of directors of SmartFinancial and PFG have each unanimously approved the merger agreement, which provides for the merger of PFG with and into SmartFinancial, with SmartFinancial as the surviving company in the merger.

 

The merger agreement also provides that immediately after the effective time of the merger but in effect simultaneously on the date the merger closes, Progressive Bank, which is a direct wholly owned subsidiary of PFG, will merge with and into SmartBank, a direct wholly owned subsidiary of SmartFinancial, with SmartBank as the surviving bank of such merger. The terms and conditions of the merger of SmartBank and Progressive Bank are set forth in a separate merger agreement and plan of merger, referred to as the bank merger agreement, the form of which is attached as Exhibit B to the merger agreement. As provided in the bank merger agreement, the merger of SmartBank and Progressive Bank may be abandoned at the election of SmartFinancial at any time, whether before or after filings are made for regulatory approval of such merger. We refer to the merger of SmartBank and Progressive Bank as the bank merger.

 

The merger agreement allows SmartFinancial to change the structure of the merger at any time and without the approval of PFG if and to the extent that SmartFinancial reasonably deems such a change to be necessary; provided, however, that no such change shall (i) alter or change the amount or kind of merger consideration to be provided under the merger agreement, (ii) materially impede or delay consummation of the merger, (iii) adversely affect the federal income tax treatment of PFG shareholders in connection with the merger, or (iv) require submission to or the approval of PFG shareholders after the merger proposal has already been approved by PFG’s shareholders.

 

Closing and Effective Time of the Merger

 

The closing will take place immediately prior to the effective time of the merger. The effective time of the merger will be the later of (i) the date and time of filing of the articles of merger with the Secretary of State of the State of Tennessee by SmartFinancial or (ii) the date and time when the merger becomes effective as set forth in such articles of merger, which will be no later than three business days after all of the conditions to the closing of the merger have been satisfied or waived in accordance with their terms.

 

We currently expect that the merger will be completed in the first quarter of 2020, subject to obtaining the requisite approvals from the shareholders of PFG, the receipt of all necessary regulatory approvals and the expiration of all regulatory waiting periods and other conditions. However, completion of the merger could be delayed if there is a delay in obtaining the required regulatory approvals or in satisfying any other conditions to the merger. No assurance is made as to whether, or when, SmartFinancial and PFG will obtain the required approvals or complete the merger. See “The Merger Agreement — Conditions to Completion of the Merger.”

 

Organizational Documents of the Surviving Company

 

At the effective time of the merger, the SmartFinancial Charter and the SmartFinancial Bylaws in effect immediately prior to the effective time of the merger will be the charter and bylaws of the surviving company until thereafter amended in accordance with their respective terms and applicable laws.

 

Board Composition and Management of Surviving Company

 

Each of the officers and directors of SmartFinancial immediately prior to the effective time of the merger will be the officers and directors of the surviving company from and after the effective time of the merger, until their respective successors have been duly elected, appointed or qualified or until their earlier death, resignation or removal in accordance with the SmartFinancial Charter and the SmartFinancial Bylaws, provided, however, that the board of directors of SmartFinancial shall be expanded as of the effective time to add one additional seat, which will be filled by Ottis H. Phillips.

 

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Merger Consideration

 

Under the terms of the merger agreement, at the effective time of the merger, each share of PFG common stock issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive  a pro rata portion (which is a ratio equal to one divided by the number of shares of PFG common stock issued and outstanding as of the closing) of (1) an aggregate amount of cash equal to $14,595,354.37 minus the amount of any pre-closing dividend paid by PFG and any loss in excess of $250,000 realized by PFG or its applicable subsidiary on sales of certain assets prior to closing, and (2) 1,292,592.556 shares of SmartFinancial common stock. We refer to the cash and shares of SmartFinancial common stock into which the PFG common stock will convert as the “merger consideration”.

 

SmartFinancial will not issue any fractional shares of SmartFinancial common stock in the merger. PFG shareholders who would otherwise be entitled to a fractional share of SmartFinancial common stock upon the completion of the merger will instead receive an amount in cash (without interest and rounded to the nearest whole cent) determined by multiplying the fractional share interest in SmartFinancial common stock (rounded to the nearest one hundredth of a share) by the average closing price of SmartFinancial’s common stock on the NASDAQ Capital Market over the ten (10) trading days ending on the trading day immediately prior to the closing date.

 

If SmartFinancial or PFG change the number of shares of SmartFinancial common stock or PFG common stock outstanding prior to the effective time of the merger as a result of a stock split, reverse stock split, stock combination, stock dividend, recapitalization, reclassification, reorganization or similar transaction with respect to SmartFinancial common stock or PFG common stock and the record date for such corporate action is prior to the effective time of the merger, then the merger consideration shall be appropriately and proportionately adjusted to give PFG shareholders the same economic effect as contemplated by the merger agreement prior to any such event.

 

The value of the shares of SmartFinancial common stock to be issued to PFG shareholders in the merger will fluctuate between now and the closing date of the merger. We make no assurances as to whether or when the merger will be completed, and you are advised to obtain current sale prices for the SmartFinancial common stock.

 

Procedures for Converting Shares of PFG Common Stock into Merger Consideration

 

Exchange Agent

 

SmartFinancial will designate a third party to act as the exchange agent in connection with the merger. The exchange agent shall also act as the agent for PFG shareholders for the purpose of receiving their PFG stock certificates and shall obtain no rights or interests in the shares represented thereby. Prior to the effective time of the merger, SmartFinancial will deposit, or cause to be deposited, with the exchange agent the aggregate merger consideration and, to the extent then determinable, any cash payable in lieu of fractional shares, necessary to satisfy the aggregate merger consideration payable.

 

Transmittal Materials and Procedures

 

Promptly (but not more than three business days) after the effective time of the merger, SmartFinancial will cause the exchange agent to send transmittal materials, which will include the appropriate form of letter of transmittal, to holders of record of shares of PFG common stock (other than excluded shares) providing instructions on how to effect the delivery of certificates or book-entry shares of PFG common stock in exchange for the merger consideration. After the effective time of the merger, when a PFG shareholder surrenders his or her stock certificates or book-entry shares, accompanied by a properly executed letter of transmittal and any other documents as may reasonably be required by the exchange agent, the holder of shares of PFG common stock will be entitled to receive, (i) the merger consideration and (ii) any cash in lieu of fractional shares to which the holder is entitled.

 

Surrender of PFG Stock Certificates

 

The exchange agent will mail to each holder of record of PFG common stock the letter of transmittal along with instructions for completing the letter of transmittal and delivering to the exchange agent the completed letter of transmittal along with the stock certificates or book-entry shares representing the shares of PFG common stock held by the shareholder.

 

Following the effective time of the merger, upon the surrender to the exchange agent of the certificate(s) or book-entry shares representing his or her shares of PFG common stock, accompanied by a properly completed letter of transmittal, a PFG shareholder will be entitled to receive the merger consideration promptly after the effective time of the merger (including any cash in lieu of fractional shares). Until surrendered, each such certificate or book-entry share will represent after the effective time of the merger, for all purposes, only the right to receive the merger consideration, without interest (including any cash in lieu of fractional shares), and any dividends to which such holder is entitled pursuant to the merger agreement.

 

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No dividends or other distributions with respect to SmartFinancial common stock after completion of the merger will be paid to the holder of any unsurrendered PFG stock certificates or book-entry shares with respect to the shares of PFG common stock represented by those certificates until those certificates or book-entry shares have been properly surrendered. Subject to applicable abandoned property, escheat or similar laws, following the proper surrender of any such previously unsurrendered PFG stock certificate or book-entry shares, the holder of the certificate or book-entry shares will be entitled to receive, without interest: (i) the amount of unpaid dividends or other distributions with a record date after the effective time of the merger payable with respect to the whole shares of SmartFinancial common stock represented by that certificate or book-entry shares; and (ii) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of SmartFinancial common stock represented by that certificate or the book-entry shares with a record date after the effective time of the merger (but before the date on which the certificate or book-entry shares are surrendered) and with a payment date subsequent to the issuance of the shares of SmartFinancial common stock issuable in exchange for that certificate or book-entry shares.

 

None of SmartFinancial, the exchange agent or any other person will be liable to any former PFG shareholder for any amount delivered in good faith to a public official pursuant to applicable abandoned property, escheat or similar laws.

 

In the event any PFG stock certificate is lost, stolen or destroyed, in order to receive the merger consideration (including cash in lieu of any fractional shares), the holder of that certificate must provide an affidavit of that fact and, if reasonably required by SmartFinancial or the exchange agent, post a bond in such amount as SmartFinancial or the exchange agent determines is reasonably necessary to indemnify it against any claim that may be made against it with respect to that certificate.

 

SmartFinancial and the exchange agent will be entitled to deduct and withhold from the consideration otherwise payable to any PFG shareholder the amounts they are required to deduct and withhold under any applicable federal, state, local or foreign tax law. If any such amounts are withheld, these amounts will be treated for all purposes of the merger agreement as having been paid to the shareholders from whom they were withheld.

 

After completion of the merger, there will be no further transfers on the stock transfer books of PFG other than to settle transfers of PFG common stock that occurred prior to the effective time of the merger.

 

No interest will be paid or accrued on any amount payable upon cancellation of shares of PFG common stock. The shares of SmartFinancial common stock issued and cash amount paid in accordance with the merger agreement upon conversion of the shares of PFG common stock (including any cash paid in lieu of fractional shares) will be deemed to have been issued and paid in full satisfaction of all rights pertaining to the shares of PFG common stock.

 

If any portion of the merger consideration is to be delivered to a person or entity other than the holder in whose name any surrendered certificate is registered, it will be a condition of such exchange that (i) the certificate surrendered must be properly endorsed or must be otherwise in proper form for transfer and (ii) the person or entity requesting such payment pays any transfer or other similar taxes required by reason of the payment of the merger consideration to a person or entity other than the registered holder of the certificate surrendered or will establish to the satisfaction of SmartFinancial that such tax has been paid or is not required to be paid. Payment of the applicable merger consideration with respect to book-entry shares will only be made to the person or entity in whose name such book-entry shares are registered. The shares of SmartFinancial common stock may be in uncertificated book-entry form, unless a physical certificate is otherwise required by any applicable law.

 

Representations and Warranties

 

The merger agreement contains customary representations and warranties of SmartFinancial and PFG relating to their respective businesses that are made as of the date of the merger agreement and as of the closing date of the merger. The representations and warranties of each of SmartFinancial and PFG have been made solely for the benefit of the other party, and these representations and warranties should not be relied on by any other person. In addition, these representations and warranties:

 

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·have been qualified by information set forth in confidential disclosure schedules in connection with signing the merger agreement—the information contained in these schedules modifies, qualifies and creates exceptions to the representations and warranties in the merger agreement;

 

·will not survive consummation of the merger;

 

·may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties to the merger agreement if those statements turn out to be inaccurate;

 

·are in some cases subject to a materiality standard described in the merger agreement which may differ from what may be viewed as material by you; and

 

·were made only as of the date of the merger agreement or such other date as is specified in the merger agreement.

 

The representations and warranties made by SmartFinancial and PFG to each other primarily relate to:

 

·corporate organization, existence, power and authority;

 

·capitalization;

 

·corporate authorization to enter into the merger agreement and to consummate the merger;

 

·regulatory approvals and consents required in connection with the merger and the bank merger;

 

·the accuracy of financial statements;

 

·absence of material adverse effect on each party since December 31, 2018;

 

·litigation and legal proceedings;

 

·compliance with laws; and

 

·accuracy of the information supplied by each party for inclusion or incorporation by reference in this proxy statement/prospectus.

 

PFG has also made representations and warranties to SmartFinancial with respect to:

 

·material contracts;

 

·effectiveness of internal controls;

 

·receipt of fairness opinion;

 

·employee benefit plans;

 

·labor and employee relations;

 

·environmental matters;

 

·investment portfolio;

 

·derivative transactions;

 

·loan portfolio;

 

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·adequacy of allowances for loan losses;

 

·trust business and the administration of fiduciary accounts;

 

·investment management and related activities;

 

·repurchase agreements;

 

·deposit insurance;

 

·regulatory compliance and information security;

 

·the absence of any regulatory agreements;

 

·transactions with affiliates;

 

·real and personal property matters;

 

·intellectual properties;

 

·insurance policies;

 

·fees paid to financial advisors;

 

·tax matters;

 

·absence of state takeover laws applicability; and

 

·transaction costs.

 

Definition of “Material Adverse Effect”

 

Certain representations and warranties of SmartFinancial and PFG are qualified as to “materiality” or “material adverse effect.” For purposes of the merger agreement, a “material adverse effect,” when used in reference to either SmartFinancial or PFG, means (i) any change, development or effect that individually or in the aggregate is, or is reasonably likely to be, material and adverse to the condition (financial or otherwise), results of operations, liquidity, assets or deposit liabilities, properties, or business of such party and its subsidiaries, taken as a whole, or (ii) any change, development or effect that individually or in the aggregate would, or would be reasonably likely to, materially impair the ability of such party to perform its obligations under the merger agreement or otherwise materially impairs, or is reasonably likely to materially impair, the ability of such party to consummate the merger and the transactions contemplated by the merger agreement. For purposes of clause (i) only, the definition of “material adverse effect” excludes the following:

 

·changes in banking and similar laws of general applicability or interpretations thereof by any governmental authority;

 

·changes in GAAP or regulatory accounting requirements applicable to banks or bank holding companies generally;

 

·changes in global, national or regional political conditions (including the outbreak of war or acts of terrorism) or in economic or market (including equity, credit and debt markets, as well as changes in interest rates) conditions affecting the financial services industry generally;

 

·public disclosure of the transactions contemplated or actions expressly required by the merger agreement or actions or omissions that are taken with the prior written consent of the other party, or as otherwise expressly permitted or contemplated by the merger agreement;

 

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·any failure by PFG or SmartFinancial to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period (it being understood and agreed that the facts and circumstances giving rise to such failure that are not otherwise excluded from the definition of material adverse effect may be taken into account in determining whether there has been a material adverse effect);

 

·changes in the trading price or trading volume of SmartFinancial common stock; and

 

·the impact of this merger agreement and the transactions contemplated by the merger agreement on relationships with customers or employees, including the loss of personnel;

 

except, with respect to the first three bullets, if the effects of such change disproportionately affect such party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which such party and its subsidiaries operate.

 

Covenants and Agreements

 

Pursuant to the merger agreement, SmartFinancial and PFG have agreed to certain restrictions on their activities until the effective time of the merger. SmartFinancial has agreed that it will carry on its business consistent with prudent banking practices and in compliance in all material respects with applicable laws. PFG has agreed to carry on its business, including the business of each of its subsidiaries, in the ordinary course of business and consistent with prudent banking practice. In addition, PFG has agreed that it will use commercially reasonable efforts to:

 

·preserve its business organization and assets intact;

 

·keep available to itself and SmartFinancial the present services of the current officers and employees of PFG and its subsidiaries; and

 

·preserve for itself and SmartFinancial the goodwill of its customers, employees, lessors and others with whom business relationships exists.

 

SmartFinancial has also agreed that until the effective time of the merger, it and its subsidiaries will not take any or knowingly fail to take any action that is intended or is reasonably likely to:

 

·prevent, delay or impair SmartFinancial’s ability to consummate the merger or the transactions contemplated by the merger agreement;

 

·agree to take, commit to take, or adopt any resolution of its board of directors in support of, any of the actions prohibited by the merger agreement;

 

·result in the merger or the bank merger failing to qualify as a “reorganization” under Section 368(a) of the Code;

 

·take any action that is likely to materially impair SmartFinancial’s ability to perform any of its obligations under the merger agreement or SmartBank to perform any of its obligations under the bank plan of merger; or

 

·agree or commit to do any of the foregoing.

 

PFG has also agreed that it will not, and will not permit its subsidiaries to do any of the following without the prior written consent of SmartFinancial, except as previously agreed to by the parties:

 

·(i) issue, sell, grant, pledge, dispose of, encumber, or otherwise permit to become outstanding, or authorize the creation of, any additional shares of its stock, any rights, any new award or grant under the PFG stock plans or otherwise, or any other securities (including units of beneficial ownership interest in any partnership or limited liability company), or enter into any agreement with respect to the foregoing, (ii) except as permitted in the merger agreement, accelerate the vesting of any existing warrants, options or other rights, or (iii) except as permitted in the merger agreement (and provided that PFG may repurchase, redeem or otherwise acquire shares of PFG common stock in connection with the payment of the withholding taxes owed by a holder of a PFG restricted share upon the vesting of a PFG restricted share), directly or indirectly change (or establish a record date for changing), adjust, split, combine, redeem, reclassify, exchange, purchase or otherwise acquire any shares of its capital stock, or any other securities (including units of beneficial ownership interest in any partnership or limited liability company) convertible into or exchangeable for any additional shares of stock, any rights issued and outstanding prior to the effective time;

 

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·make, declare, pay or set aside for payment of dividends payable in cash, stock or property on or in respect of, or declare or make any distribution on, any shares of its capital stock, except (i) the AAA Dividend and tax distributions, and (ii) dividends from wholly owned subsidiaries to PFG;

 

·enter into or amend or renew any employment, consulting, compensatory, severance, retention or similar agreements or arrangements with any director, officer or employee of PFG or its subsidiaries, or grant any salary, wage or fee increase or increase any employee benefit or pay any incentive or bonus payments, except (i) normal increases in base salary to employees in the ordinary course of business and pursuant to policies currently in effect, provided that, such increases shall not result in an annual adjustment in base compensation (which includes base salary and any other compensation other than bonus payments) of more than 5% for any individual or 3% in the aggregate for all employees of PFG or its subsidiaries, (ii) as specifically provided for by the merger agreement, (iii) as may be required by law, (iv) to satisfy contractual obligations, or (v) as previously disclosed to SmartFinancial;

 

·hire any person as an employee of PFG or any of its subsidiaries, except for at-will employees at an annual rate of salary not to exceed $75,000;

 

·enter into, establish, adopt, amend, modify or terminate (except (i) as may be required by or to make consistent with applicable law, subject to the provision of prior written notice to and consultation with SmartFinancial, (ii) to satisfy contractual obligations existing as of the date of the merger agreement and as previously disclosed to SmartFinancial, (iii) as previously disclosed to SmartFinancial, or (iv) as may be required pursuant to the terms of the merger agreement) any PFG benefit plan or other pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any current or former director, officer or employee of PFG or any of its subsidiaries;

 

·pay, loan or advance any amount to, or sell, transfer or lease any properties or assets (real, personal or mixed, tangible or intangible) to, or enter into any agreement or arrangement with, any of its officers or directors or any of their immediate family members or any affiliates or associates of any of its officers or directors other than compensation or business expense advancements or reimbursements in the ordinary course of business, except (i) pursuant to agreements or arrangements in effect on the date of the merger agreement and previously disclosed to SmartFinancial, (ii) making or renewing loans to directors, officers, and their immediate family members, affiliates, or associates that are below certain thresholds and which are in compliance with federal banking regulations, or (iii) entering into deposit agreements or pay out deposits to any of the persons or entities covered by the preceding clause (ii);

 

·except in the ordinary course of business, sell, license, lease, transfer, mortgage, pledge, encumber or otherwise dispose of or discontinue any of its rights, assets, deposits, business or properties or cancel or release any indebtedness owed to PFG or any of its subsidiaries;

 

·acquire or agree to acquire, by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire any assets, which would be material, individually or in the aggregate, to PFG, other than in connection with foreclosures, settlements in lieu of foreclosure or troubled loan or debt restructurings in the ordinary course of business;

 

·make any capital expenditures in amounts exceeding $50,000 individually, or $250,000 in the aggregate, provided that SmartFinancial shall grant or deny its consent to emergency repairs or replacements necessary to prevent substantial deterioration of the condition of a property within two (2) business days of its receipt of a written request from PFG;

  

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·amend the PFG Charter or the PFG Bylaws or any equivalent documents of PFG’s subsidiaries;

 

·implement or adopt any change in its accounting principles, practices or methods, other than as may be required by applicable laws, GAAP or applicable accounting requirements of any governmental authority, in each case, including changes in the interpretation or enforcement thereof;

 

·except as previously disclosed to SmartFinancial, enter into, amend, modify, terminate, extend, or waive any material provision of, any PFG material contract, lease or insurance policy, or make any change in any instrument or agreement governing the terms of any of its securities, or material lease, license or contract, other than normal renewals of contracts, licenses and leases without material adverse changes of terms with respect to PFG or any of its subsidiaries, or enter into any contract that would constitute a PFG material contract if it were in effect on the date of the merger agreement, except for any amendments, modifications or terminations reasonably requested by SmartFinancial;

 

·other than settlement of foreclosure actions in the ordinary course of business, (i) enter into any settlement or similar agreement with respect to any action, suit, proceeding, order or investigation to which PFG or any of its subsidiaries is or becomes a party after the date of the merger agreement, which settlement or agreement involves payment by PFG or any of its subsidiaries of an amount which exceeds $75,000 individually or $150,000 in the aggregate and/or would impose any material restriction on the business of PFG or any of its subsidiaries or (ii) waive or release any material rights or claims, or agree or consent to the issuance of any injunction, decree, order or judgment restricting or otherwise affecting its business or operations;

 

·(i) enter into any material new line of business, introduce any material new products or services, any material marketing campaigns or any material new sales compensation or incentive programs or arrangements; (ii) change in any material respect its lending, investment, underwriting, risk and asset liability management and other banking and operating policies, except as required by applicable law, regulation or policies imposed by any governmental authority; (iii) make any material changes in its policies and practices with respect to underwriting, pricing, originating, acquiring, selling, servicing, or buying or selling rights to service loans, its hedging practices and policies, and (iv) incur any material liability or obligation relating to retail banking and branch merchandising, marketing and advertising activities and initiatives except in the ordinary course of business;

 

·enter into any derivative transaction;

 

·incur any indebtedness for borrowed money other than in the ordinary course of business consistent with past practice with a term not in excess of 12 months (other than creation of deposit liabilities or sales of certificates of deposit in the ordinary course of business), or incur, assume or become subject to, whether directly or by way of any guarantee or otherwise, any obligations or liabilities (whether absolute, accrued, contingent or otherwise) of any other person, other than the issuance of letters of credit in the ordinary course of business and in accordance with restrictions on making or extending loans as set forth in the merger agreement;

 

·(i) other than in accordance with PFG’s investment guidelines, acquire, sell or otherwise dispose of any debt security or equity investment or any certificates of deposits issued by other banks, or (ii) change the classification method for any of the PFG investment securities from “held to maturity” to “available for sale” or from “available for sale” to “held to maturity,” as those terms are used in specified accounting literature;

 

·make any changes to deposit pricing other than such changes made in the ordinary course of business;

 

