Smartfinancial Earnings 2019-06-30

SMBK 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 smbk_063019x10qdocument.htm 10-Q SMARTFINANCIAL INC JUNE 30 2019 Document

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2019



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

For the transition period from __________to

Commission File Number:333-203449

(Exact name of registrant as specified in its charter)



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

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

865-453-2650		Not Applicable
(Registrant’s telephone number, including area code)		(Former name, former address and former fiscal
		year, if changed since last report)

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



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

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

Yes x No ¨

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

Yes x No ¨

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



Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company x	Emerging growth company ¨

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

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

Yes ¨ No x

As of August 1, 2019 there were 13,953,209 shares of common stock, $1.00 par value per share, issued and outstanding.

TABLE OF CONTENTS



PART I –FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	4

	Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	4

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2019 and 2018	5

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018	6

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	7

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	8

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

PART I –FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share data)



	(Unaudited) June 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	44,500		$	40,015
Interest-bearing deposits with banks	75,371			75,807
Federal funds sold	79,663			—
Total cash and cash equivalents	199,534			115,822
Securities available-for-sale, at fair value	174,114			201,688
Other investments	12,905			11,499
Loans held for sale	4,087			1,979
Loans	1,832,902			1,775,260
Less: Allowance for loan losses	(9,097		)	(8,275		)
Loans, net	1,823,805			1,766,985
Premises and equipment, net	56,589			56,012
Other real estate owned	1,814			2,495
Goodwill and core deposit intangible, net	78,348			79,034
Bank owned life insurance	24,695			24,381
Other assets	15,366			14,514
Total assets	$	2,391,257		$	2,274,409
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	357,220		$	319,861
Interest-bearing demand	333,705			311,482
Money market and savings	648,132			641,945
Time deposits	673,243			648,676
Total deposits	2,012,300			1,921,964
Securities sold under agreement to repurchase	8,219			11,756
Federal Home Loan Bank advances and other borrowings	15,460			11,243
Subordinated debt	39,219			39,177
Other liabilities	16,448			7,258
Total liabilities	2,091,646			1,991,398
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding	—			—
Common stock, $1 par value; 40,000,000 shares authorized; 13,953,209 and 13,933,504 shares issued and outstanding, respectively	13,953			13,933
Additional paid-in capital	232,386			231,852
Retained earnings	53,843			39,991
Accumulated other comprehensive loss	(571		)	(2,765		)
Total shareholders' equity	299,611			283,011
Total liabilities and shareholders' equity	$	2,391,257		$	2,274,409

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for share data)



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
INTEREST INCOME
Loans, including fees	$	25,278	$	21,652		$	50,253	$	39,880
Securities available-for-sale:
Taxable	871		897			1,842		1,770
Tax-exempt	411		76			836		112
Federal funds sold and other earning assets	743		368			1,315		609
Total interest income	27,303		22,993			54,246		42,371
INTEREST EXPENSE
Deposits	5,788		3,238			11,039		5,639
Securities sold under agreements to repurchase	6		11			14		23
Federal Home Loan Bank advances and other borrowings	117		206			221		360
Subordinated debt	590		—			1,173		—
Total interest expense	6,501		3,455			12,447		6,022
Net interest income	20,802		19,538			41,799		36,349
Provision for loan losses	393		617			1,190		1,305
Net interest income after provision for loan losses	20,409		18,921			40,609		35,044
NONINTEREST INCOME
Customer service fees	707		557			1,361		1,135
Gain (loss) on sale of securities, net	33		(1		)	33		(1		)
Mortgage banking	392		322			674		688
Interchange and debit card transaction fees	143		121			318		267
Merger termination fee	6,400		—			6,400		—
Other	741		578			1,328		984
Total noninterest income	8,416		1,577			10,114		3,073
NONINTEREST EXPENSE
Salaries and employee benefits	8,984		7,649			17,382		14,825
Occupancy and equipment	1,658		1,522			3,298		3,055
FDIC insurance	180		317			359		419
Other real estate and loan related expense	242		926			732		1,596
Advertising and marketing	259		215			554		399
Data processing	577		600			1,192		1,127
Professional services	489		587			1,151		1,259
Amortization of intangibles	342		229			686		417
Software as service contracts	568		492			1,136		970
Merger related and restructuring expenses	1,796		1,123			2,719		1,621
Other	1,714		1,611			3,179		2,848
Total noninterest expense	16,809		15,271			32,388		28,536
Income before income tax expense	12,016		5,227			18,335		9,581
Income tax expense	2,895		1,295			4,483		2,235
Net income	$	9,121	$	3,932		$	13,852	$	7,346
EARNINGS PER COMMON SHARE
Basic	$	0.65	$	0.32		$	0.99	$	0.63
Diluted	$	0.65	$	0.32		$	0.99	$	0.62
Weighted average common shares outstanding
Basic	13,951,643		12,201,185			13,946,856		11,708,746
Diluted	14,046,500		12,320,498			14,036,790		11,822,497

