10-Q 1 smbk_093017x10qdocument.htm 10-Q SMARTFINANCIAL, INC SEPTEMBER 30 2017
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2017

¨ | 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 small business issuer 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 |  |
(Registrant’s telephone number, including area code) |  | (Former name, former address and former fiscal
|  | year, if changes since last report)

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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 October 31, 2017 there were 8,243,717 shares of common stock, $1.00 par value per share, issued and outstanding.
1

TABLE OF CONTENTS

| PART I –FINANCIAL INFORMATION |
Item 1. | Financial Statements (Unaudited) | 4
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 45
Item 4. | Controls and Procedures | 45
| PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 46
Item 1A. | Risk Factors | 46
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 46
Item 3. | Defaults Upon Senior Securities | 46
Item 4. | Mine Safety Disclosures | 46
Item 5. | Other Information | 46
Item 6. | Exhibits | 47

2

FORWARD-LOOKING STATEMENTS
SmartFinancial, Inc. (“SmartFinancial” or the "Company") may from time to time make written or oral statements, including statements contained in this report (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. SmartFinancial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors include, without limitation, those specifically described in Item 1A of Part I of the Company’s most recent Annual Report on Form 10-K, as well as the following: the expected revenue synergies and cost savings from the merger with Capstone may not be fully realized or may take longer than anticipated to be realized; the disruption from the Capstone merger with customers, suppliers or employees or other business partners’ relationships; the risk of successful integration of our business with that of Capstone after consummation of the merger; the amount of costs, fees, expenses, and charges related to the merger; changes in management’s plans for the future, prevailing economic and political conditions, particularly in our market area; credit risk associated with our lending activities; changes in interest rates, loan demand, real estate values and competition; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services. Many of such factors are beyond SmartFinancial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. SmartFinancial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to SmartFinancial.
Non-GAAP Financial Measures
Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled “Net Interest Income and Yield Analysis”), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.
3

PART I –FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

|  | Unaudited September 30, 2017 |  | December 31, 2016
ASSETS |  |  |  |  |  |
Cash and due from banks |  | $ | 40,867,054 |  |  | $ | 34,290,617 |
Interest-bearing deposits at other financial institutions |  | 24,833,385 |  |  | 34,457,691 |
Federal funds sold |  | 18,398,000 |  |  | — |
Total cash and cash equivalents |  | 84,098,439 |  |  | 68,748,308 |
Securities available for sale |  | 115,534,979 |  |  | 129,421,914 |
Restricted investments, at cost |  | 6,080,700 |  |  | 5,627,950 |
Loans, net of allowance for loan losses of $5,392,606 at September 30, 2017 and $5,105,255 at December 31, 2016 |  | 866,286,380 |  |  | 808,271,003 |
Bank premises and equipment, net |  | 33,777,723 |  |  | 30,535,594 |
Foreclosed assets |  | 2,887,556 |  |  | 2,386,239 |
Goodwill and core deposit intangible, net |  | 7,414,120 |  |  | 6,635,655 |
Cash surrender value of life insurance |  | 11,483,915 |  |  | 1,320,723 |
Other assets |  | 8,258,028 |  |  | 9,508,899 |
Total assets |  | $ | 1,135,821,840 |  |  | $ | 1,062,456,285 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |
Deposits: |  |  |  |  |  |
Noninterest-bearing demand deposits |  | $ | 185,385,953 |  |  | $ | 153,482,650 |
Interest-bearing demand deposits |  | 156,953,397 |  |  | 162,702,457 |
Money market and savings deposits |  | 306,357,476 |  |  | 274,604,724 |
Time deposits |  | 311,490,253 |  |  | 316,275,340 |
Total deposits |  | 960,187,079 |  |  | 907,065,171 |
Securities sold under agreement to repurchase |  | 26,541,772 |  |  | 26,621,984 |
Federal Home Loan Bank advances and other borrowings |  | 6,000,000 |  |  | 18,505,390 |
Accrued expenses and other liabilities |  | 6,505,401 |  |  | 5,023,600 |
Total liabilities |  | 999,234,252 |  |  | 957,216,145 |
Stockholders' equity: |  |  |  |  |  |
Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding as of 9/30/2017; 12,000 issued and outstanding in 2016. |  | — |  |  | 12,000 |
Common stock - $1 par value; 40,000,000 shares authorized; 8,243,256 and 5,896,033 shares issued and outstanding in 2017 and 2016, respectively |  | 8,243,256 |  |  | 5,896,033 |
Additional paid-in capital |  | 107,064,832 |  |  | 83,463,051 |
Retained earnings |  | 21,653,303 |  |  | 16,871,296 |
Accumulated other comprehensive loss |  | (373,803 | ) |  | (1,002,240 | )
Total stockholders' equity |  | 136,587,588 |  |  | 105,240,140 |
Total liabilities and stockholders' equity |  | $ | 1,135,821,840 |  |  | $ | 1,062,456,285 |

The Notes to Consolidated Financial Statements are an integral part of these statements.
4

SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

|  | Unaudited Three Months Ended September 30, |  | Unaudited Nine Months Ended September 30,
|  | 2017 |  | 2016 |  | 2017 |  | 2016
INTEREST INCOME |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 11,491,016 |  |  | $ | 10,110,680 |  |  | $ | 32,448,666 |  |  | $ | 29,439,355 |
Securities and interest-bearing deposits at other financial institutions |  | 739,905 |  |  | 601,815 |  |  | 2,092,948 |  |  | 1,984,041 |
Federal funds sold and other earning assets |  | 86,267 |  |  | 50,981 |  |  | 237,213 |  |  | 164,218 |
Total interest income |  | 12,317,188 |  |  | 10,763,476 |  |  | 34,778,827 |  |  | 31,587,614 |
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |
Deposits |  | 1,373,236 |  |  | 1,065,092 |  |  | 3,712,326 |  |  | 3,039,044 |
Securities sold under agreements to repurchase |  | 15,054 |  |  | 16,614 |  |  | 46,593 |  |  | 48,353 |
Federal Home Loan Bank advances and other borrowings |  | 4,769 |  |  | 17,165 |  |  | 31,925 |  |  | 91,714 |
Total interest expense |  | 1,393,059 |  |  | 1,098,871 |  |  | 3,790,844 |  |  | 3,179,111 |
Net interest income before provision for loan losses |  | 10,924,129 |  |  | 9,664,605 |  |  | 30,987,983 |  |  | 28,408,503 |
Provision for loan losses |  | 30,000 |  |  | 260,567 |  |  | 340,482 |  |  | 616,543 |
Net interest income after provision for loan losses |  | 10,894,129 |  |  | 9,404,038 |  |  | 30,647,501 |  |  | 27,791,960 |
NONINTEREST INCOME |  |  |  |  |  |  |  |  |  |
Customer service fees |  | 294,315 |  |  | 295,951 |  |  | 849,614 |  |  | 850,632 |
Gain on sale of securities |  | 143,508 |  |  | 18,224 |  |  | 143,508 |  |  | 199,587 |
Gain on sale of loans and other assets |  | 224,494 |  |  | 286,966 |  |  | 910,250 |  |  | 706,371 |
(Loss) gain on sale of foreclosed assets |  | (27,250 | ) |  | 130,383 |  |  | (42,314 | ) |  | 184,626 |
Other noninterest income |  | 584,621 |  |  | 472,300 |  |  | 1,543,018 |  |  | 1,294,318 |
Total noninterest income |  | 1,219,688 |  |  | 1,203,824 |  |  | 3,404,076 |  |  | 3,235,534 |
NONINTEREST EXPENSES |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | 5,035,443 |  |  | 4,311,708 |  |  | 14,471,602 |  |  | 13,292,864 |
Net occupancy and equipment expense |  | 1,113,542 |  |  | 965,159 |  |  | 3,054,594 |  |  | 3,120,234 |
Depository insurance |  | 101,665 |  |  | 153,353 |  |  | 315,951 |  |  | 440,100 |
Foreclosed assets |  | 19,928 |  |  | 78,988 |  |  | 30,449 |  |  | 199,419 |
Advertising |  | 176,998 |  |  | 179,145 |  |  | 470,657 |  |  | 536,657 |
Data processing |  | 483,411 |  |  | 450,289 |  |  | 1,291,969 |  |  | 1,333,082 |
Professional services |  | 471,707 |  |  | 558,368 |  |  | 1,483,108 |  |  | 1,564,973 |
Amortization of intangible assets |  | 78,057 |  |  | 79,761 |  |  | 191,705 |  |  | 266,467 |
Service contracts |  | 363,114 |  |  | 271,921 |  |  | 971,648 |  |  | 873,160 |
Other operating expenses |  | 1,703,338 |  |  | 1,000,924 |  |  | 4,239,594 |  |  | 2,846,886 |
Total noninterest expenses |  | 9,547,203 |  |  | 8,049,616 |  |  | 26,521,277 |  |  | 24,473,842 |
Income before income tax expense |  | 2,566,614 |  |  | 2,558,246 |  |  | 7,530,300 |  |  | 6,553,652 |
Income tax expense |  | 881,745 |  |  | 947,354 |  |  | 2,553,293 |  |  | 2,402,267 |
Net income |  | 1,684,869 |  |  | 1,610,892 |  |  | 4,977,007 |  |  | 4,151,385 |
Preferred stock dividends |  | — |  |  | 270,000 |  |  | 195,000 |  |  | 752,000 |
Net income available to common stockholders |  | $ | 1,684,869 |  |  | $ | 1,340,892 |  |  | $ | 4,782,007 |  |  | $ | 3,399,385 |
EARNINGS PER COMMON SHARE |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.20 |  |  | $ | 0.23 |  |  | $ | 0.60 |  |  | $ | 0.58 |
Diluted |  | 0.20 |  |  | 0.22 |  |  | 0.59 |  |  | 0.56 |
Weighted average common shares outstanding |  |  |  |  |  |  |  |  |  |
Basic |  | 8,234,783 |  |  | 5,834,520 |  |  | 7,994,661 |  |  | 5,820,834 |
Diluted |  | 8,332,680 |  |  | 6,096,333 |  |  | 8,086,346 |  |  | 6,092,035 |
Dividends per share |  | — |  |  | — |  |  | — |  |  | — |

The Notes to Consolidated Financial Statements are an integral part of these statements.
5

SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

|  | Unaudited Three Months Ended September 30,
|  | 2017 |  | 2016
Net income |  | $ | 1,684,869 |  |  | $ | 1,610,892 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |
Unrealized holding gains (losses) arising during the period, net of tax (benefit) expense of $(23,286) and $114,925 in 2017 and 2016, respectively |  | (37,312 | ) |  | 185,360 |
Reclassification adjustment for gains included in net income, net of tax expense of $54,533 and $6,925 in 2017 and 2016, respectively |  | (88,975 | ) |  | (11,299 | )
Total other comprehensive income (loss) |  | (126,287 | ) |  | 174,061 |
Comprehensive income |  | $ | 1,558,582 |  |  | $ | 1,784,953 |

|  | Unaudited Nine Months Ended September 30,
|  | 2017 |  | 2016
Net income |  | $ | 4,977,007 |  |  | $ | 4,151,385 |
Other comprehensive income, net of tax: |  |  |  |  |  |
Unrealized holding gains arising during the period, net of tax expense of $444,467 and $573,073 in 2017 and 2016, respectively |  | 717,412 |  |  | 924,675 |
Reclassification adjustment for gains included in net income, net of tax expense of $54,533 and $75,843 in 2017 and 2016, respectively |  | (88,975 | ) |  | (123,744 | )
Total other comprehensive income |  | 628,437 |  |  | 800,931 |
Comprehensive income |  | $ | 5,605,444 |  |  | $ | 4,952,316 |