·except for loans or extensions of credit approved and/or committed as of the date of the merger agreement and disclosed to SmartFinancial, (i) make, renew, renegotiate, increase, extend or modify any (A) unsecured loan, if the amount of such unsecured loan, together with any other outstanding unsecured loans made by PFG or any of its subsidiaries to such borrower or its affiliates, would be in excess of $100,000, in the aggregate, (B) loan secured by other than a first lien in excess of $350,000, (C) loan in excess of the Federal Financial Institutions Examination Council’s regulatory guidelines relating to loan to value ratios, (D) loan secured by a first lien residential mortgage and with no loan policy exceptions in excess of $500,000, (E) secured loan over $750,000, (F) any loan that is not made in conformity with PFG’s ordinary course lending policies and guidelines in effect as of the date of the merger agreement, or (G) loan, whether secured or unsecured, if the amount of such loan, together with any other outstanding loans (without regard to whether such other loans have been advanced or remain to be advanced), would result in the aggregate outstanding loans to any borrower of PFG or any of its subsidiaries (without regard to whether such other loans have been advanced or remain to be advanced) to exceed $750,000, (ii) sell any loan or loan pools in excess of $1,000,000 in principal amount or sale price (other than residential mortgage loan pools sold in the ordinary course of business), or (iii) acquire any servicing rights, or sell or otherwise transfer any loan where PFG or any of its subsidiaries retains any servicing rights. Any loan in excess of the foregoing limits shall require the prior written approval of the President or Chief Credit Officer of SmartBank;

 

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·make any investment or commitment to invest in real estate or in any real estate development project other than by way of foreclosure or deed in lieu thereof or make any investment or commitment to develop, or otherwise take any actions to develop any real estate owned by PFG or its subsidiaries;

 

·except as required by applicable law or in the ordinary course of business, make or change any material tax election, file any material amended tax return, enter into any material closing agreement with respect to taxes, settle or compromise any material liability with respect to taxes, agree to any material adjustment of any tax attribute, file any claim for a material refund of taxes, or consent to any extension or waiver of the limitation period applicable to any material tax claim or assessment;

 

·commit any act or omission which constitutes a material breach or default by PFG or any of its subsidiaries under any agreement with any governmental authority or under any PFG material contract, material lease or other material agreement or material license to which PFG or any of its subsidiaries is a party or by which any of them or their respective properties are bound or under which any of them or their respective assets, business, or operations receives benefits;

 

·foreclose on or take a deed or title to any real estate other than single-family residential properties without first conducting a Phase I environmental site assessment of the property in accordance with specified standards, or foreclose on or take a deed or title to any real estate other than single-family residential properties if such environmental assessment indicates the presence or likely presence of any hazardous substances under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances into structures on the property or into the ground, ground water, or surface water of the property;

 

·take any action or knowingly fail to take any action not contemplated by the merger agreement that is intended or is reasonably likely to (i) prevent, delay or impair PFG’s ability to consummate the merger or the transactions contemplated by the merger agreement, or (ii) agree to take, make any commitment to take, or adopt any resolutions of its board of directors in support of any actions prohibited by the merger agreement;

 

·directly or indirectly repurchase, redeem or otherwise acquire any shares of PFG capital stock or any securities convertible into or exercisable for any shares of PFG capital stock, except that PFG may repurchase, redeem or otherwise acquire shares of PFG common stock in connection with the payment of the withholding taxes owed by a holder of a PFG restricted share upon the vesting of a PFG restricted share;

 

·except as required by law, file any application or make any contract or commitment for the opening, relocation or closing of any, or open, relocate or close any, branch office, loan production or servicing facility or automated banking facility, except for any change that may be requested by SmartFinancial;

 

·merge or consolidate itself or any of its subsidiaries with any other person, or restructure, reorganize or completely or partially liquidate or dissolve it or any of its subsidiaries; or

 

·(i) enter into any contract with respect to, or otherwise agree or commit to do, or adopt any resolutions of its board of directors or similar governing body in support of, any of the foregoing or (ii) take any action that is intended or expected to result in any of its representations and warranties set forth in the merger agreement being or becoming untrue in any material respect at any time prior to the effective time, or in any of the conditions to the merger not being satisfied or in a violation of any provision of the merger agreement, except, in every case, as may be required by applicable law.

 

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PFG has also agreed to cause to be delivered to SmartFinancial resignations of all the directors of PFG and its subsidiaries to be effective as of the effective time of the merger.

 

Regulatory Matters

 

SmartFinancial and PFG agreed to use their respective commercially reasonable efforts to cause the registration statement to be declared effective by the SEC as promptly as reasonably practicable after filing. SmartFinancial has also agreed to use its commercially reasonable efforts to obtain all necessary state securities law or “blue sky” permits and approvals required to carry out the transactions contemplated by the merger agreement.

 

SmartFinancial and PFG and their respective subsidiaries have agreed to cooperate with each other and use their reasonable best efforts to prepare and file all necessary documentation, to effect all filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and regulatory and governmental entities that are necessary to consummate the transactions contemplated by the merger agreement, and to comply with the terms and conditions of all such permits, consents, approvals and authorizations; provided, however, that nothing contained in the merger agreement will require SmartFinancial or any of its subsidiaries or PFG or any of its subsidiaries to take any action, or commit to take any action, or agree to any condition or restriction, in connection with obtaining the foregoing permits, consents, approvals and authorizations of any governmental authority that would reasonably be likely to have a material and adverse effect (measured on a scale relative to PFG) on the condition (financial or otherwise), results of operations, liquidity, assets or deposit liabilities, properties or business of SmartFinancial, PFG, the surviving entity or the surviving bank, after giving effect to the merger (a “burdensome condition”).

 

SmartFinancial and PFG will furnish each other and each other’s counsel with all information as may be necessary or advisable in connection with any application, petition or any other statement or application made by or on behalf of SmartFinancial or PFG to any governmental authority in connection with the transactions contemplated by the merger agreement. Each party has the right to review and approve in advance all characterizations of the information relating to such party and any of its subsidiaries that appear in any filing with a governmental authority made in connection with the transactions contemplated by the merger agreement. In addition, SmartFinancial and PFG agreed to provide to the other party for review a copy of each filing with a governmental authority made in connection with the transactions contemplated by the merger agreement prior to its filing.

 

NASDAQ Listing

 

SmartFinancial has agreed to use its commercially reasonable efforts to cause the shares of its common stock to be issued in connection with the merger to be approved for listing on NASDAQ, subject to official notice of issuance, prior to the effective time of the merger.

 

Employee Matters

 

General

 

Following the effective time of the merger, SmartFinancial must maintain employee benefit plans and compensation opportunities for those persons who are full-time employees of PFG and its subsidiaries on the closing date of the merger (referred to below as “covered employees”) that provide employee benefits which, in the aggregate, are substantially comparable to the employee benefits and cash-based compensation opportunities that are made available on a uniform and non-discriminatory basis to similarly situated employees of SmartFinancial or its subsidiaries (except that no covered employee may participate in any closed or frozen plan of SmartFinancial or its subsidiaries). SmartFinancial shall give the covered employees credit for their prior service with PFG and its subsidiaries for purposes of eligibility and vesting under any employee benefit plan maintained by SmartFinancial in which covered employees may be eligible to participate.

 

With respect to any SmartFinancial health, dental, vision or other welfare plan in which any covered employee is eligible to participate, for the plan year in which the covered employee is first eligible to participate, SmartFinancial or its applicable subsidiary must use its commercially reasonable efforts to (i) cause any pre-existing condition limitations or eligibility waiting periods under such plan to be waived with respect to the covered employee and his or her covered dependents to the extent the condition was, or would have been, covered under the PFG benefit plan in which the covered employee participated immediately prior to the effective time of the merger and (2) recognize any health, dental, vision or other welfare expenses incurred by such covered employee and his or her covered dependents in the year that includes the closing date (or, if later, the year in which such covered employee is first eligible to participate) for purposes of any applicable copayment, deductibles and annual out of pocket expense requirements under any such health, dental, vision or other welfare plan.

 

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Employees of PFG (other than those who will enter into termination agreements with SmartFinancial and/or SmartBank in connection with the transaction) who (i) become employees of SmartFinancial or SmartBank at the effective time of the merger and (ii) is terminated within one year following the effective time of the merger (other than for cause, death, disability, normal retirement or voluntarily resignation) will be entitled to receive  severance compensation based on the number of years of service with PFG and the employees’ weekly rate of pay.

 

Prior to the effective time of the merger, PFG will effectuate the termination or discontinuation of certain benefits plans maintained by PFG, as requested by SmartFinancial.

 

Indemnification and Directors’ and Officers’ Insurance

 

The merger agreement provide that, for a period of six years after the effective time of the merger, SmartFinancial shall indemnify and hold harmless the present and former directors, officers, employees and agents of PFG and its subsidiaries against all costs or expenses, judgments, fines, losses, claims, damages or other liabilities incurred in connection with any claim, action, suit, proceeding or investigation arising out of actions or omissions of such persons in the course of performing their duties for PFG or its subsidiaries occurring at or before the effective time of the merger (including the transactions contemplated by the merger agreement), to the same extent as such persons have the right to be indemnified pursuant to the organizational documents of PFG in effect as of the date of the merger agreement to the extent permitted by applicable law. SmartFinancial will also advance expenses in connection with such indemnification.

 

For a period of six years after the effective time of the merger, SmartFinancial will provide directors’ and officers’ liability insurance that serves to reimburse the present and former officers and directors of PFG or its subsidiaries with respect to claims against them arising from facts or events occurring before the effective time of the merger (including the transactions contemplated by the merger agreement). The directors’ and officers’ liability insurance will contain at least the same coverage and amounts, and contain terms and conditions no less advantageous to the indemnified person as the coverage currently provided by PFG; provided, however, that: (i) if SmartFinancial is unable to obtain or maintain the directors’ and officers’ liability insurance, then SmartFinancial will provide as much comparable insurance as is reasonably available, and (ii) officers and directors of PFG or its subsidiaries may be required to make application and provide customary representations and warranties to the carrier of the insurance. SmartFinancial will not be required to expend for such tail insurance a premium amount in excess of an amount equal to 200% of the annual premiums paid by PFG for director and officer insurance in effect as of the date of this Agreement.

 

SmartFinancial has agreed that if it, or any of its successors and assigns, consolidates with or merges with any other corporation or entity where it is not the continuing or surviving corporation, or transfers all or substantially all of its property or assets, it will make proper provision so that the successors and assigns of SmartFinancial and its subsidiaries will assume the obligations of indemnification under the merger agreement.

 

No Solicitation

 

PFG has agreed that, from the date of the merger agreement it will not, and will cause its subsidiaries and each of their respective officers, directors and employees not to, and will not authorize or permit its investment bankers, financial advisors, attorneys, accountants, consultants, affiliates or other agents of PFG or any of its subsidiaries to, directly or indirectly, (i) initiate, solicit, induce or knowingly encourage, or take any action to facilitate the making of, any inquiry, offer or proposal which constitutes, or could reasonably be expected to lead to, an acquisition proposal; (ii) participate in any discussions or negotiations regarding any acquisition proposal or furnish, or otherwise afford access, to any person (other than SmartFinancial) any information or data with respect to PFG or any of its subsidiaries or otherwise relating to an acquisition proposal; (iii) release any person from, waive any provisions of, or fail to enforce any confidentiality agreement or standstill agreement to which PFG is a party; or (iv) enter into any agreement, confidentiality agreement, agreement in principle or letter of intent with respect to any acquisition proposal or approve or resolve to approve any acquisition proposal or any agreement, agreement in principle or letter of intent relating to an acquisition proposal.

 

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For purposes of the merger agreement, an “acquisition proposal” means any inquiry, offer or proposal (other than an inquiry, offer, or proposal from SMBK), whether or not in writing, contemplating, relating to, or that could reasonably be expected to lead to, an Acquisition Transaction, and an “Acquisition Transaction” means (A) any transaction or series of transactions involving any merger, consolidation, recapitalization, share exchange, liquidation, dissolution or similar transaction involving PFG or any of its subsidiaries; (B) any transaction pursuant to which any third party or group acquires or would acquire (whether through sale, lease or other disposition), directly or indirectly, a significant portion of the assets of PFG or any of its subsidiaries; (C) any issuance, sale or other disposition of (including by way of merger, consolidation, share exchange or any similar transaction) securities (or options, rights or warrants to purchase or securities convertible into, such securities) representing 20% or more of the votes attached to the outstanding securities of PFG or any of its subsidiaries; (D) any tender offer or exchange offer that, if consummated, would result in any third party or group beneficially owning 20% or more of any class of equity securities of PFG or any of its subsidiaries; or (E) any transaction which is similar in form, substance or purpose to any of the foregoing transactions, or any combination of the foregoing.

 

A “superior proposal” means a bona fide, unsolicited acquisition proposal (i) that if consummated would result in a third party (or in the case of a direct merger between such third party and PFG or any of its subsidiaries, the shareholders of such third party) acquiring, directly or indirectly, more than 50% of the outstanding PFG common stock or more than 50% of the assets of PFG and its subsidiaries, taken as a whole, for consideration consisting of cash and/or securities and (ii) that the board of directors of PFG reasonably determines in good faith, after consultation with its outside financial advisor and outside legal counsel, (a) is reasonably capable of being completed, taking into account all financial, legal, regulatory and other aspects of such proposal, including all conditions contained therein and the person making such acquisition proposal, and (b) taking into account any changes to the merger agreement proposed by SmartFinancial in response to such acquisition proposal, and all financial, legal, regulatory and other aspects of such proposal, including all conditions contained therein and the person making such acquisition proposal, such proposal is more favorable to the shareholders of PFG from a financial point of view than the merger.

 

However, at any time prior to PFG special meeting, PFG may take any of the actions described in the first paragraph of this “– No Solicitation” section if, but only if (i) PFG receives a bona fide unsolicited acquisition proposal that did not result from a breach of the first paragraph of this section, and (ii) the PFG board of directors reasonably determines in good faith, after consultation with and having considered the advice of its outside financial advisor and outside legal counsel, that (A) such acquisition proposal constitutes or is reasonably likely to lead to a superior proposal and (B) the failure to take such actions more likely than not would cause it to violate its fiduciary duties to PFG’s shareholders under applicable law, (iii) PFG has provided SmartFinancial with at least three business days prior notice of such determination, and (iv) prior to furnishing or affording access to any information or data with respect to PFG or any of its subsidiaries or otherwise relating to an acquisition proposal, PFG receives from such person a confidentiality agreement with terms no less favorable to PFG than those contained in the confidentiality agreement with SmartFinancial. PFG must promptly provide to SmartFinancial any non-public information regarding PFG or any of its subsidiaries provided to any other person which was not previously provided to SmartFinancial, and such additional information must be provided no later than the date of provision of such information to such other party.

 

PFG must promptly (and in any event within (1) Business Day) notify SmartFinancial in writing if any proposals or offers are received by, any information is requested from, or any negotiations or discussions are sought to be initiated or continued with, PFG or its representatives, in each case in connection with any acquisition proposal, and such notice must indicate the name of the person initiating such discussions or negotiations or making such proposal, offer or information request and the material terms and conditions of any proposals or offers (and, in the case of written materials relating to such proposal, offer, information request, negotiations or discussion, providing copies of such materials (including e-mails or other electronic communications), except to the extent that such materials constitute confidential information of the party making such offer or proposal under an effective confidentiality agreement). PFG has agreed that it will keep SmartFinancial informed, on a reasonably current basis, of the status and terms of any such proposal, offer, information request, negotiations or discussions (including any amendments or modifications to such proposal, offer or request).

 

Except as provided below, neither the board of directors of PFG nor any committee thereof shall (i) withdraw, qualify, amend or modify, or propose to withdraw, qualify, amend or modify, in a manner adverse to SmartFinancial in connection with the transactions contemplated by the merger agreement (including the merger), the PFG recommendation, fail to reaffirm the PFG recommendation within three business days following a request by SmartFinancial, or make any statement, filing or release, in connection with the PFG special meeting or otherwise, inconsistent with the PFG recommendation (it being understood that taking a neutral position or no position with respect to an acquisition proposal will be considered an adverse modification of the PFG recommendation); (ii) approve or recommend, or propose to approve or recommend, any acquisition proposal; or (iii) enter into (or cause PFG or any of its subsidiaries to enter into) any letter of intent, agreement in principle, acquisition agreement or other agreement (a) related to any acquisition transaction (other than a confidentiality agreement entered into in accordance with the foregoing) or (b) requiring PFG to abandon, terminate or fail to consummate the merger or any other transaction contemplated by the merger agreement.

 

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Notwithstanding the foregoing, prior to the date of the PFG special meeting, the board of directors of PFG may withdraw, qualify, amend or modify the PFG recommendation (“PFG subsequent determination”) after the fifth business day following SmartFinancial’s receipt of a notice (the “notice of superior proposal”) from PFG advising SmartFinancial that the board of directors of PFG has decided that a bona fide unsolicited written acquisition proposal that it received (that did not result from a breach of the merger agreement) constitutes a superior proposal if, but only if, (i) the board of directors of PFG has determined in good faith, after consultation with and having considered the advice of outside legal counsel and its financial advisor, that the failure to take such actions more likely than not would cause it to violate its fiduciary duties to PFG’s shareholders under applicable law, (ii) during the five business day period after receipt of the notice of superior proposal by SmartFinancial (the “notice period”), PFG and the board of directors of PFG shall have cooperated and negotiated in good faith with SmartFinancial to make such adjustments, modifications or amendments to the terms and conditions of the merger agreement as would enable PFG to proceed with the PFG recommendation in favor of the merger with SmartFinancial without a PFG subsequent determination; provided, however, that SmartFinancial does not have any obligation to propose any adjustments, modifications or amendments to the terms and conditions of the merger agreement and (iii) at the end of the notice period, after taking into account any such adjusted, modified or amended terms as may have been proposed by SmartFinancial since its receipt of such notice of superior proposal, the board of directors of PFG has again in good faith made the determination that such acquisition proposal constitutes a superior proposal. In the event of any material revisions to the superior proposal, PFG is required to deliver a new notice of superior proposal to SmartFinancial and again comply with the foregoing requirements, except that the notice period will be reduced to three business days.

 

Notwithstanding any PFG subsequent determination, the merger agreement will be submitted to PFG’s shareholders at the PFG special meeting for the purpose of voting on the approval of the merger proposal and nothing contained in the merger agreement will be deemed to relieve PFG of such obligation; providedhowever, that if the board of directors of PFG makes a PFG subsequent determination with respect to a superior proposal, then the board of directors of PFG may recommend approval of such superior proposal by the shareholders of PFG and may submit the merger proposal to PFG’s shareholders without recommendation, in which event the board of directors of PFG will communicate the basis for its recommendation of such superior proposal and the basis for its lack of a recommendation with respect to the merger proposal to PFG’s shareholders in an appropriate amendment or supplement to this proxy statement/prospectus.

 

Conditions to Completion of the Merger

 

The completion of the merger depends on a number of conditions being satisfied or, where permitted, waived, including:

 

·the required approval by the shareholders of PFG;

 

·the receipt of all regulatory approvals, or expiration or termination of all statutory waiting periods in respect thereof, required to consummate the transactions contemplated by the merger agreement, without any burdensome conditions (as such term is defined in the merger agreement);

 

·the absence of any judgment, order, injunction or decree issued by any court or agency of competent jurisdiction or other law preventing or making illegal the consummation of the merger, the bank merger or the other transactions contemplated by the merger agreement;

 

·the effectiveness of the registration statement on Form S-4, of which this proxy statement/prospectus is a part, under the Securities Act;

 

·the receipt by SmartFinancial and PFG from their respective tax counsel of a U.S. federal income tax opinion, dated the closing date of the merger, that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code;

 

·the accuracy, subject to varying degrees of materiality, of SmartFinancial’s and PFG’s respective representations and warranties in the merger agreement on the date of the merger agreement and as of the effective time of the merger (or such other date specified in the merger agreement);

 

·performance in all material respects by SmartFinancial and PFG of their respective obligations under the merger agreement;

 

·the Plan of Bank Merger is executed and delivered;

 

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·less than 7.5% of the outstanding shares of PFG common stock validly exercise, or remain entitled to exercise, their dissenters’ rights;

 

·the disposition of PFG’s holdings of the common stock of Upper Cumberland Bancshares, Inc. (which was completed on November 19, 2019);

 

·the dissolution of certain PFG subsidiaries that hold real property (The Cove at Little Island, LLC, Horse Creek Holdings LLC, Progressive Funding, Inc., and Cumberland Mountain Preserve/East First Street, LLC); and the transfer of any real property held by such entities to Progressive Savings Bank;

 

·the shares of SmartFinancial common stock to be issued in connection with the transactions contemplated by this Agreement shall be approved for listing on the NASDAQ;

 

·the entry of certain employees of PFG and its subsidiaries into new employment arrangements;

 

·the absence of any event which has resulted in a material adverse effect on the other party, and the absence of any condition, event, fact, circumstance or other occurrence that is reasonably expected to have a material adverse effect on the other party.

 

No assurance is given as to when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed.

 

Termination

 

The merger agreement may be terminated at any time prior to the effective time of the merger:

 

·by mutual written consent of SmartFinancial and PFG;

 

·by SmartFinancial or PFG if any regulatory approval required for consummation of the transactions contemplated by the merger agreement has been denied by final non-appealable action by the relevant governmental authority or any application for such regulatory approval shall have been permanently withdrawn at the request of a governmental authority;

 

·by SmartFinancial or PFG if the approval of the shareholders of PFG is not obtained;

 

·by SmartFinancial or PFG in the event of a material breach by the other party of any representation, warranty or covenant contained in the merger agreement and such breach is not cured prior to the earlier of thirty days of notice of the breach or two business days prior to the expiration date of the merger agreement and the terminating party is not itself in material breach;

 

·by SmartFinancial or PFG if the merger is not consummated on or before June 30, 2020, subject to automatic extension to September 30, 2020 if the only outstanding condition to closing is the receipt of regulatory approvals, which we refer to as the expiration date;

 

·by SmartFinancial if PFG materially breaches its covenant not to solicit other offers;

 

·by SmartFinancial if PFG withdraws, qualifies, amends, modifies or withholds its recommendation to its shareholders to approve the merger and the merger agreement, or makes any statement, filing or release, in connection with the shareholder meeting or otherwise, inconsistent with its recommendation (it being understood that taking a neutral position or no position with respect to an acquisition proposal shall be considered an adverse modification of its recommendation);

 

·by SmartFinancial if PFG fails to properly call, give notice of, and commence a meeting of shareholders to vote on the merger;

 

·by SmartFinancial if PFG approves or recommends an acquisition proposal;

 

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·by SmartFinancial if PFG fails to publicly recommend against a publicly announced acquisition proposal within five business days of such proposal being announced or fails to publicly reconfirm its recommendation to its shareholders within three business days of being requested to do so by SmartFinancial;

 

·by PFG if PFG’s board of directors determines to enter into a definitive agreement with respect to a superior proposal in accordance with the terms of the merger agreement, but only if PFG pays to SmartFinancial the $2,000,000 termination fee.