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income	$	9,121		$	3,932		$	13,852		$	7,346
Other comprehensive income, net of tax:
Unrealized holding gains (losses) and hedge effects on securities available-for-sale arising during the period	(112		)	(397		)	2,219			(1,769		)
Reclassification adjustment for (gains) losses realized	(25		)	1			(25		)	1
Total other comprehensive income (loss)	(137		)	(396		)	2,194			(1,768		)
Comprehensive income	$	8,984		$	3,536		$	16,046		$	5,578

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

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

For the Three and Six Months Ended June 30, 2019 and 2018

(Dollars in thousands, except for share data)



	Common Stock
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Gain			Total
Balance, December 31, 2017	11,152,561	$	11,153	$	174,009	$	21,889	$	(1,198	)	$	205,852
Net income	—	—		—		7,346		—			7,346
Other comprehensive loss	—	—		—		—		(1,768		)	(1,768		)
Common stock issued pursuant to:
Stock awards	394	—		9		—		—			9
Exercise of stock options	92,645	93		978		—		—			1,071
Shareholders of TN Bancshares, Inc.	1,458,981	1,459		33,273		—		—			34,732
Stock compensation expense	—	—		244		—		—			244
Balance, June 30, 2018	12,704,581	$	12,705	$	208,513	$	29,235	$	(2,966	)	$	247,487



Balance, December 31, 2018	13,933,504	$	13,934	$	231,852	$	39,991	$	(2,765	)	$	283,011
Net income	—	—		—		13,852		—			13,852
Other comprehensive income	—	—		—		—		2,194			2,194
Common stock issued pursuant to:
Stock awards	3,298	3		61		—		—			65
Exercise of stock options	16,407	16		196		—		—			213
Stock compensation expense	—	—		276		—		—			276
Balance, June 30, 2019	13,953,209	$	13,953	$	232,386	$	53,843	$	(571	)	$	299,611



Balance, March 31, 2018	11,233,806	$	11,234	$	174,981	$	25,303	$	(2,569	)	$	208,949
Net income	—	—		—		3,932		—			3,932
Other comprehensive loss	—	—		—		—		(396		)	(396		)
Common stock issued pursuant to:
Stock awards	394	—		9		—		—			9
Exercise of stock options	11,400	11		109		—		—			120
Shareholders of TN Bancshares, Inc.	1,458,981	1,459		33,273		—		—			34,732
Stock compensation expense	—	—		141		—		—			141
Balance, June 30, 2018	12,704,581	$	12,705	$	208,513	$	29,235	$	(2,966	)	$	247,487



Balance, March 31, 2019	13,951,590	$	13,952	$	232,241	$	44,722	$	(434	)	$	290,481
Net income	—	—		—		9,121		—			9,121
Other comprehensive loss	—	—		—		—		(137		)	(137		)
Common stock issued pursuant to:
Exercise of stock options	1,619	2		12		—		—			14
Stock compensation expense	—	—		133		—		—			133
Balance, June 30, 2019	13,953,209	$	13,953	$	232,386	$	53,843	$	(571	)	$	299,611