The Notes to Consolidated Financial Statements are an integral part of these statements.
6

SMARTFINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
For the Nine Months Ended September 30, 2017

|  | Preferred Shares |  | Common Shares |  | Preferred Stock |  | Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) |  | Total Stockholders' Equity
BALANCE, December 31, 2016 |  | 12,000 |  |  | 5,896,033 |  |  | $ | 12,000 |  |  | $ | 5,896,033 |  |  | $ | 83,463,051 |  |  | $ | 16,871,296 |  |  | $ | (1,002,240 | ) |  | $ | 105,240,140 |
Net income |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 4,977,007 |  |  | — |  |  | 4,977,007 |
Other comprehensive income |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 628,437 |  |  | 628,437 |
Issuance of common stock |  | — |  |  | 1,840,000 |  |  | — |  |  | 1,840,000 |  |  | 31,094,676 |  |  | — |  |  | — |  |  | 32,934,676 |
Issuance of stock grants |  | — |  |  | 1,511 |  |  | — |  |  | 1,511 |  |  | 30,280 |  |  | — |  |  | — |  |  | 31,791 |
Exercise of stock options |  | — |  |  | 505,712 |  |  | — |  |  | 505,712 |  |  | 4,368,045 |  |  | — |  |  | — |  |  | 4,873,757 |
Cash dividend on preferred stock |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (195,000 | ) |  | — |  |  | (195,000 | )
Redemption of preferred stock |  | (12,000 | ) |  | — |  |  | (12,000 | ) |  | — |  |  | (11,988,000 | ) |  | — |  |  | — |  |  | (12,000,000 | )
Restricted stock compensation expense |  | — |  |  | — |  |  | — |  |  | — |  |  | 22,532 |  |  | — |  |  | — |  |  | 22,532 |
Stock compensation expense |  | — |  |  | — |  |  | — |  |  | — |  |  | 74,248 |  |  | — |  |  | — |  |  | 74,248 |
BALANCE, September 30, 2017 |  | — |  |  | 8,243,256 |  |  | $ | — |  |  | $ | 8,243,256 |  |  | $ | 107,064,832 |  |  | $ | 21,653,303 |  |  | $ | (373,803 | ) |  | $ | 136,587,588 |

The Notes to Consolidated Financial Statements are an integral part of these statements.
7

SMARTFINANICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | Unaudited Nine Months Ended September 30,
|  | 2017 |  | 2016
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |
Net income |  | $ | 4,977,007 |  |  | $ | 4,151,385 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |
Depreciation and amortization |  | 1,776,958 |  |  | 1,624,809 |
Provision for loan losses |  | 340,482 |  |  | 616,543 |
Stock compensation expense |  | 74,248 |  |  | 99,635 |
Restricted stock compensation expense |  | 22,532 |  |  | — |
Gains from sale of securities |  | (143,508 | ) |  | (199,587 | )
Net gains from sale of loans and other assets |  | (910,250 | ) |  | (706,371 | )
Net losses (gains) from sale of foreclosed assets |  | 42,314 |  |  | (184,626 | )
Changes in other assets and liabilities: |  |  |  |
Accrued interest receivable |  | (38,985 | ) |  | 355,796 |
Accrued interest payable |  | 38,172 |  |  | (23,177 | )
Other assets and liabilities |  | 2,427,408 |  |  | 6,480,504 |
Net cash provided by operating activities |  | 8,606,378 |  |  | 12,214,911 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |  |
Proceeds from security sales, maturities, and paydowns |  | 27,070,170 |  |  | 50,055,118 |
Purchase of securities |  | (12,507,860 | ) |  | (21,351,789 | )
Purchase of bank owned life insurance |  | (10,000,000 | ) |  | — |
Purchase of restricted investments |  | (452,750 | ) |  | (200 | )
Net cash for purchase of branch acquisition |  | (1,049,878 | ) |  | — |
Loan originations and principal collections, net |  | (33,957,948 | ) |  | (66,811,239 | )
Purchase of bank premises and equipment |  | (1,693,323 | ) |  | (3,932,566 | )
Proceeds from sale of foreclosed assets |  | 41,636 |  |  | 1,152,775 |
Net cash used in investing activities |  | (32,549,953 | ) |  | (40,887,901 | )
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |
Net increase in deposits |  | 26,234,084 |  |  | 2,359,290 |
Net decrease in securities sold under agreements to repurchase |  | (80,212 | ) |  | (3,866,120 | )
Issuance of common stock |  | 37,840,224 |  |  | 693,092 |
Redemption of preferred stock |  | (12,000,000 | ) |  | — |
Payment of dividends on preferred stock |  | (195,000 | ) |  | (752,000 | )
Proceeds from Federal Home Loan Bank advances and other borrowings |  | 95,804,205 |  |  | 38,100,000 |
Repayment of Federal Home Loan Bank advances and other borrowings |  | (108,309,595 | ) |  | (29,239,039 | )
Net cash provided by financing activities |  | 39,293,706 |  |  | 7,295,223 |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |  | 15,350,131 |  |  | (21,377,767 | )
CASH AND CASH EQUIVALENTS, beginning of year |  | 68,748,308 |  |  | 79,964,633 |
CASH AND CASH EQUIVALENTS, end of period |  | $ | 84,098,439 |  |  | $ | 58,586,866 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |  |  |  |
Cash paid during the period for interest |  | $ | 3,742,255 |  |  | $ | 3,202,288 |
Cash paid during the period for taxes |  | 2,795,584 |  |  | 1,570,558 |
NONCASH INVESTING AND FINANCING ACTIVITIES |  |  |  |
Change in unrealized losses on securities available for sale |  | $ | (1,018,370 | ) |  | $ | (1,298,161 | )
Acquisition of real estate through foreclosure |  | 585,267 |  |  | 1,431,857 |
Financed sales of foreclosed assets |  | — |  |  | 3,286,138 |

The Notes to Consolidated Financial Statements are an integral part of these statements.
8

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Presentation of Financial Information
Nature of Business:
SmartFinancial, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the “Bank”). The Company provides a variety of financial services to individuals and corporate customers through its offices in eastern Tennessee, northwest Florida, and north Georgia. The Company’s primary deposit products are interest-bearing demand deposits and certificates of deposit. Its primary lending products are commercial, residential, and consumer loans. On May 22, 2017, the Company along with the Bank entered into an agreement and plan of merger with Capstone Bancshares, Inc., an Alabama corporation and Capstone Bank, an Alabama-chartered commercial bank and wholly owned subsidiary of Capstone Bancshares, Inc. Under the terms of the merger agreement, Capstone Bancshares, Inc. will merge with the Company to be the surviving entity and Capstone Bank will merge with and into the Bank with the Bank surviving. The mergers were consummated on November 1, 2017.
Interim Financial Information (Unaudited):
The financial information in this report for September 30, 2017 and September 30, 2016 has not been audited. The information included herein should be read in conjunction with the Company’s annual consolidated financial statements and footnotes included in the Company's most recent Annual Report on Form 10-K. The consolidated financial statements presented herein conform to U.S. generally accepted accounting principles and to general industry practices. In the opinion of SmartFinancial’s management, the accompanying interim financial statements contain all material adjustments necessary to present fairly the 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.
Basis of Presentation and Accounting Estimates:
All adjustments consisting of normal recurring accruals, that in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with those appearing in the most recent Annual Report previously filed on Form 10-K.
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, and the fair value of financial instruments.
The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.
The Company’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
9

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Presentation of Financial Information, Continued
Recently Issued 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, 2016 as filed with the Securities and Exchange Commission. The following is a summary of recent authoritative pronouncements not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company issued since December 31, 2016.
In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2017, FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2017, FASB issued 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 amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings on the date of adoption. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (ASC) 815, Derivatives and Hedging. The goals of the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
Reclassifications:
Certain captions and amounts in the 2016 financial statements were reclassified to conform to the 2017 presentation.
Earnings per common share:
Basic earnings per common share represents income available to common stockholders 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. 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.
10

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 2. Earnings per share
The following is a summary of the basic and diluted earnings per share for the three and nine month periods ended September 30, 2017 and September 30, 2016.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Net income available to common shareholders | $ | 1,684,869 |  |  | $ | 1,340,892 |  |  | $ | 4,782,007 |  |  | $ | 3,399,385 |
Weighted average common shares outstanding | 8,234,783 |  |  | 5,834,520 |  |  | 7,994,661 |  |  | 5,820,834 |
Effect of dilutive stock options | 97,897 |  |  | 261,813 |  |  | 91,685 |  |  | 271,201 |
Diluted shares | 8,332,680 |  |  | 6,096,333 |  |  | 8,086,346 |  |  | 6,092,035 |
Basic earnings per common share | $ | 0.20 |  |  | $ | 0.23 |  |  | $ | 0.60 |  |  | $ | 0.58 |
Diluted earnings per common share | $ | 0.20 |  |  | $ | 0.22 |  |  | $ | 0.59 |  |  | $ | 0.56 |

For the three and nine months ended September 30, 2017 and 2016, the effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings per common share because the exercise price of such options is higher than the market price. There were 13,166 and 18,100 antidilutive stock options as of September 30, 2017 and 2016, respectively.
Note 3. Securities
The amortized cost and fair value of securities available-for-sale at September 30, 2017 and December 31, 2016 are summarized as follows (in thousands):

|  | September 30, 2017
|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
U.S. Government-sponsored enterprises (GSEs) |  | $ | 16,217 |  |  | $ | 3 |  |  | $ | (309 | ) |  | $ | 15,911 |
Municipal securities |  | 8,341 |  |  | 63 |  |  | (41 | ) |  | 8,363 |
Other debt securities |  | 973 |  |  | — |  |  | (35 | ) |  | 938 |
Mortgage-backed securities |  | 90,610 |  |  | 208 |  |  | (495 | ) |  | 90,323 |
|  | $ | 116,141 |  |  | $ | 274 |  |  | $ | (880 | ) |  | $ | 115,535 |

|  | December 31, 2016
|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value
U.S. Government-sponsored enterprises (GSEs) |  | $ | 18,279 |  |  | $ | 8 |  |  | $ | (564 | ) |  | $ | 17,723 |
Municipal securities |  | 8,182 |  |  | 16 |  |  | (179 | ) |  | 8,019 |
Mortgage-backed securities |  | 104,585 |  |  | 185 |  |  | (1,090 | ) |  | 103,680 |
|  | $ | 131,046 |  |  | $ | 209 |  |  | $ | (1,833 | ) |  | $ | 129,422 |

At September 30, 2017, securities with a fair value totaling approximately $77,000,000 were pledged to secure public funds and securities sold under agreements to repurchase.
11

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3. Securities, Continued
For the three and nine months ended September 30, 2017, there were available-for-sale securities sold with proceeds totaling $12,363,748 which resulted in gross gains realized of $145,288 and gross losses realized of $1,780. For the three and nine months ended September 30, 2016 there were available-for-sale securities sold with proceeds totaling $5,578,023 and $13,748,623 which resulted in gross gains realized of $18,224 and $199,587, respectively.
The amortized cost and estimated fair value of securities at September 30, 2017, by contractual maturity, are shown below (in thousands). Expected maturities will 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 |  | $ | 2,173 |  |  | $ | 2,175 |
Due from one year to five years |  | 11,607 |  |  | 11,374 |
Due from five years to ten years |  | 8,311 |  |  | 8,206 |
Due after ten years |  | 3,440 |  |  | 3,457 |
|  | 25,531 |  |  | 25,212 |
Mortgage-backed securities |  | 90,610 |  |  | 90,323 |
|  | $ | 116,141 |  |  | $ | 115,535 |