 

Termination Fee

 

PFG will pay SmartFinancial a termination fee equal to $2,000,000 in the event of any of the following:

 

·SmartFinancial terminates the merger agreement because: (i) PFG materially breached its covenant not to solicit other offers; (ii) PFG withdrew, qualified, amended, modified or withheld its recommendation to its shareholders to approve the merger and the merger agreement to its shareholders, or made any statement, filing or release, in connection with the shareholder meeting or otherwise, inconsistent with its recommendation (it being understood that taking a neutral position or no position with respect to an acquisition proposal shall be considered an adverse modification of its recommendation); (iii) PFG failed to properly call, give notice of, and commence a meeting of shareholders to vote on the merger; (iv) PFG approved or recommended an acquisition proposal; (v) PFG failed to publicly recommend against a publicly announced acquisition proposal within five (5) business days of such proposal being announced or failed to publicly reconfirm its recommendation to its shareholders within (3) business days of being requested to do so by SmartFinancial; or (vi) PFG resolved or otherwise determined to take, or announced an intention to take, any of the foregoing actions;

 

·in the event that after the date of the merger agreement and prior to the termination of the merger agreement, an acquisition proposal was made known to senior management of PFG or has been made directly to PFG’s shareholders generally or an acquisition proposal shall have been publicly announced (and not withdrawn), and (i) the merger agreement is terminated by (A) SmartFinancial or PFG because the requisite PFG shareholder approval was not obtained or (B) SmartFinancial because of PFG’s material breach of its representations and warranties or covenants in the merger agreement, and (ii) prior to the date within 12 months of such termination, PFG enters into any agreement or consummates a transaction with respect to an acquisition proposal (whether or not it’s the same acquisition proposal as that referred to above);

 

·PFG terminates the merger agreement at any time before the receipt of PFG shareholder approval for the purpose of entering into an acquisition agreement with respect to a superior proposal in compliance with the terms of the merger agreement.

 

Effect of Termination

 

A termination of the merger agreement will not relieve a breaching party from liability for any breach of any covenant, agreement, representation or warranty of the merger agreement giving rise to such termination or resulting from fraud or any willful and material breach. Notwithstanding the foregoing, the parties have agreed that if PFG pays or causes to be paid to SmartFinancial the termination fee in accordance with the merger agreement, PFG (or any successor in interest of PFG) will not have any further obligations or liabilities to SmartFinancial with respect to the merger agreement or the transactions contemplated by it.

 

Amendment; Waiver

 

Prior to the effective time of the merger and to the extent permitted by applicable law, any provision of the merger agreement may be (a) waived by the party benefitted by the provision, provided the waiver is in writing and signed by such party, or (b) amended or modified at any time, by an agreement in writing between the parties, except that after the PFG special meeting no amendment may be made which by law requires further approval by the shareholders of SmartFinancial or PFG without obtaining such approval.

 

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Expenses

 

All expenses incurred in connection with the merger, the bank merger, the merger agreement and other transactions contemplated thereby, including fees and expenses of financial consultants, accountants and counsel, will be paid by the party incurring the expenses. Nothing in the merger agreement limits either party’s rights to recover any liabilities or damages arising out of the other party’s willful breach of any provision of the merger agreement.

 

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ANCILLARY AGREEMENTS

 

Voting Agreements

 

In connection with, and as a condition to, entering into the merger agreement, each of the directors of PFG and Progressive Bank who hold shares of PFG common stock entered into a voting agreement with SmartFinancial. The following summary of the voting agreements is subject to, and qualified in its entirety by reference to, the form voting agreement attached as Exhibit A to the merger agreement attached as Annex A to this document.

 

Pursuant to the voting agreements, each party to a voting agreement has agreed to appear at the PFG special meeting (in person or by proxy) and to vote his or her shares of PFG common stock:

 

·in favor of adoption and approval of the merger agreement and the approval of the merger and the other transactions contemplated by the merger agreement;

 

·in favor of any proposal to adjourn or postpone such meeting, if necessary, to solicit additional proxies to approve the merger agreement and the merger;

 

·against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of PFG contained in the merger agreement;

 

·against any acquisition proposal other than the merger; and

 

·against any other action, agreement or transaction that is intended, or could reasonably be expected, to impede, interfere or be inconsistent with, delay, postpone, discourage or materially and adversely affect consummation of the transactions contemplated by the merger agreement.

 

In addition, the voting agreements provide that each shareholder party to a voting agreement will not:

 

·directly or indirectly sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option, commitment or other arrangement or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, any of such shareholder’s shares of PFG common stock; and

 

·(i) initiate, solicit, induce or knowingly encourage, or take any action to facilitate the making of, any inquiry, offer or proposal which constitutes, or could reasonably be expected to lead to, an acquisition proposal, (ii) participate in any discussions or negotiations regarding any acquisition proposal or furnish, or otherwise afford access, to any person (other than SmartFinancial) any information or data with respect to PFG or any of its subsidiaries or otherwise relating to an acquisition proposal, (iii) enter into any agreement, agreement in principle or letter of intent with respect to any acquisition proposal or approve or resolve to approve any acquisition proposal or any agreement, agreement in principle or letter of intent relating to an acquisition proposal, (iv) solicit proxies with respect to an acquisition proposal or otherwise encourage or assist any party in taking or planning any action that would compete with, restrain or otherwise serve to interfere with or inhibit the timely consummation of the merger in accordance with the terms of the merger agreement, or (v) initiate a shareholders’ vote or action by consent of PFG’s shareholders with respect to an acquisition proposal.

 

The voting agreements will automatically terminate upon the earlier of (i) the effective date of the merger, (ii) the amendment of the merger agreement in any manner that materially and adversely affects any of the shareholder’s rights set forth in the merger agreement, (iii) termination of the merger agreement, or (iv) two years from the date the voting agreements are executed.

 

As of the record date, shareholders who are party to the voting agreements beneficially owned and were entitled to vote an aggregate of approximately 12,177.161 shares of PFG common stock, which represented approximately 58.8% of the shares of PFG common stock outstanding on that date.

 

Non-Competition and Non-Disclosure Agreements

 

In addition to the voting agreements, as a condition to SmartFinancial entering into the merger agreement, each of the directors of PFG and Progressive Bank entered into a non-competition and non-disclosure agreements with SmartFinancial. The following summary of the non-competition and non-disclosure agreements is subject to, and qualified in its entirety by reference to, the form of non-competition and non-disclosure agreement attached as Exhibit C to the merger agreement attached as Annex A to this document.

 

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Each party to a non-competition and non-disclosure agreement has agreed to, among other things:

  

·from and after the effective time of the merger, not disclose or use any confidential information or trade secrets of PFG for any purpose for so long as such information remains confidential information or a trade secret, except as required by law; and

 

·for a period of two years following the closing the merger:

 

·not solicit or attempt to solicit any customers of SmartFinancial, SmartBank, PFG or Progressive Bank, including actively sought prospective customers of Progressive Bank as of the effective time of the merger; and

 

·on such director’s own behalf or on behalf of others, not solicit or recruit or attempt to solicit or recruit any employee (full-time or temporary) of SmartFinancial, SmartBank, PFG or Progressive Bank;

 

·directly on the director’s own behalf or on behalf any other person, not act as a director, manager, officer, or employee of any banking business that is the same or essentially the same as the banking business conducted by SmartFinancial, SmartBank or PFG or Progressive Bank and that has a banking office located within any county in Tennessee where Progressive Bank operates a banking office as of the closing of the merger and each county contiguous to each of such counties (except that one director, Gary Hicks, is not bound by this non-competition covenant).

 

The restrictions in the non-competition and non-disclosure agreements will automatically terminate upon the earlier of (i) the termination of the merger agreement, (ii) two years after the effective date of the merger, or (iii) upon a change in control of SmartFinancial.

 

Claims Letters

 

At the time of the execution of the merger agreement, and effective upon the closing of the merger, each director of PFG and Progressive Bank executed a claims letter with SmartFinancial. The following summary of the claims letters is subject to, and qualified in its entirety by reference to, the claims letter attached as Exhibit D to the merger agreement attached as Annex A to this document.

 

Pursuant to the claims letter, each director of PFG and Progressive Bank released and discharged, effective upon the consummation of the merger, PFG and its subsidiaries, their respective directors and officers (in their capacities as such), and their respective successors and assigns (including SmartFinancial and SmartBank), of and from any and all liabilities or claims that such director has or claims to have, or previously had or claimed to have, solely in his or her capacity as an officer, director or employee of PFG or any of its subsidiaries, as of the effective time of the merger. The release does not apply to (i) compensation for services that has accrued but not yet been paid in the ordinary course of business consistent with past practice; (ii) claims that the director may have in any capacity other than as an officer, director or employee of PFG or any of its subsidiaries, such as claims as a borrower under loan commitments and agreements, claims as a depositor under any deposit account with or as the holder of any certificate of deposit issued by Progressive Bank, claims on account of any services rendered by the director in a capacity other than as an officer, director or employee of PFG or any of its subsidiaries, claims in his or her capacity of a shareholder of PFG and claims as a holder of any check issued by any other depositor of Progressive Bank; (iii) any claims that the director may have under the merger agreement; or (iv) any right to indemnification that the director may have under the PFG Charter or PFG Bylaws or similar documents or any of its subsidiaries, Tennessee law or the merger agreement.

 

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THE COMPANIES

 

SmartFinancial, Inc.

 

Overview

 

SmartFinancial was incorporated on September 19, 1983, under the laws of the State of Tennessee. SmartFinancial is a bank holding company registered under the Bank Holding Company Act, as amended.

 

The primary activity of SmartFinancial currently is, and is expected to remain for the foreseeable future, the ownership and operation of SmartBank. As a bank holding company, SmartFinancial intends to facilitate SmartBank’s ability to serve its customers’ requirements for financial services. The holding company structure also provides flexibility for expansion through the possible acquisition of other financial institutions and the provision of additional banking-related services, as well as certain non-banking services, which a traditional commercial bank may not provide under present laws.

 

Mergers

 

SmartFinancial and Cornerstone Merger

 

In 2015, SmartFinancial operated under the name Cornerstone Bancshares, Inc., and it merged with legacy SmartFinancial, Inc. (which we refer to as “Legacy SmartFinancial”) (which merger we refer to the merger as the “2015 merger”). Cornerstone Bancshares was the survivor of the 2015 merger, and immediately following that transaction, the company changed its name to “SmartFinancial, Inc.” and relocated its headquarters to Knoxville, Tennessee. Following the 2015 merger, Cornerstone Community Bank merged with and into SmartBank, with SmartBank surviving the merger.

 

Capstone Merger

 

On May 22, 2017, SmartFinancial’s shareholders approved a merger with Capstone Bancshares, Inc. (which we refer to as “Capstone”), the one bank holding company of Capstone Bank, which was consummated on November 1, 2017 (which merger we refer to as the “Capstone merger”). In connection with the Capstone merger, Capstone shareholders received either stock, cash, or a combination of stock and cash. After the Capstone merger, shareholders of SmartFinancial owned approximately 74 percent of the outstanding common stock of the combined entity on a fully diluted basis. The assets and liabilities of Capstone as of the effective date of the merger were recorded at their respective estimated fair values and combined with those of SmartFinancial. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill, which was approximately $38 million. As a result of the Capstone merger, SmartFinancial’s assets increased approximately $536 million and liabilities increased approximately $466 million.

 

Tennessee Bancshares Merger

 

On May 1, 2018, SmartFinancial consummated its merger with Tennessee Bancshares (which merger we refer to as the “Tennessee Bancshares merger”), pursuant to which Tennessee Bancshares merged with and into SmartFinancial, with SmartFinancial continuing as the surviving corporation. Immediately following the Tennessee Bancshares merger, Southern Community Bank, the wholly owned subsidiary of Tennessee Bancshares, merged with and into SmartBank, with SmartBank continuing as the surviving banking corporation.

 

In connection with the Tennessee Bancshares merger, each outstanding share of Tennessee Bancshares common stock was converted into and cancelled in exchange for 0.8065 shares of SmartFinancial common stock. SmartFinancial issued approximately 1,459,186 shares of SmartFinancial common stock as consideration for the Tennessee Bancshares merger. After the merger, shareholders of SmartFinancial owned approximately 88 percent of the outstanding common stock of the combined entity on a fully diluted basis. The assets and liabilities of Tennessee Bancshares as of the effective date of the merger were recorded at their respective estimated fair values and combined with those of Smart Financial. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill, which was approximately $8 million. As a result of the merger, SmartFinancial’s assets increased approximately $237 million and liabilities increased approximately $216 million. SmartFinancial is a community-focused financial institution that offers a full range of financial services to individuals, businesses, municipal entities, and nonprofit organizations in the communities that it serves. These services include consumer and commercial loans, deposit accounts, trust services, safe deposit services and brokerage services.

 

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Foothills Bancorp Merger

 

On November 1, 2018, SmartFinancial consummated its merger with Foothills Bancorp, Inc. (which merger we refer to as the “Foothills Bancorp Merger”), pursuant to which Foothills Bancorp, Inc. merged with and into SmartFinancial, with SmartFinancial continuing as the surviving corporation. Immediately following the Foothills Bancorp merger, Foothills Bank & Trust, the wholly owned subsidiary of Foothills Bancorp, merged with and into SmartBank, with SmartBank continuing as the surviving banking corporation.

 

In connection with the Foothills Bancorp merger, each share of Foothills Bancorp, Inc. common stock outstanding immediately prior to the merger was converted into the right to receive $1.75 in cash and 0.666 share of SmartFinancial common stock. After the Foothills Bancorp merger, shareholders of SmartFinancial owned approximately 91 percent of the outstanding common stock of the combined entity on a fully diluted basis while the previous Foothills Bancorp shareholders owned approximately 9 percent. The assets and liabilities of Foothills Bancorp, as of the effective date of the Foothills Bancorp merger, were recorded at their respective estimated fair values and combined with those of the Company. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities was allocated to identifiable intangible assets with the remaining excess allocated to goodwill, which was approximately $7.5 million. As a result of the merger the Company assets increased approximately $218 million and liabilities increased approximately $196 million

 

SmartFinancial and its subsidiaries are subject to comprehensive regulation, examination and supervision by the Federal Reserve Board and the TDFI, and are subject to numerous laws and regulations relating to their operations, including, among other things, permissible activities, capital adequacy, reserve requirements, standards for safety and soundness, internal controls, consumer protection, anti-money laundering, and privacy and data security.

 

SmartFinancial’s headquarters are located at 5401 Kingston Pike, Suite 600, Knoxville, Tennessee 37919 and its telephone number is (865) 437-5700. SmartFinancial’s website can be found at www.smartfinancialinc.com. The contents of SmartFinancial’s website are not incorporated into this proxy statement/prospectus.

 

For more information about SmartFinancial’s business, see “Where You Can Find More Information” below.

 

Progressive Financial Group Inc.

 

Progressive Financial Group Inc. is a business corporation incorporated on May 9, 2016 under the laws of the State of Tennessee for the purpose of acquiring the Progressive Savings Bank by means of a share exchange (completed on October 17, 2016), and becoming a registered bank holding company under the Federal Reserve Act. In 2016, PFG also acquired 23.3% of another bank holding company, Upper Cumberland Bancshares, Inc., which owns two banks, People's Bank and Trust Company of Pickett County, Byrdstown, Tennessee, and People's Bank and Trust Company of Clinton County, Albany, Kentucky (these shares were redeemed by Upper Cumberland Bancshares, Inc. on November 19, 2019). The activities of PFG are subject to the supervision of the Federal Reserve Board and the TDFI.

 

Progressive Savings Bank (“Progressive Bank”) is a state bank chartered in Tennessee. Progressive Bank conducts a full service commercial banking business from its main office in Jamestown, Fentress County, Tennessee. Among Progressive Bank's business services are lending, leasing checking accounts, certificates of deposit, and depository services. These services are performed for individuals, business enterprises, other banks and financial institutions and nonprofit corporations. All of the Progressive Bank’s products and services are directly or indirectly related to the business of community banking, and all activity is reported as one segment of operations. Progressive Bank is not a member of the Federal Reserve System. Supervision and regulation is similar to that described for SmartFinancial (see “Information about SmartFinancial - Business of the Company; Supervision and Regulation”).

 

As of the Record Date, Progressive Bank has 116 full time employees. Progressive Bank considers its relationship with its employees to be excellent.

 

The main offices of Progressive Bank are presently located in an office building on 500 N. Main Street, Jamestown, Tennessee 38556. Progressive Bank operates branch offices at the following locations: 705 Main Street, Wartburg, Tennessee 37887; 1080 Interstate Drive, Cookeville, Tennessee 38501; 807 N. Main Street, Crossville, Tennessee 38555; 1760 S. Main Street, Crossville, Tennessee 38555; and 4929 Peavine Road, Crossville, Tennessee 38571.

 

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As of September 30, 2019, Progressive Bank had total assets of approximately $296 million, total deposits of $258 million, and total shareholders’ equity of approximately $30 million. Progressive Bank files periodic reports and other information relating to its business, financial statements and other matters with the FDIC and the Commissioner of Financial Institutions of the State of Tennessee. Such reports and other information may be obtained upon written request to the Federal Deposit Insurance Corporation, 3501 North Fairfax Drive, Room E-1002, Arlington, Virginia 22226, Attention: Public Information Center, or by calling the FDIC at (877) 275-3342 or (703) 562-2200. The non-confidential portions of Progressive Bank’s Call Reports are also available on the internet website of the Federal Financial Institutions Examinations Council (the “FFIEC”). The address of the FFIEC’s internet website is https://cdr.ffiec.gov/public.

 

As is the case with banking institutions generally, Progressive Bank’s operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the FRB and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds.

 

Progressive Bank’s primary banking markets consist of Cumberland, Fentress, Morgan, and Putnam Counties in Tennessee. The commercial banking environment is highly competitive, and Progressive Bank encounters strong competition both in making loans and in attracting deposits. In one or more aspects of its business, Progressive Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Many of these competitors have substantially greater resources and lending limits, have more extensive and established branch networks, and offer certain products or services that Progressive Bank does not currently provide. Additionally, many of Progressive Bank’s non-bank competitors are not subject to the same extensive federal regulations that govern federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

 

Progressive Bank is from time to time a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens and claims relating to the servicing or collection of real estate and other loans. As of the date of this proxy statement/prospectus, Progressive Bank is not a party to or otherwise involved in any legal proceedings that Progressive Bank’s management believes are material to Progressive Bank's business, financial condition, or results of operations.

 

Other major operating subsidiaries of PFG include:

 

Rains Agency Inc., which in 1927, began operations as a one-man office offering a few insurance lines. More than 90 years later, the Rains Agency is an independent agency offering a full line of personal, commercial, property and casualty, and life and health lines to help protect the lives and interests of its friends and customers. The agency represents companies such as AllState, Westfield, Auto-Owners, SafeCo, Cincinnati, Blue Cross/Blue Shield, New York Life, and John Hancock, allowing its customers the ability to shop several companies with one phone call. The Rains Agency officially joined the Progressive family in 1995.

 

Cravens & Company Advisors, LLC ("CCA") was created and registered as an independent investment advisory firm in 2003. With experience in the fields of investments, financial, and estate planning, insurance, tax, and law, CCA brings a depth of perspective in creating comprehensive financial solutions for successful entrepreneurs, medical professionals, retirees, and their families. CCA officially joined the Progressive family in March of 2007. This has allowed Progressive Bank to offer yet another valuable relationship to its clients — wealth management services.

 

Progressive Tax and Accounting LLC is a full-service accounting firm providing accounting services, tax compliance, and business consulting. Because it is a small firm, the firm maintains close and open relationships with each of its clients. The firm's commitment is to provide the highest quality services while retaining a small-town atmosphere. Progressive Tax and Accounting LLC officially joined the Progressive family in November 2016.

 

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PFG also has four non-operating subsidiaries -- The Cove at Little Island, Inc., Horse Creek Holdings, LLC, Cumberland Mountain Preserve East First Street, Inc., and Progressive Funding, Inc. – each of which has historically held only real estate assets or no assets at all. PFG is in the process of winding up The Cove at Little Island, Inc., Horse Creek Holdings, LLC, and Cumberland Mountain Preserve East First Street, Inc.

 

Pursuant to the Merger Agreement, prior to the closing, PFG will must (1) sell its holdings in Upper Cumberland Bancshares, Inc., and (2) dissolve The Cove at Little Island, Inc., Horse Creek Holdings, LLC, and Cumberland Mountain Preserve East First Street, Inc. and transfer the real estate held by those entities to Progressive Savings Bank. Additionally, the Merger Agreement requires PFG to cooperate with SmartFinancial in good faith regarding the sale of Progressive Tax and Accounting LLC and CCA. On November 19, 2019, PFG completed the sale of its holdings in Upper Cumberland Bancshares, Inc. common stock, resulting in an aggregate loss of $27,160.00.

 

DESCRIPTION OF CAPITAL STOCK

 

As a result of the merger, PFG shareholders who receive shares of SmartFinancial common stock in the merger will become shareholders of SmartFinancial. Your rights as shareholders of SmartFinancial will be governed by Tennessee law and the SmartFinancial Charter and the SmartFinancial Bylaws. The following briefly summarizes the material terms of SmartFinancial common stock. We urge you to read the applicable provisions of the Tennessee Business Corporation Act, or the TBCA, the SmartFinancial Charter and SmartFinancial Bylaws and federal laws governing bank holding companies carefully and in their entirety. Copies of SmartFinancial’s governing documents have been filed with the SEC. To obtain copies of these documents, see “Where You Can Find More Information.” SmartFinancial common stock is listed on the NASDAQ Capital Market under the symbol “SMBK.”

 

Common Stock

 

Authorized.   SmartFinancial has 40,000,000 shares of authorized common stock, $1.00 par value. As of December 18, 2019, there were 14,002,658 shares of common stock outstanding (inclusive of 34,000 unvested shares of restricted stock having voting rights).

 

Voting Rights; Cumulative Voting.   The outstanding shares of SmartFinancial common stock are fully paid and nonassessable. Holders of SmartFinancial common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Holders of SmartFinancial common stock do not have preemptive rights and are not entitled to cumulative voting rights with respect to the election of directors. SmartFinancial’s common stock is neither redeemable nor convertible into other securities, and there are no sinking fund provisions with respect to the common stock.

 

Subject to the preferences applicable to any shares of SmartFinancial preferred stock outstanding at the time, holders of common stock are entitled to, in the event of liquidation, share pro rata in all assets remaining after payment of liabilities.

 

Board of Directors. The business of SmartFinancial is controlled by a board of directors, which is elected by a non-cumulative vote of the common shareholders. Currently, the SmartFinancial board of directors consists of 12 individuals. SmartFinancial’s bylaws provide that the power to increase or decrease the number of directors and to fill vacancies is vested in SmartFinancial’s board of directors. The overall effect of this provision may be to prevent a person or entity from seeking to acquire control of SmartFinancial through an increase in the number of directors on the board of directors and the election of designated nominees to fill newly created vacancies.