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

SMARTFINANICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)



	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,852		$	7,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,088			1,908
Accretion of fair value purchase accounting adjustments, net	(3,091		)	(4,205		)
Provision for loan losses	1,190			1,305
Stock compensation expense	276			244
(Gains) losses from redemption and sale on securities available-for-sale	(33		)	1
Deferred income tax expense	1,039			945
Increase in cash surrender value of bank owned life insurance	(314		)	(297		)
Loss on disposal of fixed assets	14			41
Net (gains) losses from sale of other real estate owned	(16		)	372
Net gains from sale of loans	(674		)	(688		)
Origination of loans held for sale	(33,491		)	(29,499		)
Proceeds from sales of loans held for sale	32,057			25,648
Net change in:
Accrued interest receivable	(612		)	(250		)
Accrued interest payable	454			48
Other assets	(593		)	2,546
Other liabilities	5,792			(1,324		)
Net cash provided by operating activities	17,938			4,141
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale	16,515			24,563
Proceeds from maturities and calls of securities available-for-sale	10,305			2,525
Proceeds from paydowns of securities available-for-sale	6,554			7,436
Purchases of securities available-for-sale	(1,054		)	(17,240		)
Purchases of other investments	(1,406		)	(1,378		)
Net cash and cash equivalents received in business combination	—			5,653
Net increase in loans	(55,323		)	(65,138		)
Purchases of premises and equipment	(2,011		)	(992		)
Proceeds from sale of other real estate owned	1,100			2,126
Net cash used in investing activities	(25,320		)	(42,445		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	90,136			75,410
Net decrease in securities sold under agreements to repurchase	(3,537		)	(5,420		)
Issuance of common stock	278			1,080
Proceeds from Federal Home Loan Bank advances and other borrowings	120,176			127,040
Repayment of Federal Home Loan Bank advances and other borrowings	(115,959		)	(102,600		)
Net cash provided by financing activities	91,094			95,510
NET INCREASE IN CASH AND CASH EQUIVALENTS	83,712			57,206
CASH AND CASH EQUIVALENTS, beginning of period	115,822			113,027
CASH AND CASH EQUIVALENTS, end of period	$	199,534		$	170,233
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest	$	11,993		$	5,974
Cash paid during the period for income taxes	2,630			713
NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized (gains) losses on securities available-for-sale	$	(2,664	)	$	2,348
Acquisition of real estate through foreclosure	403			2,351
Financed sales of other real estate owned	—			257
Change in goodwill due to acquisition	—			15,739
Initial recognition of operating lease right-of-use assets	2,344			—
Initial recognition of operating lease liabilities	2,344			—

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

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

Basis of Presentation and Accounting Estimates:

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

Recently Issued and Adopted Accounting Pronouncements:

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

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

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

direct costs for any existing leases. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations or office space, which are considered operating leases, and therefore, were not previously recognized on the Company’s consolidated balance sheet. The new guidance requires these lease agreements to be recognized on the consolidated balance sheet as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 8 Leases for more information.

In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above.

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

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

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2018 as filed with the Securities and Exchange Commission. The following is a summary of recent authoritative pronouncements issued since December 31, 2018 but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

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

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

recognized on PCD assets based on the effective interest rate, determined excluding the discount attributed to credit losses at acquisition. Credit losses relating to available-for-sale debt securities will be recognized through an allowance for credit losses. The amount of the credit loss is limited to the amount by which fair value is below amortized cost of the available-for-sale debt security. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years for the Company and other SEC filers. Early adoption is permitted and if early adopted, all provisions must be adopted in the same period. The amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the period adopted. A prospective approach is required for securities with other than temporary impairment recognized prior to adoption. The Company is continuing its implementation efforts through its company-wide implementation team. The implementation team meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretations and industry practices related to ASU 2016-13 via webcasts, publications, conferences, and peer bank meetings. The team continues to evaluate and validate data resources and different loss methodologies. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular an increase to the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact. The guidance of ASU 2016-13 was recently amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which changed the effective date for non-public companies and clarified that operating lease receivables are not within the scope of the standard.