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, as of September 30, 2017 and December 31, 2016 (in thousands):

|  | As of September 30, 2017
|  | Less than 12 Months |  | 12 Months or Greater |  | Total
|  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses
U.S. Government- sponsored enterprises (GSEs) |  | $ | 6,110 |  |  | $ | (113 | ) |  | $ | 7,804 |  |  | $ | (196 | ) |  | $ | 13,914 |  |  | $ | (309 | )
Municipal securities |  | 1,839 |  |  | (18 | ) |  | 1,305 |  |  | (23 | ) |  | 3,144 |  |  | (41 | )
Other debt securities |  | 938 |  |  | (35 | ) |  | — |  |  | — |  |  | 938 |  |  | (35 | )
Mortgage-backed securities |  | 32,389 |  |  | (175 | ) |  | 16,881 |  |  | (320 | ) |  | 49,270 |  |  | (495 | )
|  | $ | 41,276 |  |  | $ | (341 | ) |  | $ | 25,990 |  |  | $ | (539 | ) |  | $ | 67,266 |  |  | $ | (880 | )

|  | As of December 31, 2016
|  | Less than 12 Months |  | 12 Months or Greater |  | Total
|  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses |  | Fair Value |  | Gross Unrealized Losses
U.S. Government- sponsored enterprises (GSEs) |  | $ | 14,702 |  |  | $ | (564 | ) |  | $ | — |  |  | $ | — |  |  | $ | 14,702 |  |  | $ | (564 | )
Municipal securities |  | 6,368 |  |  | (179 | ) |  | — |  |  | — |  |  | 6,368 |  |  | (179 | )
Mortgage-backed securities |  | 67,063 |  |  | (690 | ) |  | 8,948 |  |  | (400 | ) |  | 76,011 |  |  | (1,090 | )
|  | $ | 88,133 |  |  | $ | (1,433 | ) |  | $ | 8,948 |  |  | $ | (400 | ) |  | $ | 97,081 |  |  | $ | (1,833 | )

At September 30, 2017, the categories of temporarily impaired securities, and management’s evaluation of those securities, are as follows:
12

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 3. Securities, Continued
U.S. Government-sponsored enterprises: At September 30, 2017, 5 (or five) investment in U.S. GSE securities had unrealized losses. These unrealized losses related principally to changes in market interest rates. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Bank does not intend to sell the investments and it is more likely than not that the Bank will not be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at September 30, 2017.
Municipal securities: At September 30, 2017, 8 (or eight) investments in obligations of municipal securities had unrealized losses. The Bank believes the unrealized losses on those investments were caused by the interest rate environment and do not relate to the underlying credit quality of the issuers. Because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not consider these investments to be other-than temporarily impaired at September 30, 2017.
Other debt securities: At September 30, 2017, 1 (or one) investment in other debt securities had unrealized losses. The Bank believes the unrealized loss on this investment was caused by the interest rate environment and does not relate to the underlying credit quality of the issuer. Because the Bank does not intend to sell the investment and it is not more likely than not that the Bank will be required to sell the investment before recovery of its amortized cost bases, which may be maturity, the Bank does not consider this investment to be other-than temporarily impaired at September 30, 2017.
Mortgage-backed securities: At September 30, 2017, 40 (or forty) investments in residential mortgage-backed securities had unrealized losses. This impairment is believed to be caused by the current interest rate environment. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Bank does not intend to sell the investments and it is not more likely than not that the Bank will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Bank does not deem these investments to be other-than-temporarily impaired at September 30, 2017.
Note 4. Loans and Allowance for Loan Losses
Portfolio Segmentation:
At September 30, 2017 and December 31, 2016, loans are summarized as follows (in thousands):

|  | September 30, 2017 |  | December 31, 2016
|  | PCI Loans |  | All Other Loans |  | Total |  | PCI Loans |  | All Other Loans |  | Total
Commercial real estate |  | $ | 13,202 |  |  | $ | 434,418 |  |  | $ | 447,620 |  |  | $ | 14,943 |  |  | $ | 400,265 |  |  | $ | 415,208 |
Consumer real estate |  | 6,143 |  |  | 193,561 |  |  | 199,704 |  |  | 9,004 |  |  | 178,798 |  |  | 187,802 |
Construction and land development |  | 1,576 |  |  | 96,636 |  |  | 98,212 |  |  | 1,678 |  |  | 116,191 |  |  | 117,869 |
Commercial and industrial |  | 1,085 |  |  | 118,697 |  |  | 119,782 |  |  | 1,568 |  |  | 83,454 |  |  | 85,022 |
Consumer and other |  | — |  |  | 6,361 |  |  | 6,361 |  |  | — |  |  | 7,475 |  |  | 7,475 |
Total loans |  | 22,006 |  |  | 849,673 |  |  | 871,679 |  |  | 27,193 |  |  | 786,183 |  |  | 813,376 |
Less: Allowance for loan losses |  | — |  |  | (5,393 | ) |  | (5,393 | ) |  | — |  |  | (5,105 | ) |  | (5,105 | )
Loans, net |  | $ | 22,006 |  |  | $ | 844,280 |  |  | $ | 866,286 |  |  | $ | 27,193 |  |  | $ | 781,078 |  |  | $ | 808,271 |

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.
13

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Portfolio Segmentation (continued):
The following describe risk characteristics relevant to each of the portfolio segments:
Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. One to four family first mortgage loans are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.
Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial, financial, and agricultural loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers' business operations.
Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.
Credit Risk Management:
The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.
Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.
Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Senior Credit Officer and the Directors Loan Committee.
The allowance for loan losses is a valuation reserve allowance established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment and general allocations for pools of homogeneous loans with similar risk characteristics and trends.
14

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
The allowance for loan losses related to specific loans is based on management's estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan's observable market price. The Company's homogeneous loan pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.
The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk and (7) effectiveness of the Company's loan policies, procedures and internal controls. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amount of the loans in the pool.
The composition of loans by loan classification for impaired and performing loan status at September 30, 2017 and December 31, 2016, is summarized in the tables below (amounts in thousands):

|  | September 30, 2017
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Performing loans |  | $ | 434,300 |  |  | $ | 192,628 |  |  | $ | 96,089 |  |  | $ | 118,570 |  |  | $ | 6,361 |  |  | $ | 847,948 |
Impaired loans |  | 118 |  |  | 933 |  |  | 547 |  |  | 127 |  |  | — |  |  | 1,725 |
|  | 434,418 |  |  | 193,561 |  |  | 96,636 |  |  | 118,697 |  |  | 6,361 |  |  | 849,673 |
PCI loans |  | 13,202 |  |  | 6,143 |  |  | 1,576 |  |  | 1,085 |  |  | — |  |  | 22,006 |
Total |  | $ | 447,620 |  |  | $ | 199,704 |  |  | $ | 98,212 |  |  | $ | 119,782 |  |  | $ | 6,361 |  |  | $ | 871,679 |

|  | December 31, 2016
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Performing loans |  | $ | 400,146 |  |  | $ | 177,977 |  |  | $ | 115,326 |  |  | $ | 83,244 |  |  | $ | 7,475 |  |  | $ | 784,168 |
Impaired loans |  | 119 |  |  | 821 |  |  | 865 |  |  | 210 |  |  | — |  |  | 2,015 |
|  | 400,265 |  |  | 178,798 |  |  | 116,191 |  |  | 83,454 |  |  | 7,475 |  |  | 786,183 |
PCI loans |  | 14,943 |  |  | 9,004 |  |  | 1,678 |  |  | 1,568 |  |  | — |  |  | 27,193 |
Total loans |  | $ | 415,208 |  |  | $ | 187,802 |  |  | $ | 117,869 |  |  | $ | 85,022 |  |  | $ | 7,475 |  |  | $ | 813,376 |

The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans as of September 30, 2017 and December 31, 2016 (amounts in thousands):

|  | September 30, 2017
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Performing loans |  | $ | 2,543 |  |  | $ | 1,315 |  |  | $ | 565 |  |  | $ | 670 |  |  | $ | 125 |  |  | $ | 5,218 |
Impaired loans |  | — |  |  | 100 |  |  | — |  |  | 75 |  |  | — |  |  | 175 |
Total |  | $ | 2,543 |  |  | $ | 1,415 |  |  | $ | 565 |  |  | $ | 745 |  |  | $ | 125 |  |  | $ | 5,393 |

15

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):

|  | December 31, 2016
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Performing loans |  | $ | 2,369 |  |  | $ | 1,382 |  |  | $ | 717 |  |  | $ | 516 |  |  | $ | 117 |  |  | $ | 5,101 |
Impaired loans |  | — |  |  | — |  |  | — |  |  | 4 |  |  | — |  |  | 4 |
Total |  | $ | 2,369 |  |  | $ | 1,382 |  |  | $ | 717 |  |  | $ | 520 |  |  | $ | 117 |  |  | $ | 5,105 |

There was no allowance for PCI loans at September 30, 2017 or December 31, 2016.
The following tables detail the changes in the allowance for loan losses for the nine month period ending September 30, 2017 and year ending December 31, 2016, by loan classification (amounts in thousands):

|  | September 30, 2017
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Beginning balance |  | $ | 2,369 |  |  | $ | 1,382 |  |  | $ | 717 |  |  | $ | 520 |  |  | $ | 117 |  |  | $ | 5,105 |
Loans charged off |  | — |  |  | (110 | ) |  | — |  |  | (18 | ) |  | (106 | ) |  | (234 | )
Recoveries of loans charged off |  | 8 |  |  | 58 |  |  | 10 |  |  | 55 |  |  | 51 |  |  | 182 |
Provision (reallocation) charged to operating expense |  | 166 |  |  | 85 |  |  | (162 | ) |  | 188 |  |  | 63 |  |  | 340 |
Ending balance |  | $ | 2,543 |  |  | $ | 1,415 |  |  | $ | 565 |  |  | $ | 745 |  |  | $ | 125 |  |  | $ | 5,393 |

|  | December 31, 2016
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Beginning balance |  | $ | 1,906 |  |  | $ | 1,015 |  |  | $ | 627 |  |  | $ | 777 |  |  | $ | 29 |  |  | $ | 4,354 |
Loans charged off |  | — |  |  | (102 | ) |  | (14 | ) |  | (35 | ) |  | (155 | ) |  | (306 | )
Recoveries of charge-offs |  | 45 |  |  | 76 |  |  | 22 |  |  | 58 |  |  | 68 |  |  | 269 |
Provision (reallocation) charged to operating expense |  | 418 |  |  | 393 |  |  | 82 |  |  | (280 | ) |  | 175 |  |  | 788 |
Ending balance |  | $ | 2,369 |  |  | $ | 1,382 |  |  | $ | 717 |  |  | $ | 520 |  |  | $ | 117 |  |  | $ | 5,105 |

A description of the general characteristics of the risk grades used by the Company is as follows:
Pass: Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.
Special Mention: Loans in this risk grade are the equivalent of the regulatory definition of "Other Assets Especially Mentioned" classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company's credit position.
16

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
Substandard: Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.
Uncollectible: Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans within this category.
The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of September 30, 2017 and December 31, 2016 (amounts in thousands):
Non PCI Loans

|  | September 30, 2017
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Pass |  | $ | 433,468 |  |  | $ | 191,969 |  |  | $ | 96,089 |  |  | $ | 117,633 |  |  | $ | 6,361 |  |  | $ | 845,520 |
Watch |  | 828 |  |  | 727 |  |  | — |  |  | 898 |  |  | — |  |  | 2,453 |
Special mention |  | — |  |  | 15 |  |  | — |  |  | — |  |  | — |  |  | 15 |
Substandard |  | 122 |  |  | 850 |  |  | 547 |  |  | 166 |  |  | — |  |  | 1,685 |
Doubtful |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total |  | $ | 434,418 |  |  | $ | 193,561 |  |  | $ | 96,636 |  |  | $ | 118,697 |  |  | $ | 6,361 |  |  | $ | 849,673 |