 

Dividends. Holders of SmartFinancial common stock are entitled to receive dividends when, as and if declared by SmartFinancial’s board of directors out of funds legally available for dividends. In order to pay any dividends, SmartFinancial generally must receive dividends from SmartBank. Under the Tennessee Banking Act, SmartBank is subject to restrictions on the payment of dividends to SmartFinancial. Pursuant to these laws, SmartBank may only make a dividend from the surplus profits arising from the business of the bank, and may not declare dividends in any calendar year that exceeds the total of its retained net income of that year combined with its retained net income of the preceding two years without the prior approval of the commissioner of the TDFI. Moreover, Tennessee laws regulating SmartBank requires certain charges against and transfers from SmartBank’s undivided profit account before undivided profits can be made available for the payment of dividends. Furthermore, the TDFI also has the authority to prohibit the payment of dividends by SmartBank if it determines such payment to be an unsafe and unsound banking practice. SmartFinancial has not paid dividends to its common shareholders during the last three years. SmartFinancial’s ability to pay dividends to shareholders in the future will depend on its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, SmartFinancial’s ability to service any equity or debt obligations senior to SmartFinancial’s common stock and other factors deemed relevant by SmartFinancial’s board of directors.

 

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The principal source of funds from which SmartFinancial pays cash dividends are the dividends received from its bank subsidiary, SmartBank. Consequently, dividends are dependent upon SmartBank’s earnings, capital needs, and regulatory policies, as well as statutory and regulatory limitations. Federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Approval by SmartFinancial’s regulators is required if the total of all dividends declared in any calendar year exceeds the total of its net income for that year combined with its retained net income of the preceding two years.

 

Under certain conditions, dividends paid to SmartFinancial by SmartBank are subject to approval by the TDFI. In addition, under the Federal Deposit Insurance Corporation Improvement Act, banks may not pay a dividend if, after paying the dividend, the bank would be undercapitalized.

 

Preemptive Rights; Liquidation.   SmartFinancial common stock does not carry any preemptive rights enabling a holder to subscribe for or receive shares of SmartFinancial common stock. In the event of liquidation, holders of SmartFinancial common stock are entitled to share in the distribution of assets remaining after payment of debts and expenses and after required payments to holders of SmartFinancial preferred stock, if any such shares are outstanding. There are no redemption or sinking fund provisions applicable to SmartFinancial common stock.

 

Preferred Stock

 

SmartFinancial’s charter authorizes the issuance of up to 2,000,000 shares of preferred stock, par value $1.00 per share. No shares of preferred stock are currently outstanding. The preferred stock may be issued by vote of the board of directors without shareholder approval. The preferred stock may be issued in one or more classes and series, with such designations, voting rights (or without voting rights), redemption, conversion or sinking fund provisions, dividend rates or provisions, liquidation rights, and other preferences and limitations as the board of directors may determine in the exercise of its business judgment. The preferred stock may be issued by the board of directors for a variety of reasons.

 

The preferred stock could be issued in public or private transactions in one or more (isolated or series of) issues. The shares of any issue of preferred stock could be issued with rights, including voting, dividend, and liquidation features, superior to those of any issue or class of shares, including the shares of common stock to be issued pursuant to the merger. The issuance of shares of the preferred stock could serve to dilute the voting rights or ownership percentage of the holders of common stock. The issuance of preferred stock might also serve to deter or block any attempt to obtain control of SmartFinancial or to facilitate any such attempt.

 

Anti-Takeover Statutes

 

The Tennessee Control Share Acquisition Act generally provides that, except as stated below, “control shares” will not have any voting rights. Control shares are shares acquired by a person under certain circumstances which, when added to other shares owned, would give such person effective control over one-fifth, one-third, or a majority of all voting power in the election of a Tennessee corporation’s directors. Shares acquired by such person that causes it to exceed each of these thresholds will be deemed to be control shares. However, voting rights may be restored to control shares by resolution approved by the affirmative vote of the holders of a majority of the corporation’s voting stock, other than shares held by the owner of the control shares. If voting rights are granted to control shares which give the holder a majority of all voting power in the election of the corporation’s directors, then the corporation’s other shareholders may require the corporation to redeem their shares at fair value.

 

The Tennessee Control Share Acquisition Act is not applicable to SmartFinancial because SmartFinancial’s charter does not contain a specific provision “opting in” to the act as is required under the act.

 

The Tennessee Business Combination Act generally prohibits a “business combination” by a Tennessee corporation with an “interested shareholder” within five years after such shareholder becomes an interested shareholder. The corporation can, however, enter into a business combination within that period if, before the interested shareholder became such, the corporation’s board of directors approved the business combination or the transaction in which the interested shareholder became an interested shareholder. After that five-year moratorium, the business combination with the interested shareholder can be consummated only if it satisfies certain fair price criteria or is approved by two-thirds of the other shareholders.

 

For purposes of the Tennessee Business Combination Act, a “business combination” includes mergers, share exchanges, sales and leases of assets, issuances of securities, and similar transactions. An “interested shareholder” is generally any person or entity that beneficially owns 10% or more of the voting power of any outstanding class or series of stock of the corporation. SmartFinancial’s charter does not have special requirements for transactions with interested parties; however, under the Tennessee Business Corporation Act, with exceptions, all mergers and similar transactions must be approved by a majority of SmartFinancial’s board of directors and a majority of the shares entitled to vote.

 

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The Tennessee Business Combination Act applies to SmartFinancial, because neither SmartFinancial’s charter nor its bylaws expressly provide that the company will not be subject to the act as is required under the act.

 

The Tennessee Greenmail Act applies to a Tennessee corporation, such as SmartFinancial, that has a class of voting stock registered or traded on a national securities exchange or registered with the SEC pursuant to Section 12(g) of the Exchange Act. Under the Tennessee Greenmail Act, SmartFinancial may not purchase any of its shares at a price above the market value of such shares from any person who holds more than 3% of the class of securities to be purchased if such person has held such shares for less than two years, unless the purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by SmartFinancial or SmartFinancial makes an offer, of at least equal value per share, to all shareholders of such class.

 

Anti-Takeover Provisions

 

General. Our charter and bylaws, as well as the Tennessee Business Corporation Act, contain certain provisions designed to enhance the ability of our board of directors to deal with attempts to acquire control of us. These provisions may be deemed to have an anti-takeover effect and may discourage takeover attempts which have not been approved by the board of directors (including takeovers which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the market price of common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even though such transaction may be favorable to the interests of shareholders, and could potentially adversely affect the market price of our common stock.

 

The following briefly summarizes protective provisions that are contained in our charter and bylaws and which are provided by the Tennessee Business Corporation Act. This summary is necessarily general and is not intended to be a complete description of all the features and consequences of those provisions and is qualified in its entirety by reference to our charter and bylaws and the statutory provisions contained in the Tennessee Business Corporation Act.

 

Authorized but Unissued Stock. The authorized but unissued shares of common stock and preferred stock will be available for future issuance without shareholder approval. These additional shares may be used for a variety of corporate purposes, including future private or public offerings to raise additional capital, corporate acquisitions, and employee benefit plans. The existence of authorized but unissued and unreserved shares of common stock and preferred stock may enable the board of directors to issue shares to persons friendly to current management, which could render more difficult or discourage any attempt to obtain control of us by means such as a proxy contest, tender offer, or merger, and thereby protect the continuity of the company’s management.

 

Removal of Directors and Filling Vacancies. Our charter and bylaws provide that a director may be removed from office prior to the expiration of such director’s term only for cause at a meeting called for such purpose. Our bylaws provide that all vacancies on our board may be filled by the board of directors for the unexpired term.

 

Advance Notice Requirements for Shareholder Proposals. Our bylaws establish advance notice procedures with regard to shareholder proposals. These procedures provide that the shareholder must submit certain information regarding the proposal, together with the proposal itself, to our corporate secretary in advance of the annual meeting. Shareholders submitting proposals for inclusion in our proxy statement must comply with the proxy rules under the Exchange Act. We may reject a shareholder proposal that is not made in accordance with such procedures.

 

Certain Nomination Requirements. Pursuant to our bylaws, we have established certain nomination requirements for an individual to be elected as a director at any annual or special meeting of the shareholders, including that the nominating party provide us within a specified time prior to the meeting (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of SmartFinancial stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC, had the nominee been nominated, or intended to be nominated, by the board of directors; and (v) the consent of each nominee to serve as a director of the Company if so elected. These provisions could reduce the likelihood that a third party would nominate and elect individuals to serve on our board of directors.

 

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Business Combinations with Interested Shareholders. The Tennessee business combinations statute provides that a 10% or greater shareholder of a resident domestic corporation cannot engage in a “business combination” (as defined in the statute) with such corporation for a period of two years following the date on which the 10% shareholder became such, unless the business combination or the acquisition of shares is approved by a majority of the disinterested members of such corporation’s board of directors before the 10% shareholder’s share acquisition date. This statute further provides that at no time (even after the two-year period subsequent to such share acquisition date) may the 10% shareholder engage in a business combination with the relevant corporation unless certain approvals of the board of directors or disinterested shareholders are obtained or unless the consideration given in the combination meets certain minimum standards set forth in the statute. The law is very broad in its scope and is designed to inhibit unfriendly acquisitions but it does not apply to corporations whose charter contains a provision electing not to be covered by the law. Our charter does not contain such a provision. An amendment of our charter to that effect would, however, permit a business combination with an interested shareholder even though that status was obtained prior to the amendment.

 

Indemnification. The Tennessee Business Corporation Act provides that a corporation may indemnify any of its directors and officers against liability incurred in connection with a proceeding if (i) the director or officer acted in good faith, (ii) in the case of conduct in his or her official capacity with the corporation, the director or officer reasonably believed such conduct was in the corporation’s best interest, (iii) in all other cases, the director or officer reasonably believed that his or her conduct was not opposed to the best interest of the corporation, and (iv) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the Tennessee Business Corporation Act provides that no indemnification may be made if the director or officer was adjudged to be liable to the corporation. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as an officer or director of a corporation, the Tennessee Business Corporation Act mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. The Tennessee Business Corporation Act also provides that in connection with any proceeding charging improper personal benefit to an officer or director, no indemnification may be made if such officer or director is adjudged liable on the basis that personal benefit was improperly received. Notwithstanding the foregoing, the Tennessee Business Corporation Act provides that a court of competent jurisdiction, upon application, may order that an officer or director be indemnified for reasonable expenses if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, notwithstanding the fact that (i) such officer or director was adjudged liable to the corporation in a proceeding by or in right of the corporation, (ii) such officer or director was adjudged liable on the basis that personal benefit was improperly received by him; or (iii) such officer or director breached his duty of care to the corporation.

 

The Tennessee Business Corporation Act also empowers a corporation to provide insurance for directors and officers against liability arising out of their positions, even though the insurance coverage may be broader than the corporation’s power to indemnify. SmartFinancial maintains directors’ and officers’ liability insurance for the benefit of its directors and officers.

 

Our bylaws provide that the company will indemnify, to the fullest extent authorized by the Tennessee Business Corporation Act and applicable federal law or regulations, any person who is made a party to or is involved in any proceeding by reason of the fact that he or she is or was a director or officer of SmartFinancial, provided that the basis of such proceeding is alleged action in an official capacity as a director or officer.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling SmartFinancial pursuant to the provisions discussed above, SmartFinancial has been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

Certain rules of the Federal Deposit Insurance Corporation limit the ability of certain depository institutions, their subsidiaries and their affiliated depository institution holding companies to indemnify affiliated parties, including institution directors. In general, subject to the ability to purchase directors and officers liability insurance and to advance professional expenses under certain circumstances, the rules prohibit such institutions from indemnifying a director for certain costs incurred with regard to an administrative or enforcement action commenced by any federal banking agency that results in a final order or settlement pursuant to which the director is assessed a civil money penalty, removed from office, prohibited from participating in the affairs of an insured depository institution or required to cease and desist from or take an affirmative action described in Section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(b)).

 

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COMPARISON OF RIGHTS OF

SMARTFINANCIAL SHAREHOLDERS AND PFG SHAREHOLDERS

 

If the merger is completed, shareholders of PFG will become shareholders of SmartFinancial. The rights of PFG shareholders are currently governed by and subject to the provisions of the Tennessee Business Corporation Act, as amended, or the TBCA, and the PFG Charter and PFG Bylaws. Upon completion of the merger, the rights of the former PFG shareholders who receive shares of SmartFinancial common stock will be governed by the TBCA and the SmartFinancial Charter and SmartFinancial Bylaws, rather than the PFG Charter and PFG Bylaws.

 

The following is a summary of the material differences between the rights of holders of SmartFinancial common stock and holders of PFG common stock, but it does not purport to be a complete description of those differences, the specific rights of such holders or the terms of the SmartFinancial common stock subject to issuance in connection with the merger. The following summary is qualified in its entirety by reference to the relevant provisions of: (1) Tennessee law; (2) the SmartFinancial Charter; (3) the PFG Charter; (4) the SmartFinancial Bylaws; and (5) the PFG Bylaws.

 

The identification of some of the differences in the rights of such holders as material is not intended to indicate that other differences that may be equally important do not exist. You are urged to read carefully the relevant provisions of Tennessee law, as well as the governing corporate instruments of each of SmartFinancial and PFG, copies of which are available, without charge, to any person, including any beneficial owner to whom this proxy statement/prospectus is delivered, by following the instructions listed under “Where You Can Find More Information.”

  

Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Voting Rights Each share of SmartFinancial’s common stock is entitled to one vote per share. Common stock has unlimited voting rights, and preferred shareholders are entitled to vote only on matters authorized under the corporation’s charter. Voting rights are non-cumulative. Each share of PFG common stock is entitled to one vote per share. Voting rights are non-cumulative.
Description of Common Stock SmartFinancial is authorized to issue 40,000,000 shares of common stock, $1.00 par value. The holders of common stock are entitled to receive net assets of the corporation upon dissolution, secondary to any rights of preferred stock holders as may be specified in the charter. PFG is authorized to issue 1,000,000 shares of common stock, $10.00 par value.
Description of Preferred Stock SmartFinancial is authorized to issue 2,000,000 shares of preferred stock, $1.00 par value, in any number of series and preferences as determined by the board. There are no shares of preferred stock issued or outstanding. PFG is authorized to issue 1,000,000 shares of preferred stock, no designated par value, in any number of series and preferences as determined by the board. There are no shares of preferred stock issued or outstanding.
Number of Shares of Outstanding Common Stock before the Merger As of December 18, 2019, there were 14,002,658 shares of SmartFinancial common stock outstanding (inclusive of 34,000 unvested shares of restricted stock having voting rights). On the record date, there were 20,721 shares of PFG common stock outstanding.

 

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Number of Shares of Outstanding Common Stock after the Merger Immediately after the merger, SmartFinancial will have approximately 15,295,250  shares of common stock outstanding. Immediately after the merger, PFG will not have any shares of common stock outstanding.
Estimated Voting Percentage of SmartFinancial and PFG Shareholders with respect to SmartFinancial Common Stock after the Merger Based on 14,002,658 shares of SmartFinancial common stock outstanding as of December 18, 2019, current holders of SmartFinancial common stock will control approximately 8.45% of SmartFinancial’s common stock following the consummation of the merger. Based on 20,721 shares of PFG common stock outstanding as of the record date, current holders of PFG common stock will control approximately 8.45% of  SmartFinancial’s common stock following the consummation of the merger.
Rights of Holders of Stock Subject to Future Issuances of Stock The rights of holders of SmartFinancial common stock may be affected by the future issuance of SmartFinancial common stock or preferred stock. The rights of holders of PFG common stock may be affected by the future issuance of PFG common stock.
Right to receive dividends Holders of SmartFinancial common stock are entitled to receive dividends as and when declared by the board of directors. Dividends are non-cumulative. Holders of PFG common stock are entitled to receive dividends as and when declared by the board of directors. Dividends are non-cumulative.
Outstanding Preferred stock SmartFinancial does not currently have any preferred stock outstanding. PFG does not currently have any preferred stock outstanding.
Preemptive Rights

The Tennessee Business Corporation Act provides that shareholders of a corporation, solely by virtue of their status as such, do not have a preemptive right to acquire the corporation’s unissued shares unless expressly stated in the charter.

 

Holders of SmartFinancial common stock are not entitled to preemptive rights to acquire unissued shares of any class.

The Tennessee Business Corporation Act provides that shareholders of a corporation, solely by virtue of their status as such, do not have a preemptive right to acquire the corporation’s unissued shares unless expressly stated in the charter.

 

Holders of PFG common stock are not entitled to preemptive rights with respect to any shares of PFG that may be issued.

Transfer Rights of Shareholders The Charter and Bylaws of SmartFinancial do not generally restrict transfers of shares of its common stock, as long as such shares are registered pursuant to the provisions of the Securities Act of 1933.

The bylaws of PFG provide certain rights and restrictions regarding the ownership and transfer of PFG common stock. Provided an election to maintain S Corporation status for federal tax purposes is in effect for PFG, no shareholder may transfer, and no person may acquire, beneficial ownership of any shares of PFG common stock, if such transfer would cause PFG's status as an S Corporation to terminate. No shareholder may sell, transfer or assign, grant a security interest in an, encumber, pledge or in any other way alienate any of his or her shares of PFG common stock without the prior written consent of PFG, except through a transfer that meets the requirements of the bylaws of PFG. Any transfer or acquisition of PFG common stock in violation of the bylaws shall be null and void. 

  

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
   

The bylaws of PFG also provide a right of first refusal, first to PFG, and then to all other shareholders of PFG. No shareholder shall sell, assign, transfer or otherwise dispose of all or any part of his or her shares of PFG common stock without first giving notice of such attempted transfer to PFG and all other shareholders of PFG of the (i) number of shares he or she proposes to transfer and (ii) the terms of such transfer. This notice shall be accompanied by evidence that the proposed transferee is able to consummate the proposed transfer and that such a proposed transferee is eligible to become a shareholder of PFG pursuant to the bylaws. For 30 days from the receipt of such notice, PFG shall have the right to purchase all or some of the offered shares. In the event PFG does not purchase all of the offered shares, the selling shareholder shall immediately notify the other shareholders of PFG that they may purchase the remaining shares not purchased by PFG. The other shareholders shall have 30 days from the date of such notice to purchase such shares. If the selling shareholder's offer is accepted by either PFG or the other shareholders, the closing of such purchase shall occur within ten days after the last notice of acceptance of such offer is given.

 

If neither PFG or the other shareholders elect to exercise their respective rights of first refusal with respect to the total number of offered shares, the selling shareholder shall be free to transfer any portion of the shares not purchased by PFG or the other shareholders in accordance with the terms of the proposed transfer described in the original notice. Such transfer shall be consummated within ten days from the last day on which PFG or any other shareholder could have accepted the selling shareholder's offer. After the expiration of such ten day period, all of the selling shareholder's shares of PFG common stock shall again be subject to the restrictions set forth in the bylaws. Any PFG common stock transferred to a third party pursuant to the bylaws shall continue to be subject to the restrictions described above and set forth in the bylaws of PFG.

Special Meeting of Shareholders SmartFinancial’s charter and bylaws allow for a meeting of the shareholders to be called only by (1) the chairman of the board of directors, (2) the vice-chairman of the board, (3) the president or chief executive officer of the corporation, (4) a majority of the members of the board, or (5) holder(s) of 20% or more of the outstanding shares of voting stock. If any person(s) other than the board call a special meeting, the request must be in writing, specify the nature of the proposed business to be discussed, and be delivered to the secretary of the corporation. PFG’s bylaws provide that a special meeting may be called by the chairman of the board of directors, the president, a majority of the board of directors, or, upon written demand, by the holders of not less than one tenth (1/10) of all the shares entitled to vote at such meeting.

 

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Election, Size, and Classification of Board of Directors

SmartFinancial’s charter provides that the number of directors will be no less than five and no more than 25 persons. The number of directors may be fixed or changed by resolution of the board. Directors are elected at the annual meeting of the shareholders by a plurality of the votes by those shareholders entitled to vote.

 

SmartFinancial’s board of directors presently consists of 12 individuals.

PFG’s bylaws provide that the number of directors may be fixed or changed by resolution of the board. Directors are elected by a plurality vote of the shareholders entitled to vote at the annual meeting. The PFG board of directors presently consists of 6 individuals.
Vacancies on the Board of Directors

The Tennessee Business Corporation Act provides that vacancies on the board of directors may be filled by the shareholders or directors, unless the charter or bylaws provides otherwise.

 

SmartFinancial’s charter states that any vacancies on the board may be filled by a majority vote of the remaining directors or the shareholders. Those directors so elected will serve until the next annual meeting of shareholders.

The Tennessee Business Corporation Act provides that vacancies on the board of directors may be filled by the shareholders or directors, unless the charter or bylaws provides otherwise.

 

PFG’s charter and bylaws state that vacancies on the board may be filled by a majority vote of the directors then in office, including vacancies that are the result of removal.

Removal of Directors

The Tennessee Business Corporation Act provides that shareholders may remove directors with or without cause unless the charter provides that directors may be removed only for cause. However, if a director is elected by a particular voting group, that director may only be removed by the requisite vote of that voting group.

 

SmartFinancial’s charter and bylaws allow for the removal of a director with cause by a majority of the board at a meeting called for such purpose. The shareholders may also remove a director with cause at a meeting called for such purpose. Directors may not be removed without cause.

The Tennessee Business Corporation Act provides that shareholders may remove directors with or without cause unless the charter provides that directors may be removed only for cause. However, if a director is elected by a particular voting group, that director may only be removed by the requisite vote of that voting group.

 

PFG’s charter states that the board of directors, by a majority vote of the entire board, may remove any or all directors for cause.

  

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Indemnification

The Tennessee Business Corporation Act provides that a corporation will indemnify a director, officer, employee or agent who was successful in the defense of any proceeding or claim to which he or she was a party because he or she was a director of the corporation against reasonable expenses incurred unless otherwise limited by the charter.

 

Under the Tennessee Business Corporation Act, a corporation may indemnify an individual against liability if the individual acted in good faith, the individual reasonably believed that the conduct was in the corporation’s best interest or was not opposed to its best interest, and the individual had no reasonable cause to believe the conduct was unlawful. The corporation may also advance for expenses if the director follows the requirements proscribed in the Tennessee Business Corporation Act Section 48-18-504.

 

The Tennessee Business Corporation Act also allows a corporation to maintain insurance or furnish other protections against liability on behalf of its directors, officers, employees, or agents.