On July 17, 2019 the Financial Accounting Standards Board unanimously voted to propose a delay for the implementation of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The Board decided that CECL will be effective for PBEs that are SEC Filers, excluding SRCs as currently defined by the SEC, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For calendar-year-end companies, this will be January 1, 2020. The determination of whether an entity is an SRC will be based on an entity’s most recent assessment in accordance with SEC regulations. For all other entities, the Board decided that CECL will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (that is, effective January 1, 2019, for calendar-year-end companies). The Board decided that the comment period for the proposed Update would be 30 days.

Reclassifications:

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Earnings Per Share

Basic earnings per common share represents net income divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance (excluding tax impact). Potential common shares that may be issued by the Company relate solely to outstanding stock options, determined using the treasury stock method, and restricted stock awards, determined by the fair value of the Company's stock on date of grant.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net income	$	9,121	$	3,932	$	13,852	$	7,346

Weighted average basic common shares outstanding	13,951,643		12,201,185		13,946,856		11,708,746
Effect of dilutive securities	94,857		119,313		89,934		113,751
Weighted average dilutive shares outstanding	14,046,500		12,320,498		14,036,790		11,822,497

Basic earnings per common share	$	0.65	$	0.32	$	0.99	$	0.63
Diluted earnings per common share	$	0.65	$	0.32	$	0.99	$	0.62

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

Note 3. Securities

The amortized cost and fair value of securities available-for-sale are summarized as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2019:
U.S. Government-sponsored enterprises (GSEs)	$	24,031	$	22	$	(65	)	$	23,988
Municipal securities	56,251		492		(17		)	56,726
Other debt securities	979		—		(42		)	937
Mortgage-backed securities (GSEs)	92,718		154		(409		)	92,463
	$	173,979	$	668	$	(533	)	$	174,114



December 31, 2018:
U.S. Government-sponsored enterprises (GSEs)	$	44,117	$	12	$	(626	)	$	43,503
Municipal securities	55,248		276		(363		)	55,161
Other debt securities	977		—		(67		)	910
Mortgage-backed securities (GSEs)	103,875		153		(1,914		)	102,114
	$	204,217	$	441	$	(2,970	)	$	201,688

At June 30, 2019 and December 31, 2018, securities with a carrying value totaling approximately $102.0 million and $103.7 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

For the three and six months ended June 30, 2019, there were approximately $17 million available-for-sale securities sold which resulted in approximately $34 thousand gross gains and $1 thousand losses realized. For the three and six months ended June 30, 2018, there were approximately $25 million available-for-sale securities sold which resulted in no net gains or losses. For the three and six months ended June 30, 2019, there were approximately $5 million and $10 million available-for-sale securities redeemed, respectively. For the three and six months ended June 30, 2018, a security was called for less than the amortized cost resulting in a realized loss of $1 thousand.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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



	Amortized Cost		Fair Value
Due in one year or less	$	294	$	297
Due from one year to five years	16,000		15,935
Due from five years to ten years	13,302		13,283
Due after ten years	51,665		52,136
	81,261		81,651
Mortgage-backed securities	92,718		92,463
	$	173,979	$	174,114

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



	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
June 30, 2019:
U.S. Government- sponsored enterprises (GSEs)	$	—	$	—		$	10,935	$	(65	)	$	10,935	$	(65	)
Municipal securities	—		—			2,021		(17		)	2,021		(17		)
Other debt securities	—		—			937		(42		)	937		(42		)
Mortgage-backed securities (GSEs)	5,165		(20		)	43,805		(389		)	48,970		(409		)
	$	5,165	$	(20	)	$	57,698	$	(513	)	$	62,863	$	(533	)