PCI Loans

|  | September 30, 2017
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Pass |  | $ | 10,416 |  |  | $ | 4,473 |  |  | $ | 916 |  |  | $ | 851 |  |  | $ | — |  |  | $ | 16,656 |
Watch |  | 841 |  |  | 1,081 |  |  | 648 |  |  | 14 |  |  | — |  |  | 2,584 |
Special mention |  | — |  |  | — |  |  | — |  |  | 196 |  |  | — |  |  | 196 |
Substandard |  | 1,945 |  |  | 589 |  |  | 12 |  |  | — |  |  | — |  |  | 2,546 |
Doubtful |  | — |  |  | — |  |  | — |  |  | 24 |  |  | — |  |  | 24 |
Total |  | $ | 13,202 |  |  | $ | 6,143 |  |  | $ | 1,576 |  |  | $ | 1,085 |  |  | $ | — |  |  | $ | 22,006 |
Total loans |  | $ | 447,620 |  |  | $ | 199,704 |  |  | $ | 98,212 |  |  | $ | 119,782 |  |  | $ | 6,361 |  |  | $ | 871,679 |

17

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Risk Management (continued):
Non PCI Loans

|  | December 31, 2016
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Pass |  | $ | 399,505 |  |  | $ | 177,466 |  |  | $ | 115,237 |  |  | $ | 82,992 |  |  | $ | 7,238 |  |  | $ | 782,438 |
Watch |  | 640 |  |  | 550 |  |  | 89 |  |  | 252 |  |  | — |  |  | 1,531 |
Special mention |  | — |  |  | 104 |  |  | — |  |  | — |  |  | 237 |  |  | 341 |
Substandard |  | 120 |  |  | 678 |  |  | 865 |  |  | 210 |  |  | — |  |  | 1,873 |
Doubtful |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total |  | $ | 400,265 |  |  | $ | 178,798 |  |  | $ | 116,191 |  |  | $ | 83,454 |  |  | $ | 7,475 |  |  | $ | 786,183 |

PCI Loans

|  | December 31, 2016
|  | Commercial Real Estate |  | Consumer Real Estate |  | Construction and Land Development |  | Commercial and Industrial |  | Consumer and Other |  | Total
Pass |  | $ | 11,836 |  |  | $ | 6,811 |  |  | $ | 1,019 |  |  | $ | 1,507 |  |  | $ | — |  |  | $ | 21,173 |
Watch |  | 1,045 |  |  | 1,577 |  |  | 645 |  |  | 22 |  |  | — |  |  | 3,289 |
Special mention |  | — |  |  | — |  |  | — |  |  | 12 |  |  | — |  |  | 12 |
Substandard |  | 2,062 |  |  | 616 |  |  | 14 |  |  | — |  |  | — |  |  | 2,692 |
Doubtful |  | — |  |  | — |  |  | — |  |  | 27 |  |  | — |  |  | 27 |
Total |  | $ | 14,943 |  |  | $ | 9,004 |  |  | $ | 1,678 |  |  | $ | 1,568 |  |  | $ | — |  |  | $ | 27,193 |
Total loans |  | $ | 415,208 |  |  | $ | 187,802 |  |  | $ | 117,869 |  |  | $ | 85,022 |  |  | $ | 7,475 |  |  | $ | 813,376 |

Past Due Loans:
A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places a loan on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.
The following tables present the aging of the recorded investment in loans as of September 30, 2017 and December 31, 2016 (amounts in thousands):

|  | September 30, 2017
|  | 30-89 Days Past Due and Accruing |  | Past Due 90 Days or More and Accruing |  | Nonaccrual |  | Total Past Due and NonAccrual |  | PCI Loans |  | Current Loans |  | Total Loans
Commercial real estate |  | $ | 414 |  |  | $ | — |  |  | $ | 122 |  |  | $ | 536 |  |  | $ | 13,202 |  |  | $ | 433,882 |  |  | $ | 447,620 |
Consumer real estate |  | 137 |  |  | — |  |  | 506 |  |  | 643 |  |  | 6,143 |  |  | 192,918 |  |  | 199,704 |
Construction and land development |  | — |  |  | — |  |  | 547 |  |  | 547 |  |  | 1,576 |  |  | 96,089 |  |  | 98,212 |
Commercial and industrial |  | 114 |  |  | — |  |  | 85 |  |  | 199 |  |  | 1,085 |  |  | 118,498 |  |  | 119,782 |
Consumer and other |  | 31 |  |  | 3 |  |  | — |  |  | 34 |  |  | — |  |  | 6,327 |  |  | 6,361 |
Total |  | $ | 696 |  |  | $ | 3 |  |  | $ | 1,260 |  |  | $ | 1,959 |  |  | $ | 22,006 |  |  | $ | 847,714 |  |  | $ | 871,679 |

18

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Past Due Loans (continued):

|  | December 31, 2016
|  | 30-89 Days Past Due and Accruing |  | Past Due 90 Days or More and Accruing |  | Nonaccrual |  | Total Past Due and NonAccrual |  | PCI Loans |  | Current Loans |  | Total Loans
Commercial real estate |  | $ | 395 |  |  | $ | — |  |  | $ | — |  |  | $ | 395 |  |  | $ | 14,943 |  |  | $ | 399,870 |  |  | $ | 415,208 |
Consumer real estate |  | 695 |  |  | 699 |  |  | 386 |  |  | 1,780 |  |  | 9,004 |  |  | 177,018 |  |  | 187,802 |
Construction and land development |  | 690 |  |  | — |  |  | 865 |  |  | 1,555 |  |  | 1,678 |  |  | 114,636 |  |  | 117,869 |
Commercial and industrial |  | 257 |  |  | — |  |  | 164 |  |  | 421 |  |  | 1,568 |  |  | 83,033 |  |  | 85,022 |
Consumer and other |  | 17 |  |  | — |  |  | — |  |  | 17 |  |  | — |  |  | 7,458 |  |  | 7,475 |
Total |  | $ | 2,054 |  |  | $ | 699 |  |  | $ | 1,415 |  |  | $ | 4,168 |  |  | $ | 27,193 |  |  | $ | 782,015 |  |  | $ | 813,376 |

Impaired Loans:
The following is an analysis of the impaired loan portfolio, excluding PCI loans, detailing the related allowance recorded as of September 30, 2017 and December 31, 2016 (amounts in thoudands):

|  |  |  |  |  |  |  | For the nine months ended
|  | At September 30, 2017 |  | September 30, 2017
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
Impaired loans without a valuation allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 118 |  |  | $ | 124 |  |  | $ | — |  |  | $ | 149 |  |  | $ | 7 |
Consumer real estate |  | 309 |  |  | 314 |  |  | — |  |  | 398 |  |  | 11 |
Construction and land development |  | 547 |  |  | 547 |  |  | — |  |  | 648 |  |  | — |
Commercial and industrial |  | 42 |  |  | 42 |  |  | — |  |  | 44 |  |  | 2 |
Consumer and other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 1,016 |  |  | 1,027 |  |  | — |  |  | 1,239 |  |  | 20 |
Impaired loans with a valuation allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Consumer real estate |  | 624 |  |  | 649 |  |  | 100 |  |  | 499 |  |  | 24 |
Construction and land development |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial and industrial |  | 85 |  |  | 85 |  |  | 75 |  |  | 103 |  |  | 3 |
Consumer and other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 709 |  |  | 734 |  |  | 175 |  |  | 602 |  |  | 27 |
Total impaired loans |  | $ | 1,725 |  |  | $ | 1,761 |  |  | $ | 175 |  |  | $ | 1,841 |  |  | $ | 47 |

19

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Impaired Loans (continued):

|  |  |  |  |  |  |  | For the year ended
|  | At December 31, 2016 |  | December 31, 2016
|  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
Impaired loans without a valuation allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 119 |  |  | $ | 119 |  |  | $ | — |  |  | $ | 1,311 |  |  | $ | 73 |
Consumer real estate |  | 821 |  |  | 849 |  |  | — |  |  | 2,334 |  |  | 100 |
Construction and land development |  | 865 |  |  | 865 |  |  | — |  |  | 967 |  |  | 3 |
Commercial and industrial |  | 46 |  |  | 46 |  |  | — |  |  | 47 |  |  | 4 |
Consumer and other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 1,851 |  |  | 1,879 |  |  | — |  |  | 4,659 |  |  | 180 |
Impaired loans with a valuation allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Consumer real estate |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Construction and land development |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Commercial and industrial |  | 164 |  |  | 243 |  |  | 4 |  |  | 306 |  |  | 70 |
Consumer and other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 164 |  |  | 243 |  |  | 4 |  |  | 306 |  |  | 70 |
Total impaired loans |  | $ | 2,015 |  |  | $ | 2,122 |  |  | $ | 4 |  |  | $ | 4,965 |  |  | $ | 250 |

Troubled Debt Restructurings:
At September 30, 2017 and December 31, 2016, impaired loans included loans that were classified as Troubled Debt Restructurings ("TDRs"). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.
The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.
The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of September 30, 2017 and December 31, 2016, management had approximately, $42,000 and $608,000, respectively, in loans that met the criteria for restructured, which included approximately $0 and $442,000, respectively, of loans on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that management will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.
20

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Troubled Debt Restructurings (continued):
There were no loans that were modified as troubled debt restructurings during the nine month period ended September 30, 2017.
The following table presents a summary of loans that were modified as troubled debt restructurings during the twelve month period ended December 31, 2016 (amounts in thousands):

|  |  |  | Pre-Modification Outstanding Recorded |  | Post-Modification Outstanding Recorded
December 31, 2016 |  | Number of Contracts |  | Investment |  | Investment
Construction and land development |  | 1 |  | $ | 278 |  |  | $ | 278 |
Commercial and industrial |  | 1 |  | $ | 164 |  |  | $ | 164 |

There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default.
Purchased Credit Impaired Loans:
The Company has acquired loans which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of is as follows (amounts in thousands):

| September 30, 2017 | December 31, 2016
Commercial real estate | $ | 16,036 |  | $ | 18,473 |
Consumer real estate | 8,955 |  | 12,111 |
Construction and land development | 1,920 |  | 2,553 |
Commercial and industrial | 1,740 |  | 2,482 |
Consumer and other | — |  | — |
Total loans | 28,651 |  | 35,619 |
Less remaining purchase discount | (6,645 | ) | (8,426 | )
Total loans, net of purchase discount | 22,006 |  | 27,193 |
Less: Allowance for loan losses | — |  | — |
Carrying amount, net of allowance | $ | 22,006 |  | $ | 27,193 |

21

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 4. Loans and Allowance for Loan Losses, Continued
Purchased Credit Impaired Loans (continued):
Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows for the three and nine months period ended September 30, 2017 and 2016:

|  | Three Months Ended September 30, 2017 |  | Three Months Ended September 30, 2016 |  | Nine Months Ended September 30, 2017 |  | Nine Months Ended September 30, 2016
Accretable yield, beginning of period |  | $ | 8,475 |  |  | $ | 10,209 |  |  | $ | 8,950 |  |  | $ | 10,216 |
Additions |  | — |  |  | — |  |  | — |  |  | — |
Accretion income |  | (1,061 | ) |  | (661 | ) |  | (2,731 | ) |  | (1,876 | )
Reclassification to accretable |  | 134 |  |  | 174 |  |  | 743 |  |  | 1,511 |
Other changes, net |  | 460 |  |  | (334 | ) |  | 1,046 |  |  | (463 | )
Accretable yield |  | $ | 8,008 |  |  | $ | 9,388 |  |  | $ | 8,008 |  |  | $ | 9,388 |