 

SmartFinancial’s charter and bylaws provide that the company will indemnify and advance expenses to its directors and officers and may indemnify all other persons it has the power to indemnify under the Tennessee Business Corporation Act. SmartFinancial may also purchase and maintain insurance or provide similar protections on behalf of its directors, officers, and employees to the fullest extent authorized by the Tennessee Business Corporation Act and applicable federal laws and regulations

The Tennessee Business Corporation Act provides that a corporation will indemnify a director, officer, employee or agent who was successful in the defense of any proceeding or claim to which he or she was a party because he or she was a director of the corporation against reasonable expenses incurred unless otherwise limited by the charter.

 

Under the Tennessee Business Corporation Act, a corporation may indemnify an individual against liability if the individual acted in good faith, the individual reasonably believed that the conduct was in the corporation’s best interest or was not opposed to its best interest, and the individual had no reasonable cause to believe the conduct was unlawful. The corporation may also advance for expenses if the director follows the requirements proscribed in the Tennessee Business Corporation Act Section 48-18-504.

 

The Tennessee Business Corporation Act also allows a corporation to maintain insurance or furnish other protections against liability on behalf of its directors, officers, employees, or agents.

 

PFG’s bylaws provide that PFG will indemnify its directors and officers to the fullest extent authorized by the Tennessee Business Corporation Act and applicable federal law and regulation, except in relation to such matters to which any such director or officer shall be adjudged in any action, suit, or proceeding to be liable for his own negligence or misconduct in the performance of his duty.

Personal Liability of Directors

The Tennessee Business Corporation Act provides that a corporation may not indemnify a director for liability (1) for any breach of the director’s duty of loyalty to the corporation or its shareholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (3) under Section 48-18-302 of the Tennessee Business Corporation Act (with respect to the unlawful payment of dividends).

 

SmartFinancial’s charter provides that a director will not be personally liable to SmartFinancial or its shareholders for monetary damages for breach of fiduciary duty as a director; however, a director’s liability will not be eliminated or limited for the following: (1) for any breach of the director's duty of loyalty to the corporation or its shareholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (3) under Section 48-18-302 of the Tennessee Business Corporation Act with respect to the unlawful payment of dividends.

 

SmartFinancial’s charter further provides that any amendment to the director’s liability section of the charter requires at least a two-thirds affirmative vote by shareholders entitled to vote on the amendment and a two-thirds affirmative vote by the board of directors.

The Tennessee Business Corporation Act provides that a corporation may not indemnify a director for liability (1) for any breach of the director’s duty of loyalty to the corporation or its shareholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (3) under Section 48-18-302 of the Tennessee Business Corporation Act (with respect to the unlawful payment of dividends).

 

PFG’s charter and bylaws contain no other specific provision.

  

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Dissenters’ Rights

Under the Tennessee Business Corporation Act, because SmartFinancial’s common stock is traded on the Nasdaq Capital Market, holders of common stock do not have dissenters’ rights.

 

SmartFinancial’s charter and bylaws do not contain any provision(s) that relate to dissenters’ rights.

The Tennessee Business Corporation Act provides dissenters rights to shareholders of a company proposing a merger, share exchange or a sale of substantially all of the assets of the company allowing shareholders to dissent from, and obtain payment of the fair value of the shareholders’ shares in the event of, certain extraordinary corporate transactions. The parties have determined that PFG’s shareholders have the right to dissent from this merger.
Votes on Extraordinary Corporate Transactions

Under the Tennessee Business Corporation Act, a sale or other disposition of all or substantially all of the corporation’s assets, a merger of the corporation with and into another corporation, or a share exchange involving one or more classes or series of the corporation’s shares or a dissolution of the corporation must be approved by the board of directors (except in certain limited circumstances) plus, with certain exceptions, the affirmative vote of the holders of a majority of all shares of stock entitled to vote thereon.

 

SmartFinancial’s charter and bylaws contain no other specific provision.

Under the Tennessee Business Corporation Act, a sale or other disposition of all or substantially all of PFG’s assets, a merger of PFG with and into another corporation, or a share exchange involving one or more classes or series of PFG’s shares or a dissolution of PFG must be approved by the board of directors (except in certain limited circumstances) plus, with certain exceptions, the affirmative vote of the holders of a majority of all shares of stock entitled to vote thereon.

 

PFG’s charter and bylaws contain no other specific provision.

Consideration of other Constituencies

The Tennessee Business Combination Act provides that no corporation (nor its officers or directors) registered or traded on a national securities exchange or registered with the SEC will be held liable for either having failed to approve the acquisition of shares by an interested shareholder on or before such interested shareholder’s share acquisition date, or for opposing any proposed merger, exchange, tender offer or significant disposition of the assets of the corporation or any of its subsidiaries because of a good faith belief that such merger, exchange, tender offer or significant disposition of assets would adversely affect the corporation’s employees, customers, suppliers, the communities in which such corporation or its subsidiaries operate or are located or any other relevant factor if such factors are permitted to be considered by the board of directors under the charter for such corporation in connection with a merger, exchange, tender offer or significant disposition of assets.

 

SmartFinancial’s charter and bylaws contain no other specific provision.

The Tennessee Business Combination Act provides that no corporation (nor its officers or directors) registered or traded on a national securities exchange or registered with the SEC will be held liable for either having failed to approve the acquisition of shares by an interested shareholder on or before such interested shareholder’s share acquisition date, or for opposing any proposed merger, exchange, tender offer or significant disposition of the assets of the corporation or any of its subsidiaries because of a good faith belief that such merger, exchange, tender offer or significant disposition of assets would adversely affect the corporation’s employees, customers, suppliers, the communities in which such corporation or its subsidiaries operate or are located or any other relevant factor if such factors are permitted to be considered by the board of directors under the charter for such corporation in connection with a merger, exchange, tender offer or significant disposition of assets

 

PFG’s charter and bylaws contain no other specific provision.

 

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Amendment of Charter

The Tennessee Business Corporation Act provides that certain relatively technical amendments to a corporation’s charter may be adopted by the directors without shareholder action. Generally, the Tennessee Business Corporation Act provides that a corporation’s charter may be amended by a majority of votes entitled to be cast on an amendment, subject to any condition the board of directors may place on its submission of the amendment to the shareholders.

 

SmartFinancial’s charter provides that any amendment to the director’s liability section of the charter requires at least a two-thirds affirmative vote by shareholders entitled to vote on the amendment and a two-thirds affirmative vote by the board of directors

The Tennessee Business Corporation Act provides that certain relatively technical amendments to a corporation’s charter may be adopted by the directors without shareholder action. Generally, the Tennessee Business Corporation Act provides that a corporation’s charter may be amended by a majority of votes entitled to be cast on an amendment, subject to any condition the board of directors may place on its submission of the amendment to the shareholders.

 

PFG’s charter and bylaws contain no other specific provision.

Amendment of Bylaws SmartFinancial’s bylaws provide that the bylaws may be amended by shareholders at any regular or special meeting of the shareholders where a quorum is present by a majority vote of the common stock entitled to vote at the meeting. The bylaws may also be amended by the board of directors with a three-fourths vote. PFG’s charter and bylaws provide that the board of directors or shareholders of PFG may amend its bylaws, except only the shareholders may amend the provisions relating to the duties, term of office, number of directors, filling vacancies occurring on the board, or indemnification of a director.
Business Combinations Involving Interested Shareholders

The Tennessee Business Combination Act generally prohibits a “business combination” by SmartFinancial or a subsidiary with an “interested shareholder” within five years after the shareholder becomes an interested shareholder. SmartFinancial or a subsidiary can, however, enter into a business combination within that period if, before the interested shareholder became such, SmartFinancial ’s board of directors approved the business combination or the transaction in which the interested shareholder became an interested shareholder. After that five-year moratorium, the business combination with the interested shareholder can be consummated only if it satisfies certain fair price criteria or is approved by two-thirds of the other shareholders. For purposes of the Tennessee Business Combination Act, a “business combination” includes mergers, share exchanges, sales and leases of assets, issuances of securities, and similar transactions. An “interested shareholder” is generally any person or entity that beneficially owns 10% or more of the voting power of any outstanding class or series of SmartFinancial stock.

 

SmartFinancial’s charter does not have special requirements for transactions with interested parties.

The Tennessee Business Combination Act generally prohibits a “business combination” by PFG or a subsidiary with an “interested shareholder” within five years after the shareholder becomes an interested shareholder. PFG or a subsidiary can, however, enter into a business combination within that period if, before the interested shareholder became such, PFG’s board of directors approved the business combination or the transaction in which the interested shareholder became an interested shareholder. After that five-year moratorium, the business combination with the interested shareholder can be consummated only if it satisfies certain fair price criteria or is approved by two-thirds of the other shareholders. For purposes of the Tennessee Business Combination Act, a “business combination” includes mergers, share exchanges, sales and leases of assets, issuances of securities, and similar transactions. An “interested shareholder” is generally any person or entity that beneficially owns 10% or more of the voting power of any outstanding class or series of PFG stock.

 

PFG’s charter does not have special requirements for transactions with interested parties.

 

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Rights SmartFinancial Bancshares, Inc.
Shareholder Rights
Progressive Financial Group Inc.
Shareholder Rights
Shareholder Right to Make Proposals and to Nominate Directors

Under the Tennessee Business Corporation Act, shareholders have the right to submit proposals to the board of directors and to submit nominations for directors.

 

SmartFinancial’s charter allows for a shareholder to nominate a director so long as the shareholder is entitled to vote and provides written notice of the nomination in proper form to the secretary of the company.

 

SmartFinancial’s bylaws allow for shareholder proposals to be brought before the board at the annual meeting so long as written notice of the proposal is timely given to the secretary of the company in proper form.

Under Tennessee law shareholders have the right to submit proposals to the board of directors and to submit nominations for directors.

 

PFG’s charter and bylaws contain no other specific provision.

Shareholder Ability to Act by Written Consent The Tennessee Business Corporation Act allows for shareholders to act by written consent if all of the shareholders entitled to vote on the matter consent to taking such action without a meeting. The affirmative vote of the number of shares otherwise required to authorize or take such action at a meeting is the act of the shareholders.

The Tennessee Business Corporation Act allows for shareholders to act by written consent if all of the shareholders entitled to vote on the matter consent to taking such action without a meeting. The affirmative vote of the number of shares otherwise required to authorize or take such action at a meeting is the act of the shareholders. 

  

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LEGAL MATTERS

 

The validity of the SmartFinancial common stock to be issued in connection with the merger will be passed upon for SmartFinancial by Alston & Bird LLP (Atlanta, Georgia). Certain U.S. federal income tax consequences relating to the merger will also be passed upon for SmartFinancial and PFG by Alston & Bird LLP (Atlanta, Georgia) and Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Nashville, TN), respectively.

 

EXPERTS

 

The consolidated financial statements of SmartFinancial and its subsidiary as of December 31, 2017, included in SmartFinancial’s Annual Report on Form 10-K for the year ended December 31, 2017, incorporated by reference herein, have been so incorporated by reference herein in reliance upon the reports of Mauldin & Jenkins, LLC, an independent registered public accounting firm, given upon the authority of said firm as experts in accounting and auditing.

 

The consolidated financial statements of SmartFinancial and its subsidiary as of December 31, 2018, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2018, included in SmartFinancial’s Annual Report on Form 10-K for the year ended December 31, 2018, incorporated by reference herein, have been so incorporated by reference herein in reliance upon the reports of Dixon Hughes Goodman LLP, an independent registered public accounting firm, given upon the authority of said firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

SmartFinancial has filed a registration statement on Form S-4 under the Securities Act of 1933 with the SEC with respect to the SmartFinancial common stock to be issued to shareholders of PFG in the merger. This proxy statement/prospectus constitutes the prospectus of SmartFinancial filed as part of the registration statement. This proxy statement/prospectus does not contain all of the information set forth in the registration statement because certain parts of the registration statement are omitted in accordance with the rules and regulations of the SEC. The registration statement and its exhibits are available for inspection and copying as set forth below.

 

In addition, SmartFinancial files annual, quarterly and special reports, proxy statements and other business and financial information with the SEC. You may read and copy any materials that SmartFinancial files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at (800) SEC-0330 for further information on the public reference room. In addition, SmartFinancial files reports and other business and financial information with the SEC electronically, and the SEC maintains a website that contains SmartFinancial’s SEC filings as well as reports, proxy and information statements, and other information issuers file electronically with the SEC at www.sec.gov. You will also be able to obtain these documents, free of charge, from SmartFinancial’s website at www.smartfinancialinc.com under the “Investor Relations” link and then under the “SEC Filings” heading. The website addresses for the SEC and SmartFinancial are inactive textual references and except as specifically incorporated by reference into this proxy statement/prospectus, information on those websites is not part of this proxy statement/prospectus.

 

The SEC allows SmartFinancial to “incorporate by reference” information in this proxy statement/prospectus. This means that SmartFinancial can disclose important business and financial information to you by referring you to another document filed separately with the SEC. The information that SmartFinancial incorporates by reference is considered to be part of this proxy statement/prospectus, and later information that SmartFinancial files with the SEC will automatically update and supersede the information SmartFinancial included in this proxy statement/prospectus. This document incorporates by reference the documents that are listed below that SmartFinancial has previously filed with the SEC, except to the extent that any information contained in such filings is deemed “furnished” in connection with SEC rules.

 

·Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2018, filed on March 20, 2019;

 

·Annual Report on Form 10-K for the year ended December 31, 2018, filed on March 18, 2019;

 

·Definitive Proxy Statement on Schedule 14A for the 2019 Annual Meeting, filed on March 19, 2019;

 

·Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019, filed on May 10, 2019, August 8, 2019, and November 8, 2019, respectively;

 

·Current Reports on Form 8-K or Form 8-K/A, as applicable, filed on January 16, 2019, January 24, 2019, February 6, 2019, April 24, 2019, April 25, 2019, May 6, 2019, May 7, 2019, May 29, 2019, July 25, 2019, October 21, 2019, October 30, 2019, and November 6, 2019; and

 

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·The description of our common stock contained in our Registration Statement filed with the SEC pursuant to Section 12 of the Securities Exchange Act of 1934, or the Exchange Act, including any amendment or report filed for purposes of updating such description.

 

SmartFinancial also incorporates by reference any future filings they make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement/prospectus and the date of the PFG special meeting. Any statement contained in this proxy statement/prospectus or in a document incorporated or deemed to be incorporated by reference in this proxy statement/prospectus is deemed to be modified or superseded to the extent that a statement contained herein or in any subsequently filed document that also is, or is deemed to be, incorporated by reference herein modified or superseded such statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus.

 

Documents incorporated by reference are available from SmartFinancial without charge (except for exhibits to the documents unless the exhibits are specifically incorporated in the document by reference). You may obtain documents incorporated by reference in this document by requesting them in writing or by telephone from SmartFinancial at the following address:

 

SmartFinancial, Inc.
5401 Kingston Pike, Suite 600
Knoxville, Tennessee 37919
Attention: Secretary
Telephone: (865) 437-5700

 

To obtain timely delivery, you must make a written or oral request for a copy of such information by January 21, 2020. You will not be charged for any of these documents that you request. If you request any incorporated documents from SmartFinancial, SmartFinancial will mail them to you by first class mail, or another equally prompt means, within one business day after receiving your request.

 

You should rely only on the information contained in this proxy statement/prospectus. Neither SmartFinancial nor PFG has authorized anyone to provide you with different information. Therefore, if anyone gives you different or additional information, you should not rely on it. The information contained in this proxy statement/prospectus is correct as of its date. It may not continue to be correct after this date. PFG has supplied all of the information about PFG and its subsidiaries contained in this proxy statement/prospectus and SmartFinancial has supplied all of the information contained in this proxy statement/prospectus about SmartFinancial and its subsidiaries. Each of us is relying on the correctness of the information supplied by the other.

 

This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this proxy statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation in such jurisdiction.

 

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Annex A

 

Execution Version

 

AGREEMENT AND PLAN OF MERGER

 

by and between

 

SMARTFINANCIAL, INC.

 

and

 

PROGRESSIVE FINANCIAL GROUP INC.

 

Dated as of October 29, 2019

 

   

 

  

TABLE OF CONTENTS

 

ARTICLE I        THE MERGER 2
Section 1.01   The Merger 2
Section 1.02   Charter and Bylaws 2
Section 1.03   Bank Merger 2
Section 1.04   Directors and Officers 2
Section 1.05   Effective Time; Closing 3
Section 1.06   Additional Actions 3
Section 1.07   Reservation of Right to Revise Structure 3
ARTICLE II      MERGER CONSIDERATION; EXCHANGE PROCEDURES 4
Section 2.01   Merger Consideration 4
Section 2.02   Rights as Shareholders; Stock Transfers 5
Section 2.03   Fractional Shares 5
Section 2.04   Plan of Reorganization 6
Section 2.05   Exchange Procedures 6
Section 2.06   Deposit and Delivery of Merger Consideration 6
Section 2.07   Rights of Certificate Holders after the Effective Time 7
Section 2.08   Anti-Dilution Provisions 8
ARTICLE III     REPRESENTATIONS AND WARRANTIES OF PFG 8
Section 3.01   Organization and Standing 8
Section 3.02   Capital Stock 8
Section 3.03   Subsidiaries 9
Section 3.04   Corporate Power; Minute Books 10
Section 3.05   Corporate Authority 10
Section 3.06   Regulatory Approvals; No Defaults 11
Section 3.07   Financial Statements; Internal Controls 12
Section 3.08   Regulatory Reports 12
Section 3.09   Absence of Certain Changes or Events 13
Section 3.10   Legal Proceedings 13
Section 3.11   Compliance With Laws 14
Section 3.12   PFG Material Contracts; Defaults 14
Section 3.13   Agreements with Regulatory Agencies 15
Section 3.14   Brokers; Fairness Opinion 16
Section 3.15   Employee Benefit Plans 16
Section 3.16   Labor Matters 19
Section 3.17   Environmental Matters 19
Section 3.18   Tax Matters 20
Section 3.19   Investment Securities 22
Section 3.20   Derivative Transactions 23
Section 3.21   Regulatory Capitalization 23
Section 3.22   Loans; Nonperforming and Classified Assets 23
Section 3.23   Allowance for Loan and Lease Losses 24
Section 3.24   Trust Business; Administration of Fiduciary Accounts 25
Section 3.25   Investment Management and Related Activities 25
Section 3.26   Repurchase Agreements 25
Section 3.27   Deposit Insurance 25
Section 3.28   Community Reinvestment Act, Anti-money Laundering and Customer Information Security 25
Section 3.29   Transactions with Affiliates 26
Section 3.30   Tangible Properties and Assets 26
Section 3.31   Intellectual Property 27
Section 3.32   Insurance 27
Section 3.33   Antitakeover Provisions 28
Section 3.34   PFG Information 28
Section 3.35   [Reserved] 28
Section 3.36   Bank Holding Company 28
Section 3.37   No Other Representations or Warranties 28

 

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ARTICLE IV     REPRESENTATIONS AND WARRANTIES OF SMBK 29
Section 4.01   Organization and Standing 29
Section 4.02   Capital Stock 29
Section 4.03   Corporate Power 29
Section 4.04   Corporate Authority 29
Section 4.05   SEC Documents; Financial Statements 30
Section 4.06   Regulatory Approvals; No Defaults 30
Section 4.07   SMBK Information 31
Section 4.08   Absence of Certain Changes or Events 31
Section 4.09   Compliance with Laws 31
Section 4.10   Legal Proceedings 32
Section 4.11   No Other Representations or Warranties 32
ARTICLE V      COVENANTS 33
Section 5.01   Covenants of PFG 33
Section 5.02   Covenants of SMBK 39
Section 5.03   Commercially Reasonable Efforts 39
Section 5.04   Shareholder Approval 39
Section 5.05   Registration Statement; Proxy Statement-Prospectus; NASDAQ Listing 40
Section 5.06   Regulatory Filings; Consents 41
Section 5.07   Publicity 41
Section 5.08   Access; Current Information; Accounting Matters 42
Section 5.09   No Solicitation by PFG; Superior Proposals 43
Section 5.10   Indemnification 46
Section 5.11   Employees; Benefit Plans 48
Section 5.12   Notification of Certain Changes 49
Section 5.13   Transition; Informational Systems Conversion 50
Section 5.14   No Control of Other Party’s Business 50
Section 5.15   Certain Litigation 50
Section 5.16   Director Resignations 50
Section 5.17   Non-Competition and Non-Disclosure Agreement 50
Section 5.18   Claims Letters 51
Section 5.19   [Reserved] 51
Section 5.20   Coordination 51
Section 5.21   Transactional Expenses 52
Section 5.22   Confidentiality 52
Section 5.23   AAA Dividend 52
Section 5.24   Tax Matters 52
ARTICLE VI     CONDITIONS TO CONSUMMATION OF THE MERGER 54
Section 6.01   Conditions to Obligations of the Parties to Effect the Merger 54
Section 6.02   Conditions to Obligations of PFG 55
Section 6.03   Conditions to Obligations of SMBK 55
Section 6.04   Frustration of Closing Conditions 57
ARTICLE VII    TERMINATION 57
Section 7.01   Termination 57
Section 7.02   Termination Fee 58
Section 7.03   Effect of Termination 59
ARTICLE VIII   DEFINITIONS 59
Section 8.01   Definitions 59

 

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ARTICLE IX     MISCELLANEOUS 68
Section 9.01   Survival 68
Section 9.02   Waiver; Amendment 68
Section 9.03   Governing Law; Jurisdiction; Waiver of Right to Trial by Jury 68
Section 9.04   Expenses 69
Section 9.05   Notices 69
Section 9.06   Entire Understanding; No Third Party Beneficiaries 70
Section 9.07   Severability 70
Section 9.08   Enforcement of the Agreement 70
Section 9.09   Interpretation 70
Section 9.10   Assignment 71
Section 9.11   Counterparts 72
Section 9.12   Privileged Communications 72

 

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Exhibit A – Form of Voting Agreement

Exhibit B – Form of Bank Plan of Merger and Merger Agreement

Exhibit C – Form of Director Non-Competition and Non-Disclosure Agreement

Exhibit D – Form of Claims Letter

 

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AGREEMENT AND PLAN OF MERGER

 

This Agreement and Plan of Merger (this “Agreement”) is dated as of October 29, 2019, by and between SmartFinancial, Inc., a Tennessee corporation (“SMBK”), and Progressive Financial Group Inc., a Tennessee corporation (“PFG” and, together with SMBK, the “Parties” and each a “Party”).