December 31, 2018:
U.S. Government- sponsored enterprises (GSEs)	$	14,763	$	(237	)	$	13,728	$	(389	)	$	28,491	$	(626	)
Municipal securities	16,455		(150		)	4,767		(213		)	21,222		(363		)
Other debt securities	—		—			910		(67		)	910		(67		)
Mortgage-backed securities (GSEs)	10,516		(155		)	69,884		(1,759		)	80,400		(1,914		)
	$	41,734	$	(542	)	$	89,289	$	(2,428	)	$	131,023	$	(2,970	)

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

At June 30, 2019, the categories of temporarily impaired securities in an unrealized loss position twelve months or greater are as follows (dollars in thousands):



	Gross Unrealized Loss			Number of Securities
U.S. Government-sponsored enterprises (GSEs)	$	(65	)	3
Municipal securities	(17		)	4
Other debt securities	(42		)	1
Mortgage-backed securities (GSEs)	(389		)	47
	$	(513	)	55

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

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

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



	June 30, 2019		December 31, 2018
Federal Reserve Bank stock	$	7,909	$	7,010
Federal Home Loan Bank stock	4,646		4,139
First National Bankers Bank stock	350		350
	$	12,905	$	11,499

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses

Portfolio Segmentation:

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



	June 30, 2019									December 31, 2018
	PCI Loans¹			All Other Loans²			Total			PCI Loans¹		All Other Loans²			Total
Commercial real estate	$	17,040		$	861,547		$	878,587		$	17,682	$	842,345		$	860,027
Consumer real estate	7,412			398,844			406,256			8,712		398,542			407,254
Construction and land development	4,669			200,027			204,696			4,602		183,293			187,895
Commercial and industrial	2,137			333,361			335,498			2,557		305,697			308,254
Consumer and other	400			11,552			11,952			605		13,204			13,809
Total loans	31,658			1,805,331			1,836,989			34,158		1,743,081			1,777,239
Less: Allowance for loan losses	(54		)	(9,043		)	(9,097		)	—		(8,275		)	(8,275		)
Loans, net	$	31,604		$	1,796,288		$	1,827,892		$	34,158	$	1,734,806		$	1,768,964

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

² Includes loans held for sale.

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

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



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
June 30, 2019:
Performing loans	$	861,288	$	398,061	$	199,326	$	333,109	$	11,552	$	1,803,336
Impaired loans	259		783		701		252		—		1,995
	861,547		398,844		200,027		333,361		11,552		1,805,331
PCI loans	17,040		7,412		4,669		2,137		400		31,658
Total	$	878,587	$	406,256	$	204,696	$	335,498	$	11,952	$	1,836,989



December 31, 2018:
Performing loans	$	841,709	$	397,306	$	182,746	$	304,673	$	13,088	$	1,739,522
Impaired loans	636		1,236		547		1,024		116		3,559
	842,345		398,542		183,293		305,697		13,204		1,743,081
PCI loans	17,682		8,712		4,602		2,557		605		34,158
Total loans	$	860,027	$	407,254	$	187,895	$	308,254	$	13,809	$	1,777,239

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
June 30, 2019:
Performing loans	$	4,062	$	1,935	$	946	$	1,641	$	114	$	8,698
PCI loans	40		14		—		—		—		54
Impaired loans	—		240		—		105		—		345
Total	$	4,102	$	2,189	$	946	$	1,746	$	114	$	9,097



December 31, 2018:
Performing loans	$	3,639	$	1,763	$	795	$	1,304	$	240	$	7,741
PCI loans	—		—		—		—		—		—
Impaired loans	—		26		—		442		66		534
Total	$	3,639	$	1,789	$	795	$	1,746	$	306	$	8,275

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



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Three Months Ended June 30, 2019:
Beginning balance	$	4,074	$	1,949	$	854	$	1,709		$	118		$	8,704
Loans charged off	—		—		—		(14		)	(80		)	(94		)
Recoveries of charge-offs	22		16		2		41			13			94
Provision (reallocation) charged to expense	6		224		90		10			63			393
Ending balance	$	4,102	$	2,189	$	946	$	1,746		$	114		$	9,097