Note 5. Employee Benefit Plans
401(k) Plan:
The Company provides a deferred salary reduction plan (“Plan”) under Section 401(k) of the Internal Revenue Code covering substantially all employees. After one year of service the Company matches 100 percent of employee contributions up to 3 percent of compensation and 50 percent of employee contributions on the next 2 percent of compensation. The Company's contribution to the Plan for the three month period ending September 30, 2017 and 2016 respectively was $89,463 and $110,107 and for the nine month period ending September30, 2017 and 2016 respectively was $298,309 and $300,530
Stock Option Plans:
As of September 30, 2017, the Company had one currently active equity incentive plan administered by the Board of Directors, and three plans or programs, pursuant to which the Company has outstanding prior grants. These plans are described below:
Legacy Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan – The plan provided Cornerstone Bancshares, Inc. officers and employees incentive stock options or non-qualified stock options to purchase shares of common stock. The exercise price for incentive stock options was not less than 100 percent of the fair market value of the common stock on the date of the grant. The exercise price of the non-qualified stock options was equal to or more or less than the fair market value of the common stock on the date of the grant. This plan expired in 2012.
Legacy Cornerstone Non-Qualified Plan Options — During 2013 and 2014, Cornerstone issued non-qualified options to employees and directors. The options were originally documented in 2013 as being issued out of the Cornerstone Bancshares, Inc. 2002 Long Term Incentive Plan but that plan expired in 2012. The non-qualified options are governed by the grant document issued to the holders which incorporate the terms of the plan by reference.
Legacy SmartFinancial, Inc. 2010 Incentive Plan - This plan was assumed by the Company on August 31, 2015. This plan provides for incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance awards, dividend equivalents and stock or other stock-based awards. The maximum number of common shares that could be sold or optioned under the plan is 525,000 shares. Under the plan, the exercise price of each option could not be less than 100 percent of the fair market value of the common stock on the date of grant.
22

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5. Employee Benefit Plans, Continued
Stock Option Plans (Continued):
2015 Stock Incentive Plan – This plan provides for incentive stock options, nonqualified stock options, and restricted stock. The maximum number of shares of common stock that can be sold or optioned under the plan is 2,000,000 shares. The term of each option shall be no more than ten years from the date of grant. In the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than ten percent of the voting power of all classes of stock of the Company or any parent or subsidiary thereof, the term of the option shall be five years from the date of grant or such shorter term as may be provided in the award agreement.
The per share exercise price for the shares to be issued upon exercise of an option shall be such price as is determined by the plan administrator, subject to the following: In the case of an incentive stock option: (1) granted to an employee who, at the time of grant of such option, owns stock representing more than ten percent of the voting power of all classes of stock of the company or any parent or subsidiary thereof, the exercise price shall be no less than one hundred and ten percent of the fair market value per share on the date of grant; or (2) granted to any other employee, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant. In the case of a nonstatutory stock option, the per share exercise price shall be no less than one hundred percent of the fair market value per share on the date of grant, unless otherwise determined by the Administrator.
The incentive stock options vest 30% on the second anniversary of the grant date, 30% on the third anniversary of the grant date and 40% on the fourth anniversary of the grant date. Director non-qualified stock options vest 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date.
A summary of the status of these stock option plans is presented in the following table:

|  | Number |  | Weighted Average Exercisable Price
Outstanding at December 31, 2016 |  | 717,524 |  |  | $ | 10.57 |
Exercised |  | (505,712 | ) |  | 9.64 |
Forfeited |  | (24,496 | ) |  | 19.90 |
Outstanding at September 30, 2017 |  | 187,316 |  |  | $ | 11.85 |

|  | Number |  | Weighted Average Exercisable Price
Outstanding at December 31, 2015 |  | 817,414 |  |  | $ | 10.62 |
Exercised |  | (89,556 | ) |  | 8.98 |
Forfeited |  | (10,334 | ) |  | 28.49 |
Outstanding at December 31, 2016 |  | 717,524 |  |  | $ | 10.57 |

23

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5. Employee Benefit Plans, Continued
Stock Option Plans (continued):
Information pertaining to options outstanding at September 30, 2017, is as follows:

|  | Options Outstanding |  | Options Exercisable
|  |  |  | Weighted- Average Remaining |  | Weighted- Average |  |  |  | Weighted- Average
Exercise |  | Number |  | Contractual |  | Exercise |  | Number |  | Exercise
Prices |  | Outstanding |  | Life |  | Price |  | Exercisable |  | Price
6.60 |  |  | 38,250 |  |  | 4.4 years |  | 6.60 |  |  | 38,250 |  |  | 6.60 |
6.80 |  |  | 16,875 |  |  | 3.4 years |  | 6.80 |  |  | 16,875 |  |  | 6.80 |
9.48 |  |  | 26,875 |  |  | 5.4 years |  | 9.48 |  |  | 26,875 |  |  | 9.48 |
9.60 |  |  | 35,625 |  |  | 6.4 years |  | 9.60 |  |  | 35,625 |  |  | 9.60 |
11.67 |  |  | 2,000 |  |  | 3.3 years |  | 11.67 |  |  | 2,000 |  |  | 11.67 |
14.40 |  |  | 12,805 |  |  | 1.4 years |  | 14.40 |  |  | 12,805 |  |  | 14.40 |
15.05 |  |  | 41,720 |  |  | 8.0 years |  | 15.05 |  |  | 18,265 |  |  | 15.05 |
31.96 |  |  | 13,166 |  |  | 0.4 years |  | 31.96 |  |  | 13,166 |  |  | 31.96 |
Outstanding, end of period |  | 187,316 |  |  | 5.1 years |  | 11.85 |  |  | 163,861 |  |  | 11.40 |

The Company recognized stock option-based compensation expense of $23,718 and $33,000 for the three months ended September 30, 2017 and September 30, 2016, respectively and $74,248 and $99,635 for the nine months ended September 30, 2017 and September 30, 2016, respecitvely. For the nine months period ended September 30, 2017, direct stock grant expense issued to local advisory board members of $31,791 was included in salary and employee benefits expense. There was no direct grant stock grant expense for the nine months period ended September 30, 2016. The total fair value of shares underlying the options which vested during the nine months period ended September 30, 2017 and September 30, 2016 was $348,124 and $84,010 , respectively. There were no income tax benefits recognized for the exercise of options for the periods ended September 30, 2017 and September 30, 2016, respectively.
The intrinsic value of options exercised during the period ended September 30, 2017 was $5,451,319. The aggregate intrinsic value of total options outstanding and exercisable options at September 30, 2017 was $2,390,463 and $2,179,133, respectively. Cash received from options exercised under all share-based payment arrangements for the period ended September 30, 2017 was $4,873,757.
Information related to non-vested options for the period ended September 30, 2017, is as follows:

|  | Number |  | Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2016 |  | 47,970 |  |  | $ | 12.31 |
Granted |  | — |  |  | — |
Vested |  | (14,469 | ) |  | 12.31 |
Forfeited/expired |  | (10,046 | ) |  | 12.31 |
Nonvested at September 30, 2017 |  | 23,455 |  |  | $ | 12.31 |

As of September 30, 2017 , there was approximately $282,000 of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Plans. The cost is expected to be recognized over a weighted-average period of 1.0 year. There were no stock options granted during the nine month period ended September 30, 2017.
24

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 5. Employee Benefit Plans, Continued
Restricted Stock Awards:
On August 4, 2017, the the Board of Directors of the Company made grants of 27,500 shares of restricted stock under the Company’s 2015 Stock Incentive Plan to certain executives of the Company. The restricted shares of stock, which are subject to
the terms of a Restricted Stock Grant Agreement between the Company and each recipient, will fully vest on the fifth anniversary of the grant date. Prior to vesting, the recipient will be entitled to vote the shares and receive dividends, if any, declared by the Company with respect to its common stock. Compensation expense for restricted stock is based on the fair value of the restricted stock awards at the time of the grant, which is equal to the market value of the Company’s common stock on the date of grant. The value of the restricted stock grants that are expected to vest is amortized monthly into compensation expense over the five year vesting period.
The restricted shares had a fair value of $24.58 per share on the date of issuance. For the three and nine months ended September 30, 2017, compensation expense of $22,532 was recognized related to non-vested restricted stock awards. There was no compensation expense related to these awards in 2016. As of September 30, 2017, there was $653,418 of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan.
The following table summarizes activity relating to non-vested restricted stock awards:

|  | Number
Balance at December 31, 2016 |  | — |
Granted |  | 27,500 |
Forfeited |  | — |
Vested |  | — |
Balance at September 30, 2017 |  | 27,500 |

Note 6. Commitments and Contingent Liabilities
Off Balance Sheet Arrangements In the normal course of business, the Bank has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions; thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are generally issued on behalf of an applicant (our client) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from the Bank under certain prescribed circumstances. Subsequently, the Bank would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
The Bank follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each client’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should customers default on their resulting obligation to the Bank the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.
25

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 6. Commitments and Contingent Liabilities, Continued
A summary of the Bank’s total contractual amount for all off-balance sheet commitments at September 30, 2017 is as follows:

Commitments to extend credit | $ | 166.8 | million
Standby letters of credit | $ | 3.2 | million

Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of claims outstanding at September 30, 2017 will not have a material effect on SmartFinancial’s consolidated financial statements.
Note 7. Fair Value Disclosures
Determination of Fair Value:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the “Fair Value Measurements and Disclosures” ASC Topic 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
Fair Value Hierarchy:
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
26

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Fair Value Hierarchy (continued):
Cash and Cash Equivalents: For cash and due from banks, interest-bearing deposits, and federal funds sold, the carrying amount is a reasonable estimate of fair value based on the short-term nature of the assets and are considered Level 1 inputs.
Securities Available for Sale: Where quoted prices are available in an active market, management classifies the securities within Level 1 of the valuation hierarchy. If quoted market prices are not available, management estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, including GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, management classifies those securities in Level 3.
Restricted Investments: It is not practicable to determine the fair value of restricted investments due the restrictions placed on its transferability.
Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair value for fixed rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. These methods are considered Level 3 inputs.
Deposits: The fair values disclosed for demand deposits (for example, interest and noninterest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts) and are considered Level 1 inputs. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits, and are considered Level 2 inputs.
Securities Sold Under Agreement to Repurchase: The carrying value of these liabilities approximates their fair value, and are considered Level 1 inputs.
Federal Home Loan Bank Advances and Other Borrowings: The fair value of the FHLB fixed rate borrowings are estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements, and are considered Level 2 inputs.
Commitments to Extend Credit and Standby Letters of Credit: Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.
Measurements of Fair Value:
Assets and liabilities recorded at fair value on a recurring basis are as follows (in thousands):

|  | Balance as of September 30, 2017 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Other Unobservable Inputs (Level 3)
Debt securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises (GSEs) |  | $ | 15,911 |  |  | $ | — |  |  | $ | 15,911 |  |  | $ | — |
Mortgage-backed securities |  | 90,323 |  |  | — |  |  | 90,323 |  |  | — |
Other debt securities |  | 938 |  |  | — |  |  | 938 |  |  | — |
Municipal securities |  | 8,363 |  |  | — |  |  | 8,363 |  |  | — |
Total securities available-for-sale |  | $ | 115,535 |  |  | $ | — |  |  | $ | 115,535 |  |  | $ | — |