 

W I T N E S S E T H

 

WHEREAS, the boards of directors of the Parties have determined that it is in the best interests of their respective companies and their respective shareholders to consummate the business combination transaction provided for in this Agreement in which PFG will, on the terms and subject to the conditions set forth in this Agreement, merge with and into SMBK (the “Merger”), with SMBK as the surviving company in the Merger (sometimes referred to in such capacity as the “Surviving Entity”);

 

WHEREAS, as a condition to the willingness of SMBK to enter into this Agreement, certain directors and shareholders of PFG have entered into voting agreements (each a “Voting Agreement” and collectively, the “Voting Agreements”), substantially in the form attached hereto as Exhibit A, dated as of the date hereof, with SMBK, pursuant to which each such director or shareholder has agreed, among other things, to vote certain of the PFG Common Stock owned by such director or shareholder in favor of the approval of this Agreement and the transactions contemplated hereby, subject to the terms of the Voting Agreements;

 

WHEREAS, PFG owns 100% of the issued and outstanding common stock of Progressive Savings Bank, a Tennessee state-chartered bank (“Progressive Bank”) and SMBK owns 100% of the issued and outstanding common stock of SmartBank, a Tennessee state-chartered bank;

 

WHEREAS, as a further condition to the willingness of SMBK to enter into this Agreement, certain employees of PFG and/or its Subsidiaries will enter into termination agreements, employment agreements, or retention agreements following the entry into this Agreement;

 

WHEREAS, the Parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger; and

 

WHEREAS, for U.S. federal income tax purposes, it is intended that the Merger qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the Regulations promulgated thereunder, and this Agreement is intended to be and is adopted as a “plan of reorganization” for purposes of Sections 354 and 361 of the Code.

 

NOW, THEREFORE, in consideration of the mutual promises herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

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ARTICLE I
THE MERGER

 

Section 1.01       The Merger. Subject to the terms and conditions of this Agreement, in accordance with the Tennessee Business Corporation Act Tenn. Code Ann. §§ 48-11-101, et seq. (the “TBCA”), at the Effective Time, PFG shall merge with and into SMBK pursuant to the terms of this Agreement. SMBK shall be the Surviving Entity in the Merger and shall continue its existence as a corporation under the laws of the State of Tennessee. As of the Effective Time, the separate corporate existence of PFG shall cease.

 

Section 1.02       Charter and Bylaws. At the Effective Time, the charter of SMBK in effect immediately prior to the Effective Time shall be the charter of the Surviving Entity until thereafter amended in accordance with applicable Law. The bylaws of SMBK in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Entity until thereafter amended in accordance with applicable Law and the terms of such bylaws.

 

Section 1.03        Bank Merger. Except as provided below, immediately following the Effective Time and sequentially but in effect simultaneously on the Closing Date, Progressive Bank shall be merged with and into SmartBank (the “Bank Merger”), in accordance with the provisions of the Tennessee Banking Act, and SmartBank shall be the surviving bank (the “Surviving Bank”). The Bank Merger shall have the effects as set forth under applicable federal and Tennessee state banking laws and regulations, as further set forth in the separate merger agreement (the “Bank Plan of Merger”) in substantially the form attached hereto as Exhibit B, which SmartBank and Progressive Bank are simultaneously executing as of the date hereof. Each of PFG and SMBK have approved the Bank Plan of Merger in its capacity as the sole shareholder of Progressive Bank and SmartBank, respectively. As provided in the Bank Plan of Merger, the Bank Merger may be abandoned at the election of SmartBank at any time, whether before or after filings are made for regulatory approval of the Bank Merger, but if the Bank Merger is abandoned for any reason, Progressive Bank shall continue to operate under its name; provided that prior to any such election, SMBK shall (a) reasonably consult with PFG and its regulatory counsel and (b) reasonably determine in good faith that such election will not, and would not reasonably be expected to, prevent, delay, or impair any Party’s ability to consummate the Merger or the other transactions contemplated by this Agreement.

 

Section 1.04       Directors and Officers. With the exception of adding Ottis Phillips to the board of directors, the directors and officers of SMBK immediately prior to the Effective Time shall, from and after the Effective Time, continue as the directors and officers of the Surviving Entity until their successors shall have been duly elected, appointed, or qualified or until their earlier death, resignation, or removal in accordance with the charter and bylaws of the Surviving Entity. With the exception of adding Ottis Phillips to the board of directors, the directors and officers of SmartBank immediately prior to the effective time of the Bank Merger shall, from and after the Effective Time, continue as the directors and officers of the Surviving Bank until their successors shall have been duly elected, appointed, or qualified or until their earlier death, resignation, or removal in accordance with the charter and bylaws of the Surviving Bank. The parties agree that any executive officer of the Surviving Entity or the Surviving Bank shall be authorized to sign any and all Tax Returns of PFG or Progressive Bank, respectively, that are filed after the Effective Time regardless of the period covered by the Tax Returns.

 

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Section 1.05        Effective Time; Closing.

 

(a)            Subject to the terms and conditions of this Agreement, the Parties will make all such filings as may be required to consummate the Merger and the Bank Merger by applicable Laws. The Merger shall become effective as set forth in the articles of merger (the “Articles of Merger”) related to the Merger, which will include the plan of merger (the “Plan of Merger”), that shall be filed with the Secretary of State of the State of Tennessee, as provided in the TBCA, on or prior to the Closing Date. The Merger shall become effective at such time as the Articles of Merger are duly filed with the Secretary of State of the State of Tennessee, or at such later time as is agreed between the Parties and specified in the Articles of Merger in accordance with the relevant provisions of the TBCA (such date and time is hereinafter referred to as the “Effective Time”).

 

(b)           The closing of the Merger contemplated by this Agreement (the “Closing”) shall take place on a date determined by SMBK and reasonably acceptable to PFG (the “Closing Date”), which shall be within 30 days after all of the conditions to the Closing set forth in Article VI (other than those conditions that by their nature are to be satisfied by action taken at the Closing, which shall be satisfied or waived at the Closing) have been satisfied or waived (to the extent permitted by applicable Law) in accordance with the terms hereof, at the headquarters of SMBK at 5401 Kingston Pike, Knoxville, Tennessee, 37319, or such other place, date, and time as the Parties may mutually agree. At or prior to the Closing, there shall be delivered to SMBK and PFG the Articles of Merger and such other certificates and other documents required to be delivered under Article VI.

 

Section 1.06        Additional Actions. If, at any time after the Effective Time, any Party shall consider or be advised that any further deeds, documents, assignments, or assurances in Law or any other acts are necessary or desirable to carry out the purposes of this Agreement (such Party, the “Requesting Party”), the other Party and its Subsidiaries and their respective officers and directors shall be deemed to have granted to the Requesting Party and its Subsidiaries, and each or any of them, an irrevocable power of attorney to execute and deliver, in such official corporate capacities, all such deeds, documents, assignments, or assurances in Law or take any such other acts as are necessary or desirable to carry out the purposes of this Agreement, and the officers and directors of the Requesting Party and its Subsidiaries, as applicable, are authorized in the name of the other Party and its Subsidiaries or otherwise to take any and all such action.

 

Section 1.07        Reservation of Right to Revise Structure. SMBK may at any time and without the approval of PFG change the method of effecting the business combination contemplated by this Agreement if and to the extent that it reasonably deems such a change to be necessary; provided, however, that no such change shall (i) alter or change the amount of the consideration to be issued to Holders as Merger Consideration, (ii) reasonably be expected to materially impede or delay consummation of the Merger, (iii) adversely affect the federal income tax treatment of the Holders in connection with the Merger, or (iv) require submission to or approval of PFG’s shareholders after the Plan of Merger has been approved by PFG’s shareholders. In the event that SMBK elects to make such a change, the Parties agree to cooperate to execute appropriate documents to reflect the change.

 

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ARTICLE II
MERGER CONSIDERATION; EXCHANGE PROCEDURES

 

Section 2.01        Merger Consideration. Subject to the provisions of this Agreement, at the Effective Time, automatically by virtue of the Merger and without any action on the part of the Parties or any shareholder of PFG:

 

(a)            Each share of SMBK Common Stock that is issued and outstanding immediately prior to the Effective Time shall remain outstanding following the Effective Time and shall be unchanged by the Merger.

 

(b)            Each share of PFG Common Stock owned directly by SMBK, PFG, or any of their respective wholly owned Subsidiaries (other than shares in trust accounts, managed accounts, and the like for the benefit of customers or shares held as collateral for outstanding debt previously contracted) immediately prior to the Effective Time shall be cancelled and retired at the Effective Time without any conversion thereof, and no payment shall be made with respect thereto (the “PFG Cancelled Shares”).

 

(c)            Holders of shares of PFG Common Stock shall have such rights to dissent from the Merger and obtain payment of the fair value of their shares as are afforded to such Person by Chapter 23 of the TBCA. Notwithstanding anything in this Agreement to the contrary, all shares of PFG Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by a shareholder who did not vote in favor of the Merger (or consent thereto in writing) and who is entitled to demand and properly demands the fair value of such shares pursuant to, and who complies in all respects with, the provisions of Chapter 23 of the TBCA, shall not be converted into or be exchangeable for the right to receive the Merger Consideration (the “Dissenting Shares”), but instead the holder of such Dissenting Shares (hereinafter called a “Dissenting Shareholder”) shall be entitled to payment of the fair value of such shares in accordance with the applicable provisions of the TBCA (and at the Effective Time, such Dissenting Shares shall no longer be outstanding and shall automatically be cancelled and shall cease to exist and such holder shall cease to have any rights with respect thereto, except the rights provided for pursuant to the applicable provisions of the TBCA and this Section 2.01(c)), unless and until such Dissenting Shareholder shall have failed to perfect such holder’s right to receive, or shall have effectively withdrawn or lost rights to demand or receive, the fair value of such shares of PFG Common Stock under the applicable provisions of the TBCA. If any Dissenting Shareholder shall fail to perfect or effectively withdraw or lose such Holder’s dissenter’s rights under the applicable provisions of the TBCA, each such Dissenting Share shall be deemed to have been converted into and to have become exchangeable for the right to receive the Merger Consideration, without any interest thereon, in accordance with the applicable provisions of this Agreement. PFG shall give SMBK (i) prompt notice of any written notices to exercise dissenters’ rights in respect of any shares of PFG Common Stock, attempted withdrawals of such notices and any other instruments served pursuant to the TBCA and received by PFG relating to dissenters’ rights and (ii) the opportunity to participate in negotiations and proceedings with respect to demands for fair value under the TBCA. PFG shall not, except with the prior written consent of SMBK, voluntarily make any payment with respect to, or settle, or offer or agree to settle, any such demand for payment. Any portion of the Merger Consideration made available to the Exchange Agent pursuant to this Article II to pay for shares of PFG Common Stock for which dissenters’ rights have been perfected shall be returned to SMBK upon demand.

 

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(d)            Each share of PFG Stock (excluding Dissenting Shares and PFG Cancelled Shares) issued and outstanding at the Effective Time shall cease to be outstanding and shall be converted, in accordance with the terms of this Article II, into and exchanged for the right to receive (i) an amount of cash equal to the Per Share Cash Consideration and (ii) a number of shares of SMBK Common Stock equal to the Per Share Stock Consideration, where:

 

(i)               Aggregate Cash Consideration” means an amount equal to $14,595,354.37, minus the amount of (i) the AAA Dividend, and (ii) the loss, if in excess of $250,000, realized by PFG or its applicable Subsidiary on any Pre-Closing Divestiture.

 

(ii)             Aggregate Stock Consideration” means 1,292,592.556 shares of SMBK Common Stock.

 

(iii)            Outstanding Shares Number” means the number of shares of PFG Common Stock issued and outstanding as of the Effective Time.

 

(iv)           Per Share Cash Consideration” means an amount of cash equal to the quotient obtained by dividing (A) the Aggregate Cash Consideration by (B) the Outstanding Shares Number.

 

(v)            Per Share Stock Consideration” means a number of shares of SMBK Common Stock obtained by dividing (A) the Aggregate Stock Consideration by (B) the Outstanding Shares Number.

 

Section 2.02        Rights as Shareholders; Stock Transfers. At the Effective Time, all shares of PFG Common Stock, when converted in accordance with Section 2.01, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each Certificate or Book-Entry Share previously evidencing such shares shall thereafter represent only the right to receive for each such share of PFG Common Stock, the Merger Consideration and any cash in lieu of fractional shares of SMBK Common Stock in accordance with this Article II. At the Effective Time, holders of PFG Common Stock shall cease to be, and shall have no rights as, shareholders of PFG, other than the right to receive the Merger Consideration and cash in lieu of fractional shares of SMBK Common Stock as provided under this Article II. At the Effective Time, the stock transfer books of PFG shall be closed, and there shall be no registration of transfers on the stock transfer books of PFG of shares of PFG Common Stock.

 

Section 2.03        Fractional Shares. Notwithstanding any other provision hereof, no fractional shares of SMBK Common Stock and no certificates or scrip therefor, or other evidence of ownership thereof, will be issued in the Merger. In lieu thereof, SMBK shall pay or cause to be paid to each Holder of a fractional share of SMBK Common Stock, rounded to the nearest one hundredth of a share, an amount of cash (without interest and rounded to the nearest whole cent) determined by multiplying the fractional share interest in SMBK Common Stock to which such Holder would otherwise be entitled by the SMBK Average Stock Price.

 

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Section 2.04        Plan of Reorganization. It is intended that the Merger shall qualify as a “reorganization” within the meaning of Section 368(a) of the Code and the Regulations promulgated thereunder, and it is intended that this Agreement shall constitute a “plan of reorganization” as that term is used in Sections 354 and 361 of the Code.

 

Section 2.05        Exchange Procedures. As promptly as practicable after the Effective Time, the Exchange Agent will mail or otherwise cause to be delivered to each Holder appropriate and customary transmittal materials, which shall specify that delivery shall be effected, and risk of loss and title to the Certificates or Book-Entry Shares shall pass, only upon delivery of the Certificates or Book-Entry Shares to the Exchange Agent, as well as instructions for use in effecting the surrender of the Certificates or Book-Entry Shares in exchange for the Merger Consideration (including cash in lieu of fractional shares) as provided for in this Agreement (the “Letter of Transmittal”).

 

Section 2.06        Deposit and Delivery of Merger Consideration.

 

(a)            Prior to the Effective Time, SMBK shall (i) deposit, or shall cause to be deposited, with the Exchange Agent stock certificates representing the number of shares of SMBK Common Stock and cash sufficient to deliver the Merger Consideration (together with, to the extent then determinable, any cash payable in lieu of fractional shares pursuant to Section 2.04, and if applicable, cash in an aggregate amount sufficient to make the appropriate payment to the Holders of Dissenting Shares) (collectively, the “Exchange Fund”), and (ii) instruct the Exchange Agent to pay such Merger Consideration and cash in lieu of fractional shares in accordance with this Agreement as promptly as practicable after the Effective Time and conditioned upon receipt of a properly completed Letter of Transmittal. The Exchange Agent and SMBK, as the case may be, shall not be obligated to deliver the Merger Consideration to a Holder to which such Holder would otherwise be entitled as a result of the Merger until such Holder surrenders the Certificates or Book-Entry Shares representing the shares of PFG Common Stock for exchange as provided in this Article II, or an appropriate affidavit of loss and indemnity agreement and/or a bond in such amount as may be reasonably required in each case by SMBK or the Exchange Agent.

 

(b)           Any portion of the Exchange Fund that remains unclaimed by a Holder for one year after the Effective Time (as well as any interest or proceeds from any investment thereof) shall be delivered by the Exchange Agent to SMBK. Any Holder who have not theretofore complied with this Section 2.06 shall thereafter look only to SMBK for the Merger Consideration, any cash in lieu of fractional shares of PFG Common Stock to be issued or paid in consideration therefor, and any dividends or distributions to which such Holder is entitled in respect of each share of PFG Common Stock such Holder held immediately prior to the Effective Time, as determined pursuant to this Agreement, in each case without any interest thereon. If outstanding Certificates or Book-Entry Shares for shares of PFG Common Stock are not surrendered or the payment for them is not claimed prior to the date on which such shares of SMBK Common Stock or cash would otherwise escheat to or become the property of any Governmental Authority, the unclaimed items shall, to the extent permitted by the law of abandoned property and any other applicable Law, become the property of SMBK (and to the extent not in its possession shall be delivered to it), free and clear of all claims or interest of any Person previously entitled to such property. Neither the Exchange Agent nor any Party shall be liable to any Holder represented by any Certificate or Book-Entry Share for any amounts delivered to a public official pursuant to applicable abandoned property, escheat, or similar Laws. SMBK and the Exchange Agent shall be entitled to rely upon the stock transfer books of PFG to establish the identity of those Persons entitled to receive the Merger Consideration specified in this Agreement, which books shall be conclusive with respect thereto. In the event of a dispute with respect to ownership of any shares of PFG Common Stock represented by any Certificate or Book-Entry Share, SMBK and the Exchange Agent shall be entitled to tender to the custody of any court of competent jurisdiction any Merger Consideration represented by such Certificate or Book-Entry Share and file legal proceedings interpleading all parties to such dispute, and will thereafter be relieved with respect to any claims thereto.

 

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(c)            SMBK or the Exchange Agent, as applicable, shall be entitled to deduct and withhold from any amounts otherwise payable pursuant to this Agreement to any Holder such amounts as SMBK is required to deduct and withhold under applicable Law. Any amounts so deducted and withheld shall be remitted to the appropriate Governmental Authority and upon such remittance shall be treated for all purposes of this Agreement as having been paid to the Holder in respect of which such deduction and withholding was made by SMBK or the Exchange Agent, as applicable.

 

Section 2.07        Rights of Certificate Holders after the Effective Time.

 

(a)            All shares of SMBK Common Stock to be issued pursuant to the Merger shall be deemed issued and outstanding as of the Effective Time and if ever a dividend or other distribution is declared by SMBK in respect of the SMBK Common Stock, the record date for which is at or after the Effective Time, that declaration shall include dividends or other distributions in respect of all shares of SMBK Common Stock issuable pursuant to this Agreement. No dividends or other distributions in respect of the SMBK Common Stock shall be paid to any Holder of any unsurrendered Certificate or Book-Entry Share until such Certificate or Book-Entry Share is surrendered for exchange in accordance with this Article II. Subject to the effect of applicable Laws, following surrender of any such Certificate or Book-Entry Share, there shall be issued and/or paid to the Holder of the certificates representing whole shares of SMBK Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of SMBK Common Stock and not paid and (ii) at the appropriate payment date, the dividends or other distributions payable with respect to such whole shares of SMBK Common Stock with a record date after the Effective Time but with a payment date subsequent to surrender.

 

(b)           In the event of a transfer of ownership of a Certificate representing PFG Common Stock that is not registered in the stock transfer records of PFG, the proper amount of cash and/or shares of SMBK Common Stock shall be paid or issued in exchange therefor to a person other than the person in whose name the Certificate so surrendered is registered if the Certificate formerly representing such PFG Common Stock shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment or issuance shall pay any transfer or other similar Taxes required by reason of the payment or issuance to a person other than the registered Holder of the Certificate or establish to the satisfaction of SMBK that the Tax has been paid or is not applicable.

 

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Section 2.08        Anti-Dilution Provisions. If the number of shares of SMBK Common Stock or PFG Common Stock issued and outstanding prior to the Effective Time shall be increased or decreased, or changed into or exchanged for a different number of kind of shares or securities, in any such case as a result of a stock split, reverse stock split, stock combination, stock dividend, reclassification, or similar transaction, or there shall be any extraordinary dividend or distribution with respect to such stock, and the record date therefor shall be prior to the Effective Time, an appropriate and proportionate adjustment shall be made to the Merger Consideration to give holders of PFG Common Stock the same economic effect as contemplated by this Agreement prior to such event.

 

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PFG

 

Except as set forth in the disclosure schedule delivered by PFG to SMBK prior to or concurrently with the execution of this Agreement with respect to each such section below (the “PFG Disclosure Schedule”); provided, that (a) the mere inclusion of an item in the PFG Disclosure Schedule as an exception to a representation or warranty shall not be deemed an admission by PFG that such item represents a material exception or fact, event, or circumstance or that such item is reasonably likely to result in a Material Adverse Effect on PFG and (b) any disclosures made with respect to a section of Article III shall be deemed to qualify (1) any other section of Article III specifically referenced or cross-referenced and (2) other sections of Article III to the extent it is reasonably apparent on its face (notwithstanding the absence of a specific cross reference) from a reading of the disclosure that such disclosure applies to such other sections, PFG hereby represents and warrants to SMBK as follows:

 

Section 3.01        Organization and Standing. Each of PFG and its Subsidiaries is (a) an entity duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation and (b) is duly licensed or qualified to do business and in good standing in each jurisdiction where its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so licensed or qualified has not had, and is not reasonably likely to have, a Material Adverse Effect with respect to PFG. A complete and accurate list of all such jurisdictions described in (a) and (b) is set forth in PFG Disclosure Schedule 3.01.

 

Section 3.02        Capital Stock.

 

(a)            The authorized capital stock of PFG consists of 1,000,000 shares of PFG Common Stock and 1,000,000 shares of preferred stock, no par value. As of the date hereof, there are 20,721 shares of PFG Common Stock issued and outstanding and no shares of preferred stock issued and outstanding. There are no shares of PFG Common Stock held by any of PFG’s Subsidiaries (other than shares in trust accounts, managed accounts and the like for the benefit of customers). PFG Disclosure Schedule 3.02(a) sets forth, as of the date hereof, the name and address, as reflected on the books and records of PFG, of each Holder, and the number of shares of PFG Common Stock held by each such Holder. The issued and outstanding shares of PFG Common Stock are duly authorized, validly issued, fully paid, non-assessable, and have not been issued in violation of nor are they subject to preemptive rights of any PFG shareholder. All shares of PFG’s capital stock issued and outstanding have been issued in compliance with and not in violation of any applicable federal or state securities Laws.

 

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(b)            There are not outstanding Rights of PFG. There are no outstanding shares of capital stock of any class, or any options, warrants or other similar rights, convertible or exchangeable securities, “phantom stock” rights, stock appreciation rights, stock based performance units, agreements, arrangements, commitments, or understandings to which PFG or any of its Subsidiaries is a party, whether or not in writing, of any character relating to the issued or unissued capital stock or other securities of PFG or any of PFG’s Subsidiaries or obligating PFG or any of PFG’s Subsidiaries to issue (whether upon conversion, exchange or otherwise) or sell any share of capital stock of, or other equity interests in or other securities of, PFG or any of PFG’s Subsidiaries other than those listed in PFG Disclosure Schedule 3.02(b). There are no obligations, contingent or otherwise, of PFG or any of PFG’s Subsidiaries to repurchase, redeem or otherwise acquire any shares of PFG Common Stock or capital stock of any of PFG’s Subsidiaries or any other securities of PFG or any of PFG’s Subsidiaries or to provide funds to or make any investment (in the form of a loan, capital contribution, or otherwise) in any such Subsidiary or any other entity. Except for the PFG Voting Agreements, there are no agreements, arrangements, or other understandings with respect to the voting of PFG’s capital stock and there are no agreements or arrangements under which PFG is obligated to register the sale of any of its securities under the Securities Act.

 

Section 3.03        Subsidiaries.