Three Months Ended June 30, 2018:
Beginning balance	$	2,925	$	1,519		$	627	$	1,210	$	196		$	6,477
Loans charged off	—		(25		)	—		—		(59		)	(84		)
Recoveries of charge-offs	—		27			3		16		18			64
Provision (reallocation) charged to expense	210		7			114		141		145			617
Ending balance	$	3,135	$	1,528		$	744	$	1,367	$	300		$	7,074

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



	Commercial Real Estate		Consumer Real Estate			Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Six Months Ended June 30, 2019:
Beginning balance	$	3,639	$	1,789		$	795	$	1,746		$	306		$	8,275
Loans charged off	—		(2		)	—		(333		)	(210		)	(545		)
Recoveries of charge-offs	24		20			4		53			76			177
Provision (reallocation) charged to expense	439		382			147		280			(58		)	1,190
Ending balance	$	4,102	$	2,189		$	946	$	1,746		$	114		$	9,097



Six Months Ended June 30, 2018:
Beginning balance	$	2,465		$	1,596		$	521	$	1,062		$	216		$	5,860
Loans charged off	(38		)	(25		)	—		(78		)	(101		)	(242		)
Recoveries of charge-offs	—			50			5		56			40			151
Provision (reallocation) charged to expense	708			(93		)	218		327			145			1,305
Ending balance	$	3,135		$	1,528		$	744	$	1,367		$	300		$	7,074

The following

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$20.74	14	$289

10-Q	2019-06-30	Quarter: 2019-06-30
10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31
10-Q	2015-09-30	Quarter: 2015-09-30
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-31	Annual: 2014-12-31
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-06-30	Quarter: 2014-06-30
10-Q	2014-03-31	Quarter: 2014-03-31
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-07-24	Earnings, Regulation FD, Exhibits
8-K	2019-05-07	Shareholder Vote
8-K	2019-05-06	Officers, Exhibits
8-K	2019-04-24	Earnings, Regulation FD, Exhibits
8-K	2019-04-23	Leave Agreement, Regulation FD, Exhibits
8-K	2019-02-05	Regulation FD, Exhibits
8-K	2019-01-23	Earnings, Regulation FD, Exhibits
8-K	2019-01-23	Earnings, Regulation FD, Exhibits
8-K	2019-01-15	Enter Agreement, Officers, Regulation FD, Exhibits
8-K	2018-11-20	Other Events, Exhibits
8-K	2018-11-01	M&A, Other Events, Exhibits
8-K	2018-10-24	Earnings, Regulation FD, Exhibits
8-K	2018-10-01	Enter Agreement, Off-BS Arrangement, Regulation FD, Other Events, Exhibits
8-K	2018-07-30	Regulation FD, Exhibits
8-K	2018-07-24	Earnings, Regulation FD, Exhibits
8-K	2018-06-27	Enter Agreement, Regulation FD, Exhibits
8-K	2018-06-05	Regulation FD, Exhibits
8-K	2018-05-29	Officers, Shareholder Vote
8-K	2018-05-07	M&A, Other Events, Exhibits
8-K	2018-04-24	Earnings, Regulation FD, Exhibits
8-K	2018-03-27	Accountant, Exhibits
8-K	2018-01-31	Earnings, Regulation FD, Exhibits
8-K	2018-01-30	Officers

AEM	Agnico Eagle Mines	9,580
TSU	TIM Participacoes	6,680
HP	Helmerich & Payne	6,390
MNK	Mallinckrodt	1,370
NGS	Natural Gas Services Group	215
INAP	Internap	98
PRCP	Perceptron	68
LPTH	Lightpath Technologies	39
IEHC	Iehoration	0
KLXI	KLX	0

EX-31.1	smbk_063019xex311.htm
EX-31.2	smbk_063019xex312.htm
EX-32.1	smbk_063019xex321.htm
EX-32.2	smbk_063019xex322.htm