27

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Measurements of Fair Value (continued):

|  | Balance as of December 31, 2016 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Other Unobservable Inputs (Level 3)
Debt securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government-sponsored enterprises (GSEs) |  | $ | 17,723 |  |  | $ | — |  |  | $ | 17,723 |  |  | $ | — |
Mortgage-backed securities: |  | 103,680 |  |  | — |  |  | 103,680 |  |  | — |
Municipal securities |  | 8,019 |  |  | — |  |  | 8,019 |  |  | — |
Total securities available-for-sale |  | $ | 129,422 |  |  | $ | — |  |  | $ | 129,422 |  |  | $ | — |

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
Assets Measured at Fair Value on a Nonrecurring Basis:
Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):

|  | Balance as of September 30, 2017 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Other Unobservable Inputs (Level 3)
Impaired loans |  | $ | 534 |  |  | $ | — |  |  | $ | — |  |  | $ | 534 |
Foreclosed assets |  | 2,888 |  |  | — |  |  | — |  |  | 2,888 |

|  | Balance as of December 31, 2016 |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Other Unobservable Inputs (Level 3)
Impaired loans |  | $ | 239 |  |  | $ | — |  |  | $ | — |  |  | $ | 239 |
Foreclosed assets |  | 2,386 |  |  | — |  |  | — |  |  | 2,386 |

For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2017 and December 31, 2016, the significant unobservable inputs used in the fair value measurements are presented below (in thousands).

|  | Balance as of September 30, 2017 |  | Valuation Technique |  | Significant Other Unobservable Input |  | Weighted Average of Input
Impaired loans |  | $ | 534 |  |  | Appraisal |  | Appraisal Discounts |  | 24.7 | %
Foreclosed assets |  | 2,888 |  |  | Appraisal |  | Appraisal Discounts |  | 19.3 | %

28

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Assets Measured at Fair Value on a Nonrecurring Basis (continued):

|  | Balance as of December 31, 2016 (in thousands) |  | Valuation Technique |  | Significant Other Unobservable Input |  | Weighted Average of Input
Impaired loans |  | $ | 239 |  |  | Cash Flow |  | Discounted Cash Flow / Appraisal Discounts |  | 2.4 | %
Foreclosed assets |  | 2,386 |  |  | Appraisal |  | Appraisal Discounts |  | 12.2 | %

Impaired Loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.
The fair value of impaired loans were measured based on the value of the collateral securing these loans or the discounted cash flows of the loans, as applicable. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.
Foreclosed assets: Foreclosed assets, consisting of properties obtained through foreclosure or in satisfaction of loans, are initially recorded at fair value less estimated costs to sell upon transfer of the loans to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, a loss is recognized in noninterest expense.
29

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 7. Fair Value Disclosures, Continued
Carrying value and estimated fair value:
The carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016 are as follows (in thousands):

|  | September 30, 2017 |  | December 31, 2016
|  | Carrying Amount |  | Estimated Fair Value |  | Carrying Amount |  | Estimated Fair Value
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 84,098 |  |  | $ | 84,098 |  |  | $ | 68,748 |  |  | $ | 68,748 |
Securities available for sale |  | 115,535 |  |  | 115,535 |  |  | 129,422 |  |  | 129,422 |
Restricted investments |  | 6,081 |  |  | N/A |  |  | 5,628 |  |  | N/A |
Loans, net |  | 866,286 |  |  | 855,882 |  |  | 808,271 |  |  | 803,057 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Noninterest-bearing demand deposits |  | 185,386 |  |  | 185,386 |  |  | 153,483 |  |  | 153,483 |
Interest-bearing demand deposits |  | 156,953 |  |  | 156,953 |  |  | 162,702 |  |  | 162,702 |
Money Market and Savings deposits |  | 306,357 |  |  | 306,357 |  |  | 274,605 |  |  | 274,605 |
Time deposits |  | 311,490 |  |  | 311,755 |  |  | 316,275 |  |  | 316,734 |
Securities sold under agreements to repurchase |  | 26,542 |  |  | 26,542 |  |  | 26,622 |  |  | 26,622 |
Federal Home Loan Bank advances and other borrowings |  | 6,000 |  |  | 6,000 |  |  | 18,505 |  |  | 18,505 |

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
30

SMARTFINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 8. Small Business Lending Fund
In connection with the Company's merger with Legacy SmartFinancial, Inc. in 2105, the company assumed Legacy SmartFinancial's obligations under that certain stock purchase agreement with the U.S. Department of the Treasury and issued 12,000 shares of preferred stock at $1,000 per share under the Small Business Lending Fund Program (the "SBLF Program").The Company paid cash dividends at a one percent rate or $120,000 for the year ended December 31, 2015 on the preferred shares. On February 4, 2016 the dividend rate for the preferred shares increased to nine percent and as a result the company incurred preferred stock dividends of $1,022,000 for the year ended December 31, 2016 .
On January 30, 2017, the Company completed a public offering of 2,010,084 shares of its common stock with the net proceeds to the Company of approximately $33.2 million. On March 6, 2017 the Company used proceeds from the offering to redeem the $12 million of preferred stock and pay the $195 thousand accrued dividend.
Note 9. Business Combination
On December 8, 2016, the Bank entered into a purchase and assumption agreement with Atlantic Capital Bank, N.A. that provided for the acquisition and assumption by the Bank of certain assets and liabilities associated with Atlantic Capital Bank’s branch office located at 3200 Keith Street NW, Cleveland, Tennessee 37312. The purchase was completed on May 19, 2017 for total cash consideration of $1,183,007.
The assets and liabilities as of the effective date of the transaction were recorded at their respective estimated fair values. 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.
In the periods following the acquisition, the financial statements will include the results attributable to the Cleveland branch purchase beginning on the date of purchase. For the nine months period ended September 30, 2017, the revenues and net income attributable to the Cleveland branch were $308,854 and $92,598, respectively. It is impracticable to determine the pro-forma impact to the 2016 revenues and net income if the acquisition had occurred on January 1, 2016 as the Company does not have access to those records for a single branch.
The following table details the financial impact of the transaction, including the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:

Allocation of Purchase Price (amounts in thousands) |
Total consideration in cash | $ | 1,183 |
Fair value of assets acquired and liabilities assumed: |  |
Cash and cash equivalents | 133 |
Loans | 24,073 |
Premises and equipment | 2,839 |
Core deposit intangible | 310 |
Prepaid and other assets | 77 |
Deposits | (26,888 | )
Payables and other liabilities | (21 | )
Total fair value of net assets acquired | 523 |
Goodwill | $ | 660 |

As of September 30, 2017 there have not been any changes to the initial fair values recorded as part of the business combination.
31

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SmartFinancial, Inc. (the “Company” or “SmartFinancial”) is a bank holding company incorporated under the laws of Tennessee and headquartered in Knoxville, Tennessee. The Company conducts its business operations primarily through its wholly-owned subsidiary, SmartBank, a Tennessee chartered community bank providing services through fourteen branches, one loan production office, and one mortgage production office located in East Tennessee, the Florida Panhandle, and North Georgia.
Executive Summary
The following is a summary of the Company’s financial highlights and significant events during the third quarter and the first nine months of 2017:

• | Net income available to common shareholders totaled $1.7 million, or $0.20 per diluted common share, during the third quarter of 2017 compared to $1.3 million, or $0.22 per diluted common share, during the third quarter of 2016.

• | Closed acquisition of Cleveland, Tennessee branch, purchasing approximately $24.4 million in loans and assuming $26.8 million in deposits, in book value, resulting in approximately $1.0 million in intangible assets.

• | Annualized return on average assets was 0.61 percent for first nine months of 2017, compared to 0.55 percent for the same period in 2016.

• | Gross loan growth of $58.3 million for first nine months of 2017, including loans purchased in 2017 which had a net carrying of approximately $20.6 million at quarter end.

• | Net interest margin, taxable equivalent, of 4.13 percent for first nine months of 2017, up from 4.06 percent for the same period in 2016.

• | .

• | Asset quality remains outstanding with nonperforming assets to total assets of just 0.37 percent.

• | Prepared for November 1 acquisition of Capstone Bancshares, Inc. of Tuscaloosa, Alabama, after which the Company will have assets in excess of $1.6 billion.

Analysis of Results of Operations
Third quarter of 2017 compared to 2016
Net income was $1.7 million in the third quarter of 2017, which was up from $1.6 million in the third quarter of 2016. Net income available to common shareholders was $1.7 million, or $0.20 per diluted common share, in the third quarter of 2017, compared to $1.3 million, or $0.22 per diluted common share, in the third quarter of 2016. Net interest income to average assets of 3.81 percent in the third quarter of 2017 was up from 3.76 percent in the third quarter of 2016 as the average earning asset balances and yields increased compared to the prior year. Noninterest income to average assets of 0.43 percent was down from 0.47 percent in the third quarter of 2016. Noninterest expense to average assets increased from 3.13 percent in the third quarter of 2016 to 3.33 percent in third quarter of 2017 primarily due to higher salaries and employee benefits and merger and conversion costs.
The first nine months of 2017 compared to 2016
Net income was $5.0 million in the first nine months of 2017, which was up from $4.2 million in the first nine months of 2016. Net income available to common shareholders was $4.8 million, or $0.59 per diluted common share, in the first nine months of 2017, an increase from $3.4 million, or $0.56 per diluted common share, in the first nine months of 2016. Net interest income to average assets of 3.81 percent in the first nine months of 2017 was up from 3.76 percent in the first nine months of 2016 as the average earning asset balances and yields increased compared to the prior year. Noninterest income to average assets of 0.42 percent was down from 0.43 percent in the first nine months of 2016. Noninterest expense to average assets increased from 3.24 percent in the first nine months of 2016 to 3.26 percent in first nine months of 2017 primarily due to to higher salaries and employee benefits and merger and conversion costs.
32

Net Interest Income and Yield Analysis
Third quarter of 2017 compared to 2016
Net interest income, taxable equivalent, improved to $10.9 million in the third quarter of 2017 from $9.7 million in the third quarter of 2016. The increase in net interest income was primarily due to increases in loan balances and increases in the yields of the loan and securities portfolios. Average earning assets increased from $953.7 million in the third quarter of 2016 to $1,042.3 million in the third quarter of 2017. Over this period, average loan balances increased by $79.8 million primarily as a result of organic growth. In addition, average interest-bearing deposits increased by $67.1 million and average noninterest-bearing deposits increased $31.8 million, a result of organic growth combined with the acquired deposits. Net interest income to average assets of 3.81 percent for the third quarter in 2017 was up from 3.76 percent during the same period in 2016. Net interest margin, taxable equivalent, was 4.17 percent in the quarter, compared to 4.03 percent a year ago as a result a higher percentage of average interest-earning assets to average interest-bearing liabilities and increases in the yield on earning assets. The yield on earning assets increased from 4.48 percent a year ago to 4.70 percent in the quarter due to higher loan balances and higher yields on loans and securities.
The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.