 

(a)            PFG Disclosure Schedule 3.03(a) sets forth a complete and accurate list of all Subsidiaries of PFG, including the jurisdiction of organization and all jurisdictions in which any such entity is qualified to do business and the number of shares or other equity interests in such Subsidiary held by PFG. Except as set forth in PFG Disclosure Schedule 3.03(a), (i) PFG owns, directly or indirectly, all of the issued and outstanding equity securities of each PFG Subsidiary, (ii) no equity securities of any of PFG’s Subsidiaries are or may become required to be issued (other than to PFG) by reason of any contractual right or otherwise, (iii) there are no contracts, commitments, understandings, or arrangements by which any of such Subsidiaries is or may be bound to sell or otherwise transfer any of its equity securities (other than to PFG or a Subsidiary of PFG), (iv) there are no contracts, commitments, understandings or arrangements relating to PFG’s rights to vote or to dispose of such securities, (v) all of the equity securities of each such Subsidiary held by PFG, directly or indirectly, are validly issued, fully paid, non-assessable and are not subject to preemptive or similar rights, and (vi) all of the equity securities of each Subsidiary that is owned, directly or indirectly, by PFG or any Subsidiary thereof, are free and clear of all Liens, other than restrictions on transfer under applicable securities or banking Laws. Neither PFG nor any of its Subsidiaries has any trust preferred securities or other similar securities outstanding.

 

(b)            Except as set forth in PFG Disclosure Schedule 3.03(b), neither PFG nor any of PFG’s Subsidiaries owns any stock or equity interest in any depository institution (as defined in 12 U.S.C. Section 1813(c)(1)) other than Progressive Bank. Except as set forth in PFG Disclosure Schedule 3.03(b), neither PFG nor any of Subsidiary of PFG beneficially owns, directly or indirectly (other than in a bona fide fiduciary capacity or in satisfaction of a debt previously contracted), any equity securities or similar interests of any Person, or any interest in a partnership or joint venture of any kind. 

 

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Section 3.04        Corporate Power; Minute Books.

 

(a)               PFG and each of its Subsidiaries has the corporate or similar power and authority to carry on its business as it is now being conducted and to own all of its properties and assets; and PFG has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and to consummate the transactions contemplated hereby, subject to receipt of all necessary approvals of Governmental Authorities, the Regulatory Approvals, and the Requisite PFG Shareholder Approval.

 

(b)               PFG has made available to SMBK a complete and correct copy of its charter and bylaws or equivalent organizational documents, each as amended to date, of PFG and each of its Subsidiaries, the minute books of PFG and each of its Subsidiaries, and the stock ledgers and stock transfer books of PFG and each of its Subsidiaries. Neither PFG nor any of its Subsidiaries is in violation of any of the terms of its charter, bylaws, or equivalent organizational documents. The minute books of PFG and each of its Subsidiaries contain records of all meetings held by, and all other corporate or similar actions of, their respective shareholders and boards of directors (including committees of their respective boards of directors) or other governing bodies, which records are complete and accurate in all material respects. The stock ledgers and the stock transfer books of PFG and each of its Subsidiaries contain complete and accurate records of the ownership of the equity securities of PFG and each of its Subsidiaries.

 

Section 3.05        Corporate Authority. Subject only to the receipt of the Requisite PFG Shareholder Approval at the PFG Meeting, this Agreement and the transactions contemplated hereby have been authorized by all necessary corporate action of PFG and the board of directors of PFG on or prior to the date hereof. The board of directors of PFG has directed that this Agreement be submitted to PFG’s shareholders for approval at a meeting of the shareholders and, except for the receipt of the Requisite PFG Shareholder Approval in accordance with the TBCA and PFG’s charter and bylaws, no other vote or action of the shareholders of PFG is required by Law, the charter or bylaws of PFG or otherwise to approve this Agreement and the transactions contemplated hereby. PFG has duly executed and delivered this Agreement and, assuming due authorization, execution and delivery by SMBK, this Agreement is a valid and legally binding obligation of PFG, enforceable in accordance with its terms (except to the extent that validity and enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or similar Laws affecting the enforcement of creditors’ rights generally or by general principles of equity or by principles of public policy (the “Enforceability Exception’’).

 

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Section 3.06        Regulatory Approvals; No Defaults.

 

(a)               No consents or approvals of, or waivers by, or filings or registrations with, any Governmental Authority are required to be made or obtained by PFG or any of its Subsidiaries in connection with the execution, delivery, or performance by PFG of this Agreement or to consummate the transactions contemplated by this Agreement, except as may be required for (i) filings of applications or notices with, and consents, approvals or waivers by the FRB, the FDIC, the Tennessee Department of Financial Institutions (the “TDFI”), and other banking, regulatory, self-regulatory, or enforcement authorities or any courts, administrative agencies, or commissions or other Governmental Authorities and approval of or non-objection to such applications, filings, and notices (the “Regulatory Approvals”), (ii) the filing with the SEC of the Proxy Statement-Prospectus and the Registration Statement and declaration of effectiveness of the Registration Statement, (iii) the filing of the Articles of Merger contemplated by Section 1.04(a) and the filing of documents with the FDIC, the TDFI, or other applicable Governmental Authorities, and the Secretary of State of the State of Tennessee to cause the Bank Merger to become effective and (iv) such filings and approvals as are required to be made or obtained under the securities or “Blue Sky” laws of various states in connection with the issuance of the shares of SMBK Common Stock pursuant to this Agreement and approval of listing of such SMBK Common Stock on the NASDAQ. Subject to the receipt of the consents, approvals, and waivers referred to in the preceding sentence, the Requisite PFG Shareholder Approval and as set forth on PFG Disclosure Schedule 3.06(a), the execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby by PFG do not and will not (1) constitute a breach or violation of, or a default under, the charter, bylaws or similar governing documents of PFG or any of its respective Subsidiaries, (2) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree, or injunction applicable to PFG or any of its Subsidiaries, or any of their respective properties or assets, (3) conflict with, result in a breach or violation of any provision of, or the loss of any benefit under, or a default (or an event which, with or without notice or lapse of time, or both, would constitute a default) under, result in the creation of any Lien under, result in a right of termination or the acceleration of any right or obligation (which, in each case, would have a material impact on PFG or could reasonably be expected to result in a financial obligation or penalty in excess of $50,000) under any permit, license, credit agreement, indenture, loan, note, bond, mortgage, reciprocal easement agreement, lease, instrument, concession, contract, franchise, agreement, or other instrument or obligation of PFG or any of its Subsidiaries or to which PFG or any of its Subsidiaries, or their respective properties or assets is subject or bound, or (4) require the consent or approval of any third party or Governmental Authority under any such Law, rule or regulation or any judgment, decree, order, permit, license, credit agreement, indenture, loan, note, bond, mortgage, reciprocal easement agreement, lease, instrument, concession, contract, franchise, agreement or other instrument or obligation, except where the failure to obtain the consent or approval would not be reasonably expected to have a material impact on PFG or result in a material financial penalty.

 

(b)              As of the date hereof, PFG has no Knowledge of any reason (i) why the Regulatory Approvals referred to in Section 6.01(b) will not be received in customary time frames from the applicable Governmental Authorities having jurisdiction over the transactions contemplated by this Agreement or (ii) why any Burdensome Condition would be imposed.

 

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Section 3.07        Financial Statements; Internal Controls.

 

(a)               PFG has previously delivered or made available to SMBK copies of PFG’s (i) audited consolidated financial statements (including the related notes and schedules thereto) for the years ended December 31, 2018, 2017 and 2016, accompanied by the unqualified audit reports of Mauldin & Jenkins LLP, independent registered accountants (collectively, the “Audited Financial Statements”) and (ii) unaudited interim consolidated financial statements (including the related notes and schedules thereto) for the nine months ended September 30, 2019 (the “Unaudited Financial Statements” and collectively with the Audited Financial Statements, the “Financial Statements”). The Financial Statements (including any related notes and schedules thereto) are accurate and complete in all material respects and fairly present in all material respects the financial condition and the results of operations, changes in shareholders’ equity, and cash flows of PFG and its consolidated Subsidiaries as of the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, consistently applied, subject, in the case of the Unaudited Financial Statements, to normal, recurring year-end adjustments (the effect of which has not had, and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect with respect to PFG) and the absence of notes and schedules (that, if presented, would not differ materially from those included in the Audited Financial Statements). No financial statements of any entity or enterprise other than PFG’s Subsidiaries are required by GAAP to be included in the consolidated financial statements of PFG. The audits of PFG have been conducted in accordance with GAAP. Since December 31, 2018, neither PFG nor any of its Subsidiaries has any liabilities or obligations of a nature that would be required by GAAP to be set forth on its consolidated balance sheet or in the notes thereto except for liabilities reflected or reserved against in the Financial Statements and current liabilities incurred in the Ordinary Course of Business since December 31, 2018. True, correct and complete copies of the Financial Statements have been provided to SMBK prior to the date hereof.

 

(b)              The records, systems, controls, data, and information of PFG and its Subsidiaries are recorded, stored, maintained, and operated under means (including any electronic, mechanical, or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of PFG or its Subsidiaries or accountants (including all means of access thereto and therefrom). PFG and its Subsidiaries have devised and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. PFG has disclosed based on its most recent evaluations, to its outside auditors and the audit committee of the board of directors of PFG (i) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect PFG’s ability to record, process, summarize and report financial data and (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in PFG’s internal control over financial reporting. PFG has made available to SMBK a summary of any such disclosure made by management to the auditor and/or audit committee of PFG or any Subsidiary.

 

(c)               Except as set forth in PFG Disclosure Schedule 3.07(c), since January 1, 2016, neither PFG nor any of its Subsidiaries nor, to PFG’s Knowledge, any director, officer, employee, auditor, accountant or representative of PFG or any of its Subsidiaries has received, or otherwise had or obtained Knowledge of, any material complaint, allegation, assertion, or claim regarding the accounting or auditing practices, procedures, methodologies, or methods of PFG or any of its Subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion, or claim that PFG or any of its Subsidiaries has engaged in questionable accounting or auditing practices.

 

Section 3.08        Regulatory Reports. Since January 1, 2016, PFG and its Subsidiaries have timely filed with the FRB, the FDIC, the TDFI and any other applicable Governmental Authority, in correct form, the material reports, registration statements, and other documents required to be filed under applicable Laws and regulations and have paid all fees and assessments due and payable in connection therewith, and such reports and other documents were complete and accurate and in compliance in all material respects with the requirements of applicable Laws and regulations. Other than normal examinations conducted by a Governmental Authority in the Ordinary Course of Business, no Governmental Authority has notified PFG or any of its Subsidiaries that it has initiated any proceeding or, to the Knowledge of PFG, threatened an investigation into the business or operations of PFG or any of its Subsidiaries since January 1, 2016. There is no material and unresolved violation, criticism, or exception by any Governmental Authority with respect to any report or statement relating to any examinations or inspections of PFG or any of its Subsidiaries.

 

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Section 3.09       Absence of Certain Changes or Events. Except as set forth in PFG Disclosure Schedule 3.09, the Financial Statements, or as otherwise contemplated by this Agreement, since December 31, 2018, (a) PFG and its Subsidiaries have carried on their respective businesses in all material respects in the Ordinary Course of Business, (b) there have been no events, changes, or circumstances which have had, or are reasonably likely to have, individually or in the aggregate, a Material Adverse Effect with respect to PFG, and (c) neither PFG nor any of its Subsidiaries has taken any action or failed to take any action prior to the date of this Agreement which action or failure, if taken after the date of this Agreement, would constitute a material breach or violation of any of the covenants and agreements set forth in Section 5.01(i), Section 5.01(ii), Section 5.01(iii), Section 5.01(v), Section 5.01(vii), Section 5.01(viii), Section 5.01(x), Section 5.01(xi), Section 5.01(xxi), or Section 5.01(xxv).

 

Section 3.10        Legal Proceedings.

 

(a)               Except as set forth on PFG Disclosure Schedule 3.10(a), there are no material civil, criminal, administrative or regulatory actions, suits, demand letters, demands for indemnification, claims, hearings, notices of violation, arbitrations, investigations, orders to show cause, market conduct examinations, notices of non-compliance, or other proceedings of any nature pending or, to the Knowledge of PFG, threatened against PFG or any of its Subsidiaries or any of their current or former directors or executive officers in their capacities as such, or to which PFG or any of its Subsidiaries or any of their current or former directors or executive officers, in their capacities as such, is a party, including without limitation, any such actions, suits, demand letters, demands for indemnification, claims, hearings, notices of violation, arbitrations, investigations, orders to show cause, market conduct examinations, notices of non-compliance, or other proceedings of any nature that would challenge the validity or propriety of the transactions contemplated by this Agreement.

 

(b)               There is no material injunction, order, judgment, or decree or regulatory restriction imposed upon PFG or any of its Subsidiaries, or the assets of PFG or any of its Subsidiaries (or that, upon consummation of the Merger or the Bank Merger would apply to the Surviving Entity or any of its Subsidiaries or affiliates), and neither PFG nor any of its Subsidiaries has been advised of the threat of any such action, other than any such injunction, order, judgement, or decree that is generally applicable to all Persons in businesses similar to that of PFG or any of PFG’s Subsidiaries.

 

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Section 3.11        Compliance With Laws.

 

(a)               PFG and each of its Subsidiaries is, and has been since January 1, 2016, in compliance in all material respects with all Laws, including, without limitation, Laws related to data protection or privacy, the USA PATRIOT Act, the Bank Secrecy Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Community Reinvestment Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Dodd-Frank Act, Sections 23A and 23B of the Federal Reserve Act, the Sarbanes-Oxley Act or the regulations implementing such statutes, all other applicable anti-money laundering Laws, fair lending Laws and other Laws relating to discriminatory lending, financing, leasing, or business practices and all agency requirements relating to the origination, sale, and servicing of mortgage loans, except where the failure to comply with such Laws would not be reasonably expected to result in a Material Adverse Effect in respect of PFG or any of its Subsidiaries. Neither PFG nor any of its Subsidiaries has been advised of any supervisory concerns regarding their compliance with the Bank Secrecy Act or related state or federal anti-money laundering laws, regulations, and guidelines, including without limitation those provisions of federal regulations requiring (i) the filing of reports, such as Currency Transaction Reports and Suspicious Activity Reports, (ii) the maintenance of records, and (iii) the exercise of due diligence in identifying customers.

 

(b)               PFG and each of its Subsidiaries have all material permits, licenses, authorizations, orders, and approvals of, and each has made all filings, applications, and registrations with, all Governmental Authorities that are required in order to permit it to own or lease its properties and to conduct its business as presently conducted. All such permits, licenses, certificates of authority, orders, and approvals are in full force and effect and, to PFG’s Knowledge, no suspension or cancellation of any of them is threatened.

 

(c)               Neither PFG nor any of its Subsidiaries has received, since January 1, 2016, written or, to PFG’s Knowledge, oral notification from any Governmental Authority (i) asserting that it is materially in non-compliance with any of the Laws which such Governmental Authority enforces or (ii) threatening to revoke any license, franchise, permit, or governmental authorization, except, in either case, where the matters referenced in such notification would not be reasonably expected to result in a Material Adverse Effect in respect of PFG or its Subsidiaries.

 

(d)               All shares of PFG Common Stock issued and outstanding have been issued in compliance in material respects with, and not in material violation of, any applicable federal or state securities Laws.

 

Section 3.12        PFG Material Contracts; Defaults.

 

(a)               Except as set forth in PFG Disclosure Schedule 3.12(a), neither PFG nor any of its Subsidiaries is a party to, bound by, or subject to any agreement, contract, arrangement, commitment, or understanding (whether written or oral) (i) which would entitle any present or former director, officer, employee, consultant, or agent of PFG or any of its Subsidiaries to indemnification from PFG or any of its Subsidiaries; (ii) which grants any right of first refusal, right of first offer, or similar right with respect to any assets or properties of PFG or its respective Subsidiaries; (iii) related to the borrowing by PFG or any of its Subsidiaries of money other than those entered into in the Ordinary Course of Business and any guaranty of any obligation for the borrowing of money, excluding endorsements made for collection, repurchase or resell agreements, letters of credit and guaranties made in the Ordinary Course of Business; (iv) which provides for payments to be made by PFG or any of its Subsidiaries upon a change in control thereof; (v) relating to the lease of personal property having a value in excess of $25,000 individually or $50,000 in the aggregate; (vi) relating to any joint venture, partnership, limited liability company agreement, or other similar agreement or arrangement; (vii) which relates to capital expenditures and involves future payments in excess of $50,000 individually or $125,000 in the aggregate; (viii) which relates to the disposition or acquisition of assets or any interest in any business enterprise outside the Ordinary Course of Business; (ix) which is not terminable on 60 days or less notice and involving the payment of more than $30,000 per annum; (x) which contains a non-compete, or client or customer non-solicit requirement, or any other provision that restricts the conduct of any line of business by PFG or any of its Affiliates or upon consummation of the Merger will restrict the ability of the Surviving Entity or any of its Affiliates to engage in any line of business (including, for the avoidance of doubt, any exclusivity provision granted in favor of any third party) or which grants any right of first refusal, right of first offer, or similar right or that limits or purports to limit the ability of PFG or any of its Subsidiaries (or, following consummation of the transactions contemplated hereby, SMBK or any of its Subsidiaries) to own, operate, sell, transfer, pledge, or otherwise dispose of any assets or business; or (xi) pursuant to which PFG or any of its Subsidiaries may become obligated to invest in or contribute capital to any entity. Each contract, arrangement, commitment, or understanding of the type described in this Section 3.12(a) is listed in PFG Disclosure Schedule 3.12(a) and is referred to herein as a “PFG Material Contract.” PFG has previously made available to SMBK true, complete and correct copies of each such PFG Material Contract, including any and all amendments and modifications thereto.

 

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(b)               Each PFG Material Contract is valid and binding on PFG and any of its Subsidiaries to the extent such Subsidiary is a party thereto, as applicable, and is in full force and effect and enforceable in accordance with its terms (assuming the due execution by each other party thereto, provided that PFG hereby represents and warrants that, to its Knowledge, each PFG Material Contract is duly executed by all such parties), subject to the Enforceability Exception and except where the failure to be valid, binding, enforceable, and in full force and effect, individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect with respect to PFG; and neither PFG nor any of its Subsidiaries is in default under any PFG Material Contract or other “material contract” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), to which it is a party, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a material default. No power of attorney or similar authorization given directly or indirectly by PFG or any of its Subsidiaries is currently outstanding.

 

(c)               PFG Disclosure Schedule 3.12(c) sets forth a true and complete list of all PFG Material Contracts pursuant to which consents, waivers, or notices are or may be required to be given thereunder, in each case, prior to the performance by PFG of this Agreement and the consummation of the Merger, the Bank Merger and the other transactions contemplated hereby and thereby.

 

Section 3.13        Agreements with Regulatory Agencies. Neither PFG nor any of its Subsidiaries is subject to any cease-and-desist or other order issued by, or is a party to any written agreement, consent agreement, or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is a recipient of any extraordinary supervisory letter from, or is subject to any order or directive by, or has adopted any board resolutions at the request of any Governmental Authority (each a “PFG Regulatory Agreement”) that restricts, or by its terms will in the future restrict, the conduct of PFG’s or any of its Subsidiaries’ business or that in any manner relates to their capital adequacy, credit or risk management policies, dividend policies, management, business, or operations, nor has PFG or any of its Subsidiaries been advised by any Governmental Authority that it is considering issuing, initiating, ordering, requesting, recommending or otherwise proceeding with (or is considering the appropriateness of any of the aforementioned actions) any PFG Regulatory Agreement. To PFG’s Knowledge, there are no investigations relating to any regulatory matters pending before any Governmental Authority with respect to PFG or any of its Subsidiaries.

 

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Section 3.14       Brokers; Fairness Opinion. Neither PFG nor any of its officers, directors or any of its Subsidiaries has employed any broker or finder or incurred, nor will it incur, any liability for any broker’s fees, commissions or finder’s fees in connection with any of the transactions contemplated by this Agreement, except that PFG has engaged, and will pay a fee or commission to Olsen Palmer LLC (“PFG Financial Advisor”), in accordance with the terms of a letter agreement between PFG Financial Advisor and PFG, a true, complete and correct copy of which has been previously delivered by PFG to SMBK. PFG has received the opinion of the PFG Financial Advisor (and, when it is delivered in writing, a copy of such opinion will be promptly provided to SMBK) to the effect that, as of the date of this Agreement and based upon and subject to the qualifications and assumptions set forth therein, the Merger Consideration is fair, from a financial point of view, to the holders of shares of PFG Common Stock, and, as of the date of this Agreement, such opinion has not been withdrawn, revoked, or modified.

 

Section 3.15        Employee Benefit Plans.

 

(a)               PFG Disclosure Schedule 3.15(a) sets forth a true and complete list of each PFG Benefit Plan. For purposes of this Agreement, “PFG Benefit Plans” means all benefit and compensation plans, contracts, policies, or arrangements (i) covering current or former employees or their beneficiaries and dependents of PFG, any of its Subsidiaries, or any of PFG’s related organizations described in Code Sections 414(b), (c), (m), or (o), or any entity which is considered one employer with PFG, any of its Subsidiaries, or Controlled Group Members under Section 4001 of ERISA or Section 414 of the Code (“ERISA Affiliates”) (such current employees collectively, the “PFG Employees”), (ii) covering current or former directors or their beneficiaries and dependents of PFG, any of its Subsidiaries, or ERISA Affiliates, or (iii) with respect to which PFG or any of its Subsidiaries has or may have any liability or contingent liability (including liability arising from ERISA Affiliates) including, but not limited to, “employee benefit plans” within the meaning of Section 3(3) of ERISA, health/welfare, employment, severance, change-of-control, fringe benefit, deferred compensation, defined benefit plan, defined contribution plan, stock option, stock purchase, stock appreciation rights, stock based, incentive, bonus plans, retirement plans, and other policies, plans, or arrangements whether or not subject to ERISA.

 

(b)               With respect to each PFG Benefit Plan, PFG has provided to SMBK true and complete copies of such PFG Benefit Plan, any trust instruments, insurance contracts, or other funding arrangements forming a part of any PFG Benefit Plans and all amendments thereto, summary plan descriptions and summary of material modifications, IRS Form 5500 (for the three most recently completed plan years), the most recent IRS determination, opinion, notification and advisory letters, with respect thereto and any correspondence from any regulatory agency. In addition, with respect to each of the PFG Benefit Plans for the three most recently completed plan years, any plan financial statements and accompanying accounting reports, service contracts, fidelity bonds, and employee and participant annual QDIA notice, safe harbor notice, or fee disclosures notices under 29 CFR 2550.404a-5, and nondiscrimination testing data and results under Code Sections 105(h), 125, 129, 401(k), and 401(m), as applicable, have been provided to SMBK.