|  | Three Months Ended September 30, 2017 |  | Three Months Ended September 30, 2016
|  | Average |  |  |  | Yield/ |  | Average |  |  |  | Yield/
|  | Balance |  | Interest * |  | Cost* |  | Balance |  | Interest * |  | Cost*
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (1) |  | $ | 868,352 |  |  | $ | 11,496 |  |  | 5.25 | % |  | $ | 788,585 |  |  | $ | 10,112 |  |  | 5.09 | %
Investment securities and interest-bearing due from banks (2) |  | 142,089 |  |  | 757 |  |  | 2.11 | % |  | 159,683 |  |  | 615 |  |  | 1.53 | %
Federal funds and other |  | 31,864 |  |  | 86 |  |  | 1.07 | % |  | 5,442 |  |  | 51 |  |  | 3.72 | %
Total interest-earning assets |  | 1,042,305 |  |  | 12,339 |  |  | 4.70 | % |  | 953,710 |  |  | 10,778 |  |  | 4.48 | %
Noninterest-earning assets |  | 96,147 |  |  |  |  |  |  | 66,735 |  |  |  |  |
Total assets |  | $ | 1,138,452 |  |  |  |  |  |  | $ | 1,020,445 |  |  |  |  |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 153,838 |  |  | $ | 118 |  |  | 0.30 | % |  | $ | 147,102 |  |  | $ | 73 |  |  | 0.20 | %
Money market and savings deposits |  | 329,933 |  |  | 519 |  |  | 0.62 | % |  | 268,307 |  |  | 283 |  |  | 0.42 | %
Time deposits |  | 311,668 |  |  | 736 |  |  | 0.94 | % |  | 312,889 |  |  | 709 |  |  | 0.90 | %
Total interest-bearing deposits |  | 795,439 |  |  | 1,373 |  |  | 0.68 | % |  | 728,298 |  |  | 1,065 |  |  | 0.58 | %
Securities sold under agreement to repurchase |  | 20,589 |  |  | 15 |  |  | 0.29 | % |  | 22,471 |  |  | 17 |  |  | 0.30 | %
Federal Home Loan Bank advances and other borrowings |  | 381 |  |  | 5 |  |  | 5.21 | % |  | 11,187 |  |  | 17 |  |  | 0.60 | %
Total interest-bearing liabilities |  | 816,409 |  |  | 1,393 |  |  | 0.68 | % |  | 761,956 |  |  | 1,099 |  |  | 0.57 | %
Noninterest-bearing deposits |  | 179,968 |  |  |  |  |  |  | 148,178 |  |  |  |  |
Other liabilities |  | 5,978 |  |  |  |  |  |  | 6,194 |  |  |  |  |
Total liabilities |  | 1,002,355 |  |  |  |  |  |  | 916,328 |  |  |  |  |
Stockholders’ equity |  | 136,097 |  |  |  |  |  |  | 104,117 |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 1,138,452 |  |  |  |  |  |  | $ | 1,020,445 |  |  |  |  |
Net interest income, taxable equivalent |  |  |  | $ | 10,946 |  |  |  |  |  |  | $ | 9,679 |  |  |
Interest rate spread (3) |  |  |  |  |  | 4.02 | % |  |  |  |  |  | 3.91 | %
Tax equivalent net interest margin (4) |  |  |  |  |  | 4.17 | % |  |  |  |  |  | 4.03 | %
Percentage of average interest-earning assets to average interest-bearing liabilities |  |  |  |  |  | 127.67 | % |  |  |  |  |  | 125.17 | %
Percentage of average equity to average assets |  |  |  |  |  | 11.95 | % |  |  |  |  |  | 10.20 | %
* Taxable equivalent basis |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1) | Loans include nonaccrual loans. Loan fees included in loan income was $624 thousand and $556 thousand for the quarters ended September 30, 2017 and 2016, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $5 thousand for the period ended September 30, 2017 and $1 thousand for the period ended September 30, 2016.

(2) | Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $17 thousand for the period ended September 30, 2017 and $13 thousand for the period ended September 30, 2016.

(3) | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(4) | Net interest margin represents net interest income divided by average interest-earning assets.

33

The first nine months of 2017 compared to 2016
Net interest income, taxable equivalent, improved to $31.1 million in the first nine months of 2017 from $28.5 million in the first nine months of 2016. The increase in net interest income was primarily due to increases in average loan balances and higher yields on securities. Average earning assets increased from $936.4 million in the first nine months of 2016 to $1,004.9 million in the first nine months of 2017. Over this period, average loan balances increased by $80.0 million primarily as a result of organic growth. In addition, average interest-bearing deposits increased by $38.6 million and average noninterest-bearing deposits increased $27.7 million, a result of organic growth combined with the acquired deposits. Net interest income to average assets of 3.81 percent in the first nine months of 2017 was up from 3.76 percent in the first nine months of 2016 due to increases in the net interest spread and higher interest earning assets to interest bearing liabilites. Net interest margin, taxable equivalent, was 4.13 percent in the first nine months of 2017, compared to 4.06 percent a year ago due to higher yields on earning assets and increases in the balances of noninterest bearing deposits. The yield on earning assets increased from 4.51 percent a year ago to 4.64 percent due to higher loan balances and higher yields on securities.
The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.

|  | Nine Months Ended September 30, 2017 |  | Nine Months Ended September 30, 2016
|  | Average |  |  |  | Yield/ |  | Average |  |  |  | Yield/
|  | Balance |  | Interest * |  | Cost* |  | Balance |  | Interest * |  | Cost*
Assets |  |  |  |  |  |  |  |  |  |  |  |
Loans (1) |  | $ | 838,388 |  |  | $ | 32,463 |  |  | 5.18 | % |  | $ | 758,420 |  |  | $ | 29,450 |  |  | 5.19 | %
Investment securities and interest-bearing due from banks (2) |  | 147,411 |  |  | 2,141 |  |  | 1.94 | % |  | 171,356 |  |  | 2,023 |  |  | 1.58 | %
Federal funds and other |  | 19,089 |  |  | 237 |  |  | 1.66 | % |  | 6,655 |  |  | 165 |  |  | 3.31 | %
Total interest-earning assets |  | 1,004,888 |  |  | 34,841 |  |  | 4.64 | % |  | 936,431 |  |  | 31,638 |  |  | 4.51 | %
Noninterest-earning assets |  | 82,746 |  |  |  |  |  |  | 69,202 |  |  |  |  |
Total assets |  | $ | 1,087,634 |  |  |  |  |  |  | $ | 1,005,633 |  |  |  |  |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | $ | 156,473 |  |  | $ | 326 |  |  | 0.28 | % |  | $ | 150,495 |  |  | $ | 208 |  |  | 0.18 | %
Money market and savings deposits |  | 302,185 |  |  | 1,271 |  |  | 0.56 | % |  | 253,000 |  |  | 854 |  |  | 0.45 | %
Time deposits |  | 306,400 |  |  | 2,115 |  |  | 0.92 | % |  | 322,935 |  |  | 1,977 |  |  | 0.82 | %
Total interest-bearing deposits |  | 765,058 |  |  | 3,712 |  |  | 0.65 | % |  | 726,430 |  |  | 3,039 |  |  | 0.56 | %
Securities sold under agreement to repurchase |  | 19,732 |  |  | 47 |  |  | 0.32 | % |  | 21,155 |  |  | 49 |  |  | 0.31 | %
Federal Home Loan Bank advances and other borrowings |  | 3,744 |  |  | 32 |  |  | 1.14 | % |  | 15,311 |  |  | 91 |  |  | 0.79 | %
Total interest-bearing liabilities |  | 788,534 |  |  | 3,791 |  |  | 0.64 | % |  | 762,896 |  |  | 3,179 |  |  | 0.56 | %
Noninterest-bearing deposits |  | 162,525 |  |  |  |  |  |  | 134,777 |  |  |  |  |
Other liabilities |  | 3,744 |  |  |  |  |  |  | 5,209 |  |  |  |  |
Total liabilities |  | 954,803 |  |  |  |  |  |  | 902,882 |  |  |  |  |
Stockholders’ equity |  | 132,831 |  |  |  |  |  |  | 102,751 |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 1,087,634 |  |  |  |  |  |  | $ | 1,005,633 |  |  |  |  |
Net interest income, taxable equivalent |  |  |  | $ | 31,050 |  |  |  |  |  |  | $ | 28,459 |  |  |
Interest rate spread (3) |  |  |  |  |  | 4.00 | % |  |  |  |  |  | 3.95 | %
Tax equivalent net interest margin (4) |  |  |  |  |  | 4.13 | % |  |  |  |  |  | 4.06 | %
Percentage of average interest-earning assets to average interest-bearing liabilities |  |  |  |  |  | 127.44 | % |  |  |  |  |  | 122.75 | %
Percentage of average equity to average assets |  |  |  |  |  | 12.21 | % |  |  |  |  |  | 10.22 | %
* Taxable equivalent basis |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1) | Loans include nonaccrual loans. Loan fees included in loan income was $1.8 million and $1.9 million for the first nine months ended September 30, 2017 and 2016, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $14 thousand for the period ended September 30, 2017 and $12 thousand for the period ended September 30, 2016.

(2) | Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $48 thousand for the period ended September 30, 2017 and $39 thousand for the period ended September 30, 2016.

(3) | Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(4) | Net interest margin represents net interest income divided by average interest-earning assets.

34

Rate and Volume Analysis
Changes in net interest income are attributed to changes in average balances (volume change), changes in average rates (rate change), and, when applicable, changes in the number of days (days change) in the period presented (for earning assets and sources of funds on which interest is received or paid. Days change is calculated as change in days times current interest per day, volume change is calculated as change in volume times the previous rate, and rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is considered as a change in volume.
Third quarter of 2017 compared to 2016
Net interest income, taxable equivalent, increased by $1.3 million between the quarters ended September 30, 2017 and 2016. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):

| Three Months Ended September 30,
| 2017 | Compared to | 2016
| Increase (decrease) due to
|  | Rate |  |  | Volume |  | Net
Interest-earning assets: |  |  |  |  |  |
Loans (1) |  | $ | 361 |  |  | $ | 1,023 |  |  | $ | 1,384 |
Investment securities and interest-bearing due from banks (2) |  | 210 |  |  | (68 | ) |  | 142 |
Federal funds and other |  | (213 | ) |  | 248 |  |  | 35 |
Total interest-earning assets |  | 358 |  |  | 1,203 |  |  | 1,561 |
Interest-bearing liabilities: |  |  |  |  |  |
Interest-bearing demand deposits |  | 42 |  |  | 3 |  |  | 45 |
Money market and savings deposits |  | 171 |  |  | 65 |  |  | 236 |
Time deposits |  | 30 |  |  | (3 | ) |  | 27 |
Total interest-bearing deposits |  | 243 |  |  | 65 |  |  | 308 |
Securities sold under agreement to repurchase |  | (1 | ) |  | (1 | ) |  | (2 | )
Federal Home Loan Bank advances and other borrowings |  | 4 |  |  | (16 | ) |  | (12 | )
Total interest-bearing liabilities |  | 246 |  |  | 48 |  |  | 294 |
Net interest income |  | $ | 112 |  |  | $ | 1,155 |  |  | $ | 1,267 |

(1) | Loans include nonaccrual loans.Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $5 thousand for the period ended September 30, 2017 and $1 thousand for the period ended September 30, 2016.

(2) | Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $17 thousand for the period ended September 30, 2017 and $13 thousand for the period ended September 30, 2016.

35

The first nine months of 2017 compared to 2016
Net interest income, taxable equivalent, increased by $2.6 million between the first nine months ended September 30, 2017 and 2016. The following is an analysis of the changes in net interest income comparing the changes attributable to days those attributable to rates and those attributable to volumes (in thousands):

| Nine Months Ended September 30,
| 2017 | Compared to | 2016
| Increase (decrease) due to
|  | Rate |  |  | Days |  | Volume |  | Net
Interest-earning assets: |  |  |  |  |  |  |  |
Loans (1) |  | $ | 5 |  |  | $ | (108 | ) |  | $ | 3,116 |  |  | $ | 3,013 |
Investment securities and interest-bearing due from banks (2) |  | 409 |  |  | (7 | ) |  | (284 | ) |  | 118 |
Federal funds and other |  | (236 | ) |  | (1 | ) |  | 309 |  |  | 72 |
Total interest-earning assets |  | 178 |  |  | (116 | ) |  | 3,141 |  |  | 3,203 |
Interest-bearing liabilities: |  |  |  |  |  |  |  |
Interest-bearing demand deposits |  | 111 |  |  | (1 | ) |  | 8 |  |  | 118 |
Money market and savings deposits |  | 254 |  |  | (3 | ) |  | 166 |  |  | 417 |
Time deposits |  | 247 |  |  | (7 | ) |  | (102 | ) |  | 138 |
Total interest-bearing deposits |  | 612 |  |  | (11 | ) |  | 72 |  |  | 673 |
Securities sold under agreement to repurchase |  | 1 |  |  | — |  |  | (3 | ) |  | (2 | )
Federal Home Loan Bank advances and other borrowings |  | 10 |  |  | — |  |  | (69 | ) |  | (59 | )
Total interest-bearing liabilities |  | 623 |  |  | (11 | ) |  | — |  |  | 612 |
Net interest income |  | $ | (445 | ) |  | $ | (105 | ) |  | $ | 3,141 |  |  | $ | 2,591 |

(1) | Loans include nonaccrual loans. Loan fees included in loan income was $1.8 million and $1.9 million for the first nine months ended September 30, 2017 and 2016, respectively. Yields related to loans exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $14 thousand for the period ended September 30, 2017 and $12 thousand for the period ended September 30, 2016.