 

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(c)               All PFG Benefit Plans are in compliance in all material respects in form and operation with all applicable Laws, including ERISA and the Code. Each PFG Benefit Plan which is intended to be qualified under Section 401(a) of the Code (“PFG 401(a) Plan”) has received a favorable opinion, determination, or advisory letter from the IRS, and to PFG’s Knowledge there is not any circumstance that could reasonably be expected to result in revocation of any such favorable determination, opinion, or advisory letter or the loss of the qualification of such PFG 401(a) Plan under Section 401(a) of the Code, and nothing has occurred that would be expected to result in the PFG 401(a) Plan ceasing to be qualified under Section 401(a) of the Code. All PFG Benefit Plans have been administered in accordance with their terms. There is no pending or, to PFG’s Knowledge, threatened litigation or regulatory action relating to the PFG Benefit Plans. Neither PFG nor any of its Subsidiaries has engaged in a transaction with respect to any PFG Benefit Plan, including a PFG 401(a) Plan that could subject PFG or any of its Subsidiaries to a tax or penalty under any Law including, but not limited to, Section 4975 of the Code or Section 502(i) of ERISA. No PFG 401(a) Plan has been submitted under or been the subject of an IRS voluntary compliance program submission that is still outstanding or that has not been fully corrected in accordance with a compliance statement issued by the IRS with respect to any applicable failures. There are no audits, inquiries or proceedings pending or, to PFG’s Knowledge, threatened by the IRS or the Department of Labor with respect to any PFG Benefit Plan. To PFG's Knowledge, there are no current, pending, or threatened investigations by the IRS or the Department of Labor with respect to any PFG Benefit Plan.

 

(d)               No liability under Title IV of ERISA has been or is expected to be incurred by PFG, any of its Subsidiaries or any ERISA Affiliates with respect to any ongoing, frozen or terminated “single employer plan,” within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by PFG, any of its Subsidiaries, or any ERISA Affiliates. Neither PFG nor any ERISA Affiliate has ever maintained, sponsored, or contributed to, or been obligated to contribute to a plan subject to Title IV of ERISA or Section 412 of the Code. None of PFG or any ERISA Affiliate has contributed to (or been obligated to contribute to) a “multiemployer plan” within the meaning of Section 3(37) of ERISA at any time. Neither PFG nor any of its Subsidiaries or ERISA Affiliates have incurred, and there are no circumstances under which they could reasonably be expected to incur, liability under Title IV of ERISA (regardless of whether based on contributions of an ERISA Affiliate). Neither PFG nor any of its Subsidiaries has ever sponsored, maintained, or participated in a multiple employer welfare arrangement as defined in ERISA Section 3(40). No notice of a “reportable event” within the meaning of Section 4043 of ERISA has been required to be filed for any PFG Benefit Plan or by any ERISA Affiliate or will be required to be filed, in either case, in connection with the transactions contemplated by this Agreement.

 

(e)               All contributions required to be made with respect to all PFG Benefit Plans have been timely made. No PFG Benefit Plan or single employer plan of an ERISA Affiliate has an “accumulated funding deficiency” (whether or not waived) within the meaning of Section 412 of the Code or Section 3012 of ERISA and no ERISA Affiliate has an outstanding funding waiver.

 

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(f)                Except as set forth in PFG Disclosure Schedule 3.15(f), no PFG Benefit Plan provides life insurance, medical, surgical, hospitalization or other employee welfare benefits to any PFG Employee, or any of their affiliates, upon or following his or her retirement or termination of employment for any reason, except as may be required by Law.

 

(g)               All PFG Benefit Plans that are group health plans have been operated in all material respects in compliance with the group health plan continuation requirements of Section 4980B of the Code and all other applicable sections of ERISA and the Code, and no material liabilities arising under Code Section 4980H have occurred. PFG may amend or terminate any such PFG Benefit Plan at any time without incurring any liability thereunder for future benefits coverage at any time after such termination.

 

(h)               Except as otherwise provided for in this Agreement or as set forth in PFG Disclosure Schedule 3.15(h), neither the execution of this Agreement, shareholder approval of this Agreement, or consummation of any of the transactions contemplated by this Agreement (individually or in conjunction with any other event) will (i) entitle any current or former PFG Employee to retention or other bonuses, parachute payments, non-competition payments, or any other payment, (ii) entitle any current or former PFG Employee to unemployment compensation, severance pay or any increase in severance pay upon any termination of employment, (iii) accelerate the time of payment or vesting (except as required by Law) or trigger any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or trigger any other obligation pursuant to, any of the PFG Benefit Plans, (iv) result in any breach or violation of, or a default under, any of the PFG Benefit Plans, (v) result in any payment of any amount that would, individually or in combination with any other such payment, be an excess “parachute payment” to a “disqualified individual” as those terms are defined in Section 280G of the Code, or (vi) limit or restrict the right of PFG or, after the consummation of the transactions contemplated hereby, SMBK or any of its Subsidiaries, to merge, amend or terminate any of the PFG Benefit Plans.

 

(i)                Except as set forth in PFG Disclosure Schedule 3.15(i), (i) each PFG Benefit Plan that is a non-qualified deferred compensation plan or arrangement within the meaning of Section 409A of the Code, and any underlying award, is in compliance in all respects with Section 409A of the Code and (ii) no payment or award that has been made to any participant under a PFG Benefit Plan is subject to the interest and penalties specified in Section 409A(a)(1)(B) of the Code. Neither PFG nor any of its Subsidiaries (x) has any obligation to reimburse or indemnify any participant in a PFG Benefit Plan for any of the interest or penalties specified in Section 409A(a)(1)(B) of the Code that may be currently due or triggered in the future, or (y) except as set forth in PFG Disclosure Schedule 3.15(i), has been required to report to any Governmental Authority any correction or taxes due as a result of a failure to comply with Section 409A of the Code.

 

(j)                No PFG Benefit Plan provides for the gross-up or reimbursement of any Taxes imposed by Section 4999 of the Code or otherwise, and neither PFG nor any of its Subsidiaries has any obligation to reimburse or indemnify any party for such Taxes.

 

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(k)               PFG has made available to SMBK copies of any Code Section 280G calculations (whether or not final) with respect to the disqualified individuals referenced in such calculations in connection with the transactions contemplated by this Agreement.

 

(l)                PFG Disclosure Schedule 3.15(l) contains a schedule showing the monetary amounts payable or potentially payable, whether individually or in the aggregate (including good faith estimates of all amounts not subject to precise quantification as of the date of this Agreement) under any employment, change-in-control, severance, or similar contract, plan, or arrangement with or which covers any present or former director, officer, employee, or consultant of PFG or any of its Subsidiaries who may be entitled to any such amount and identifying the types and estimated amounts of the in-kind benefits due under any PFG Benefit Plans (other than a plan qualified under Section 401(a) of the Code) for each such Person, specifying the assumptions in such schedule and providing estimates of other required contributions to any trusts for any related fees or expenses.

 

(m)              PFG and its Subsidiaries have correctly classified in all material respects all individuals who directly or indirectly perform services for PFG or any of its Subsidiaries for purposes of each PFG Benefit Plan, ERISA, and the Code.

 

Section 3.16        Labor Matters. Neither PFG nor any of its Subsidiaries is a party to or bound by any collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization, nor is there any proceeding pending or, to PFG’s Knowledge threatened, asserting that PFG or any of its Subsidiaries has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel PFG or any of its Subsidiaries to bargain with any labor organization as to wages or conditions of employment, nor is there any strike or other labor dispute against PFG pending or, to PFG’s Knowledge, threatened, nor to PFG’s Knowledge is there any activity involving PFG Employees seeking to certify a collective bargaining unit or engaging in other organizational activity. To its Knowledge, PFG and its Subsidiaries have correctly classified all individuals who directly or indirectly perform services for PFG or any of its Subsidiaries for purposes of federal and state unemployment compensation Laws, workers’ compensation Laws, and the rules and regulations of the U.S. Department of Labor. To PFG’s Knowledge, no officer of PFG or any of its Subsidiaries is in material violation of any employment contract, confidentiality, non-competition agreement, or any other restrictive covenant.

 

Section 3.17        Environmental Matters. (a) To its Knowledge, PFG and its Subsidiaries have been and are in material compliance with all applicable Environmental Laws, including obtaining, maintaining, and complying with all permits required under Environmental Laws for the operation of their respective businesses, (b) there is no action or investigation by or before any Governmental Authority relating to or arising under any Environmental Laws that is pending or, to the Knowledge of PFG, threatened against PFG or any of its Subsidiaries or any real property or facility presently owned, operated, or leased by PFG or any of its Subsidiaries or any predecessor (including in a fiduciary or agency capacity), (c) neither PFG nor any of its Subsidiaries has received any notice of or is subject to any liability, order, settlement, judgment, injunction, or decree involving uncompleted, outstanding, or unresolved requirements relating to or arising under Environmental Laws, (d) to the Knowledge of PFG, there have been no releases of Hazardous Substances at, on, under or affecting any of the real properties or facilities presently owned, operated or leased by PFG or any of its Subsidiaries or any predecessor (including in a fiduciary or agency capacity) in amount or condition that has resulted in or would reasonably be expected to result in liability to PFG or any of its Subsidiaries relating to or arising under any Environmental Laws, and (e) to the Knowledge of PFG, there are no underground storage tanks on, in or under any property currently owned, operated or leased by PFG or any of its Subsidiaries.

 

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Section 3.18        Tax Matters.

 

(a)               Each of PFG and its Subsidiaries has duly and timely filed (taking into account all applicable extensions) all Tax Returns that it was required to file under applicable Laws, other than Tax Returns that are not yet due or for which a request for extension was timely filed consistent with requirements of applicable Law. All such Tax Returns were correct and complete in all material respects and have been prepared in compliance with all applicable Laws. All Taxes due and owing by PFG or any of its Subsidiaries (whether or not shown on any Tax Return) have been fully and timely paid. Neither PFG nor any of its Subsidiaries is currently the beneficiary of any extension of time within which to file any Tax Return. Neither PFG nor any of its Subsidiaries has ever received written notice of any claim by any Governmental Authority in a jurisdiction where PFG or such Subsidiary does not file Tax Returns that it is or may be subject to Taxes by that jurisdiction. There are no Liens for Taxes (other than Taxes not yet due and payable or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP) upon any of the assets of PFG or any of its Subsidiaries.

 

(b)               PFG and each of its Subsidiaries have properly withheld and paid over to the appropriate Governmental Authority all Taxes required to have been withheld and paid over in connection with any amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other Person, and have complied in all material respects with all applicable reporting requirements related to Taxes.

 

(c)               No foreign, federal, state, or local Tax audits or administrative or judicial Tax proceedings are currently being conducted or pending or threatened in writing, in each case, with respect to Taxes of PFG or any of its Subsidiaries. Neither PFG nor any of its Subsidiaries has received from any foreign, federal, state, or local taxing authority (including jurisdictions where PFG or any of its Subsidiaries have not filed Tax Returns) any (i) notice indicating an intent to open an audit or other review with respect to Taxes or (ii) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted, or assessed by any taxing authority against PFG or any of its Subsidiaries which, in either case of (i) or (ii), have not been fully paid or settled.

 

(d)               PFG has delivered or made available to SMBK true and complete copies of the foreign, federal, state, or local Tax Returns filed with respect to PFG or any of its Subsidiaries, and of all examination reports and statements of deficiencies assessed against or agreed to by PFG, in each case with respect to income Taxes, for taxable periods ended on or after December 31, 2015.

 

(e)               With respect to tax years open for audit as of the date hereof, neither PFG nor any of its Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

 

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(f)                Neither PFG nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). Neither PFG nor any of its Subsidiaries is a party to or is otherwise bound by any Tax allocation or sharing agreement (other than such an agreement (i) exclusively between or among PFG and its Subsidiaries or (ii) with customers, vendors, lessors, or similar third parties entered into in the Ordinary Course of Business and not primarily related to Taxes). PFG (i) has not been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was PFG), and (ii) has no liability for the Taxes of any Person (other than PFG and its Subsidiaries) under Regulations Section 1.1502-6 (or any similar provision of foreign, state, or local Law), as a transferee or successor, by contract, or otherwise.

 

(g)               The most recent Financial Statements as of the date hereof reflect an adequate reserve, in accordance with GAAP, for all Taxes payable by PFG and its Subsidiaries for all taxable periods through the date of such Financial Statements. Since December 31, 2017, neither PFG nor any of its Subsidiaries has incurred any liability for Taxes arising from extraordinary gains or losses, as that term is used in GAAP, outside the Ordinary Course of Business.

 

(h)               Neither SMBK, PFG nor any of its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Effective Time as a result of any: (i) change in method of accounting pursuant to Section 481 of the Code or any comparable provision under foreign, state, or local Law for a taxable period ending on or prior to the Closing Date by PFG or any of its Subsidiaries; (ii) “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of foreign, state, or local Law) executed on or prior to the Closing Date by PFG or any of its Subsidiaries; (iii) intercompany transactions or any excess loss account described in Regulations under Code Section 1502 (or any corresponding or similar provision of foreign, state, or local Law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date by PFG or any of its Subsidiaries; or (v) prepaid amount received on or prior to the Closing Date by PFG or any of its Subsidiaries.

 

(i)                Since January 1, 2016, neither PFG nor any of its Subsidiaries has distributed stock of another Person nor had its stock distributed by another Person in a transaction that was intended to be nontaxable and governed in whole or in part by Section 355 or Section 361 of the Code.

 

(j)                Neither PFG nor any of its Subsidiaries has been a party to any “listed transaction,” as defined in Section 6707A(c)(2) of the Code and Section 1.6011-4(b)(2) of the Regulations.

 

(k)               Since its formation in 2016, PFG has been a validly electing “S corporation” (Subchapter S corporation) under Sections 1361 and 1362 of the Code for federal income Tax purposes, and a valid “S corporation” in all states that permit comparable flow-through income Tax treatment for state purposes (whether or not the state requires a separate state election). No actions or omissions have been committed by PFG, holders of PFG Common Stock or otherwise to cause PFG to cease to so qualify as an “S corporation.” At no time has PFG had, within the meaning of Code Section 1361(b) and the Treasury Regulations thereunder: (i) more than 100 shareholders (taking into account the special rules in Code Section 1361(c)); (ii) any shareholder who is a person (other than an estate, a trust described in Code Section 1361(c)(2), or an organization described in Code Section 1361(c)(6)) who is not an individual; (iii) any shareholder that is a nonresident alien; or (iv) more than one class of stock. Neither PFG nor any of its Subsidiaries is a financial institution which uses the reserve method of accounting for bad debts described in Code 585. Any “trust preferred securities” issued by PFG or any of its Subsidiaries are properly treated as debt, rather than equity, for federal income Tax purposes.

 

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(l)                Since the formation of PFG in 2016, each Subsidiary of PFG that otherwise would be taxed as a domestic corporation as that term is defined in Section 7701(a)(3) and the Regulations thereunder, is and always has been, within the meaning of Section 1361(b)(3) and the Regulations thereunder, a domestic corporation, a 100% subsidiary of PFG, and a properly electing ‘‘qualified subchapter S subsidiary’’ within the meaning of Section 1361(b)(3)(B) of the Code.

 

(m)              PFG and its Subsidiaries will not be subject to Tax under Code Section 1374 (or any similar provision of Law) in connection with the transactions contemplated by this Agreement. Neither PFG nor any of its Subsidiaries has, in the past five years, acquired assets from a C corporation in a transaction in which the Tax basis of PFG or any of its Subsidiaries for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets in the hands of the transferor.

 

(n)               Neither PFG nor any of its Subsidiaries (i) is a “controlled foreign corporation” as defined in Section 957 of the Code, (ii) is a “passive foreign investment company” within the meaning of Section 1297 of the Code, or (iii) has a permanent establishment (within the meaning of an applicable Tax treaty) or otherwise has an office or fixed place of business in a country other than the United States of America.

 

(o)               Neither PFG nor any of its Subsidiaries has taken or agreed to take any action, and to the Knowledge of PFG there is no fact or circumstance, that would be reasonably likely to prevent the Merger from qualifying for U.S. federal income tax purposes as a “reorganization” within the meaning of Section 368(a) of the Code.

 

Section 3.19       Investment Securities. PFG Disclosure Schedule 3.19 sets forth as of July 31, 2019, the PFG Investment Securities, as well as any purchases or sales of PFG Investment Securities between December 31, 2018 to and including July 31, 2019, reflecting with respect to all such securities, whenever purchased or sold, descriptions thereof, CUSIP numbers, designations as securities “available for sale” or securities “held to maturity” (as those terms are used in ASC 320), book values, fair values and coupon rates, and any gain or loss with respect to any PFG Investment Securities sold during such time period between December 31, 2019 to and including July 31, 2019. Neither PFG nor any of its Subsidiaries owns any of the outstanding equity of any savings bank, savings and loan association, savings and loan holding company, credit union, bank or bank holding company, insurance company, mortgage or loan broker, or any other financial institution other than Progressive Bank.

 

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Section 3.20        Derivative Transactions.

 

(a)               All Derivative Transactions entered into by PFG or any of its Subsidiaries or for the account of any of its customers were entered into in accordance in all material respects with applicable Laws and regulatory policies of any Governmental Authority, and in accordance in all material respects with the investment, securities, commodities, risk management, and other policies, practices and procedures employed by PFG or any of its Subsidiaries, and were entered into with counterparties believed at the time to be financially responsible and able to understand (either alone or in consultation with its advisers) and to bear the risks of such Derivative Transactions. PFG and each of its Subsidiaries have duly performed, in all material respects, all of their obligations under the Derivative Transactions to the extent that such obligations to perform have accrued, and there are no material breaches, violations, or defaults or allegations or assertions of such by any party thereunder.

 

(b)               Each Derivative Transaction is listed in PFG Disclosure Schedule 3.20(b), and the financial position of PFG or its Subsidiaries under or with respect to each has been reflected in the books and records of PFG or its Subsidiaries in accordance with GAAP, and no material open exposure of PFG or its Subsidiaries with respect to any such instrument (or with respect to multiple instruments with respect to any single counterparty) exists, except as set forth in PFG Disclosure Schedule 3.20(b).

 

(c)               No Derivative Transaction, were it to be a Loan held by PFG or any of its Subsidiaries, would be classified as “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans,” “Watch List,” as such terms are defined by the FDIC’s uniform loan classification standards, or words of similar import.

 

Section 3.21        Regulatory Capitalization. PFG and Progressive Bank are “well-capitalized,” as such term is defined in the applicable state and federal rules and regulations.

 

Section 3.22        Loans; Nonperforming and Classified Assets.

 

(a)               PFG Disclosure Schedule 3.22(a) sets forth all (i) loans, loan agreements, notes, or borrowing arrangements and other extensions of credit (including, without limitation, leases, credit enhancements, commitments, guarantees, and interest-bearing assets) (collectively, “Loans”) in which PFG or any of its Subsidiaries is a creditor which, as of July 31, 2019, was over 30 days or more delinquent in payment of principal or interest, and (ii) Loans with any director, executive officer or 5% or greater shareholder of PFG or any of its Subsidiaries, or to the Knowledge of PFG, any affiliate of any of the foregoing. Set forth in PFG Disclosure Schedule 3.22(a) is a true, correct and complete list of (A) all of the Loans of PFG and its Subsidiaries that, as of July 31, 2019, were classified as “Special Mention,” “Substandard,” “Doubtful,” “Loss,” “Classified,” “Criticized,” “Credit Risk Assets,” “Concerned Loans,” “Watch List” or words of similar import by Progressive Bank, PFG, or any bank examiner, together with the principal amount of and accrued and unpaid interest on each such Loan and the identity of the borrower thereunder, together with the aggregate principal amount of such Loans by category of Loan (e.g., commercial, consumer, etc.), and (B) each Loan classified by Progressive Bank as a Troubled Debt Restructuring as defined by GAAP.

 

(b)               PFG Disclosure Schedule 3.22(b) identifies each asset of PFG or any of its Subsidiaries that as of July 31, 2019 was classified as other real estate owned (“OREO”) and the book value thereof as of July 31, 2019 as well as any assets classified as OREO between December 31, 2018 and July 31, 2019 and any sales of OREO between December 31, 2018 and July 31, 2019, reflecting any gain or loss with respect to any OREO sold.

 

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(c)               Each Loan held in PFG’s or any of its Subsidiaries’ loan portfolio (each a “PFG Loan”) (i) is evidenced by notes, agreements, or other evidences of indebtedness that are true, genuine, and what they purport to be, (ii) to the extent secured, is and has been secured by valid Liens which have been perfected and (iii)  is a legal, valid, and binding obligation of PFG or any Subsidiary and the obligor named therein, and, assuming due authorization, execution and delivery thereof by such obligor or obligors, enforceable in accordance with its terms, subject to the Enforceability Exception.

 

(d)              All currently outstanding PFG Loans were solicited, originated, and currently exist in material compliance with all applicable requirements of Law and the notes or other credit or security documents with respect to each such outstanding PFG Loan are complete and correct in all material respects. There are no oral modifications or amendments or additional agreements related to the PFG Loans that are not reflected in the written records of PFG or its Subsidiary, as applicable. All such PFG Loans are owned by PFG or its Subsidiaries free and clear of any Liens other than a blanket lien on qualifying loans provided to the Federal Home Loan Bank of Atlanta. No claims of defense as to the enforcement of any PFG Loan have been asserted in writing against PFG or any of its Subsidiaries for which there is a reasonable possibility of a material adverse determination, and PFG has no Knowledge of any acts or omissions which would give rise to any claim or right of rescission, set-off, counterclaim, or defense for which there is a reasonable possibility of a material adverse determination to its Subsidiaries. Other than participation loans purchased by PFG or any Subsidiary from third parties that are described on PFG Disclosure Schedule 3.22(d), no PFG Loans are presently serviced by third parties and there is no obligation which could result in any PFG Loan becoming subject to any third party servicing.

 

(e)               Neither PFG nor any of its Subsidiaries is a party to any agreement or arrangement with (or otherwise obligated to) any Person which obligates PFG or any of its Subsidiaries to repurchase from any such Person any Loan or other asset of PFG or any of its Subsidiaries, unless there is a material breach of a representation or covenant by PFG or any of its Subsidiaries, and none of the agreements pursuant to which PFG or any of its Subsidiaries has sold Loans or pools of Loans or participations in Loans or pools of Loans contains any obligation to repurchase such Loans or interests therein solely on account of a payment default by the obligor on any such Loan.

 

(f)                Neither PFG nor any of its Subsidiaries is now nor has it ever been since January 1, 2016, subject to any fine, suspension, settlement, or other contract or other administrative agreement or sanction by, or any reduction in any loan purchase commitment from, any Governmental Authority relating to the origination, sale or servicing of mortgage or consumer Loans.

 

Section 3.23        Allowance for Loan and Lease Losses. The allowances for loan and lease losses as reflected in each of (a) the latest balance sheets included in the Financial Statements and (b) in the balance sheets as of December 31, 2018 included in the Financial Statements, were, in the opinion of management, as of each of the dates thereof, in compliance in all material respects with PFG and Progressive Bank’s respective existing methodology for determining the adequacy of its allowance for loan and lease losses as well as the standards established by applicable Governmental Authority, the Financial Accounting Standards Board, and GAAP.