(2) | Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 34.0 percent. The taxable-equivalent adjustment was $48 thousand for the period ended September 30, 2017 and $39 thousand for the period ended September 30, 2016.

Noninterest Income
Third quarter of 2017 compared to 2016
Noninterest income totaled $1.2 million in the third quarter of 2017, compared to $1.2 million in the third quarter of 2016. Noninterest income to average assets of 0.43 percent for the quarter was down from 0.47 percent in 2016 primarily due to losses instead of gains on the sale of foreclosed assets.

|  | Three months ended September 30,
(Dollars in thousands) |  | 2017 |  | 2016
Service charges and fees on deposit accounts |  | $ | 294 |  |  | $ | 296 |
Gain on sale of securities |  | 144 |  |  | 18 |
Gain on sale of loans and other assets |  | 224 |  |  | 287 |
Gain (loss) on sale of foreclosed assets |  | (27 | ) |  | 131 |
Other noninterest income |  | 585 |  |  | 472 |
Total noninterest income |  | $ | 1,220 |  |  | $ | 1,204 |

36

The first nine months of 2017 compared to 2016
Noninterest income totaled $3.4 million in the first nine months of 2017, compared to $3.2 million in the first nine months of 2016. Noninterest income to average assets of 0.42 percent was down from 0.43 percent in the first nine months of 2016 primarily due to higher losses on the sale of foreclosed assets. Charges and fees on deposit accounts were unchanged from a year ago. Gains on the sale of loans, which includes mortgage and SBA loans, were $910 thousand, up from $706 thousand a year ago.

|  | Nine months ended September 30,
(Dollars in thousands) |  | 2017 |  | 2016
Service charges and fees on deposit accounts |  | $ | 850 |  |  | $ | 851 |
Gain on sale of securities |  | 143 |  |  | 200 |
Gain on sale of loans and other assets |  | 910 |  |  | 706 |
Gain (loss) on sale of foreclosed assets |  | (42 | ) |  | 185 |
Other noninterest income |  | 1,543 |  |  | 1,294 |
Total noninterest income |  | $ | 3,404 |  |  | $ | 3,236 |

Noninterest Expense
Third quarter of 2017 compared to 2016
Noninterest expense totaled $9.5 million in the third quarter of 2017 compared to $8.0 million in the third quarter of 2016. Noninterest expense to average assets decreased from 3.13 percent a year ago to 3.33 percent in the quarter. The increase in noninterest expense compared to the prior year was primarily due to higher salary and employee benefit expenses and merger and conversion costs of $303 thousand for the third quarter of 2017, which is included in other operating expenses.

|  | Three months ended September 30,
(Dollars in thousands) |  | 2017 |  | 2016
Salaries and employee benefits |  | $ | 5,035 |  |  | $ | 4,312 |
Net occupancy and equipment expense |  | 1,114 |  |  | 965 |
Depository insurance |  | 102 |  |  | 153 |
Foreclosed assets |  | 20 |  |  | 79 |
Advertising |  | 177 |  |  | 179 |
Data processing |  | 483 |  |  | 450 |
Professional services |  | 472 |  |  | 559 |
Amortization of intangible assets |  | 78 |  |  | 80 |
Service contracts |  | 363 |  |  | 272 |
Other operating expenses |  | 1,703 |  |  | 1,001 |
Total noninterest expense |  | $ | 9,547 |  |  | $ | 8,050 |

37

The first nine months of 2017 compared to 2016
Noninterest expense totaled $26.5 million in the first nine months of 2017 compared to $24.5 million in the first nine months of 2016. Noninterest expense to average assets increased from 3.24 percent a year ago to 3.26 percent in the during the period. The increase in noninterest expense compared to the prior year was primarily due higher salary and employee benefit expenses and merger and conversion costs merger and conversion costs of $723 thousand for the first nine months of 2017, which is included in other operating expenses.

|  | Nine months ended September 30,
(Dollars in thousands) |  | 2017 |  | 2016
Salaries and employee benefits |  | $ | 14,472 |  |  | $ | 13,293 |
Net occupancy and equipment expense |  | 3,054 |  |  | 3,120 |
Depository insurance |  | 316 |  |  | 440 |
Foreclosed assets |  | 30 |  |  | 199 |
Advertising |  | 471 |  |  | 537 |
Data processing |  | 1,292 |  |  | 1,333 |
Professional services |  | 1,483 |  |  | 1,565 |
Amortization of intangible assets |  | 192 |  |  | 267 |
Service contracts |  | 972 |  |  | 873 |
Other operating expenses |  | 4,239 |  |  | 2,847 |
Total noninterest expense |  | $ | 26,521 |  |  | $ | 24,474 |

Taxes
Third quarter of 2017 compared to 2016
In the third quarter of 2017 income tax expense totaled $882 thousand compared to $947 thousand a year ago. The effective tax rate was approximately 37.0 percent a year ago compared to approximately 34.4 percent in the third quarter of 2017.
The first nine months of 2017 compared to 2016
In the first nine months of 2017 income tax expense totaled $2.6 million compared to $2.4 million a year ago. The effective tax rate was approximately 36.6 percent a year ago compared to approximately 33.9 percent in the first nine months of 2017.
Loan Portfolio Composition
The Company had total net loans outstanding, including organic and purchased loans, of approximately $866.3 million at September 30, 2017 and $808.3 million at December 31, 2016. Loans secured by real estate, consisting of commercial or residential property, are the principal component of our loan portfolio. We do not generally originate traditional long-term residential fixed rate mortgages for our portfolio but we do originate and hold traditional second mortgage residential real estate loans, adjustable rate mortgages and home equity lines of credit. Even if the principal purpose of the loan is not to finance real estate, when reasonable, we attempt to obtain a security interest in the real estate in addition to any other available collateral to increase the likelihood of ultimate repayment or collection of the loan.
Organic Loans
Our organic net loans increased by $87.8 million, or 14.3 percent, from December 31, 2016, to $699.7 million at September 30, 2017 as we continue to originate well underwritten loans. Our goal of streamlining the credit process has improved our efficiency and is a competitive advantage in many of our markets. In addition, the overall business environment continues to rebound from recessionary conditions. Organic loans include loans which were originally purchased non-credit impaired loans but have been renewed since purchase.
38

Purchased Loans
Purchased non-credit impaired loans of $144.6 million at September 30, 2017 were down from $169.2 million at December 31, 2016 as a result of loan payoffs and renewals. Since December 31, 2016, our net purchased credit impaired (“PCI”) loans decreased by $5.2 million to $22.0 million at September 30, 2017. The activity within the purchased credit impaired loans will be impacted by how quickly these loans are resolved and/or our future acquisition activity.
The following tables summarize the composition of our loan portfolio for the periods presented (dollars in thousands):

|  | September 30, 2017
|  | Organic Loans |  | Purchased Non-Credit Impaired Loans |  | Purchased Credit Impaired Loans |  | Total Amount |  | % of Gross Total
Commercial real estate-mortgage |  | $ | 344,282 |  |  | $ | 90,136 |  |  | $ | 13,202 |  |  | $ | 447,620 |  |  | 51.4 | %
Consumer real estate-mortgage |  | 154,974 |  |  | 38,587 |  |  | 6,143 |  |  | 199,704 |  |  | 22.9 | %
Construction and land development |  | 92,381 |  |  | 4,255 |  |  | 1,576 |  |  | 98,212 |  |  | 11.3 | %
Commercial and industrial |  | 107,930 |  |  | 10,767 |  |  | 1,085 |  |  | 119,782 |  |  | 13.7 | %
Consumer and other |  | 5,546 |  |  | 815 |  |  | — |  |  | 6,361 |  |  | 0.7 | %
Total gross loans receivable, net of deferred fees |  | 705,113 |  |  | 144,560 |  |  | 22,006 |  |  | 871,679 |  |  | 100.0 | %
Allowance for loan and lease losses |  | (5,393 | ) |  | — |  |  | — |  |  | (5,393 | ) |  |  |
Total loans, net |  | $ | 699,720 |  |  | $ | 144,560 |  |  | $ | 22,006 |  |  | $ | 866,286 |  |  |  |

|  | December 31, 2016
|  | Organic Loans |  | Purchased Non-Credit Impaired Loans |  | Purchased Credit Impaired Loans |  | Total Amount |  | % of Gross Total
Commercial real estate-mortgage |  | $ | 297,689 |  |  | $ | 102,576 |  |  | $ | 14,943 |  |  | $ | 415,208 |  |  | 51.0 | %
Consumer real estate-mortgage |  | 135,923 |  |  | 42,875 |  |  | 9,004 |  |  | 187,802 |  |  | 23.1 | %
Construction and land development |  | 108,390 |  |  | 7,801 |  |  | 1,678 |  |  | 117,869 |  |  | 14.5 | %
Commercial and industrial |  | 68,235 |  |  | 15,219 |  |  | 1,568 |  |  | 85,022 |  |  | 10.5 | %
Consumer and other |  | 6,786 |  |  | 689 |  |  | — |  |  | 7,475 |  |  | 0.9 | %
Total gross loans receivable, net of deferred fees |  | 617,023 |  |  | 169,160 |  |  | 27,193 |  |  | 813,376 |  |  | 100.0 | %
Allowance for loan and lease losses |  | (5,105 | ) |  | — |  |  | — |  |  | (5,105 | ) |  |  |
Total loans, net |  | $ | 611,918 |  |  | $ | 169,160 |  |  | $ | 27,193 |  |  | $ | 808,271 |  |  |  |

39

Loan Portfolio Maturities
The following table sets forth the maturity distribution of our loans, including the interest rate sensitivity for loans maturing after one year.

|  |  |  |  |  |  |  |  |  | Rate Structure for Loans
|  |  |  | Maturing Over One Year
|  | One Year or Less |  | One through Five Years |  | Over Five Years |  | Total |  | Fixed Rate |  | Floating Rate
Commercial real estate-mortgage |  | $ | 39,118 |  |  | $ | 233,750 |  |  | $ | 174,752 |  |  | $ | 447,620 |  |  | $ | 273,157 |  |  | $ | 135,345 |
Consumer real estate-mortgage |  | 21,869 |  |  | 87,451 |  |  | 90,384 |  |  | 199,704 |  |  | 98,305 |  |  | 79,530 |
Construction and land development |  | 24,512 |  |  | 38,087 |  |  | 35,613 |  |  | 98,212 |  |  | 38,322 |  |  | 35,378 |
Commercial and industrial |  | 27,234 |  |  | 64,464 |  |  | 28,084 |  |  | 119,782 |  |  | 80,608 |  |  | 11,940 |
Consumer and other |  | 2,913 |  |  | 2,782 |  |  | 666 |  |  | 6,361 |  |  | 2,038 |  |  | 1,410 |
Total Loans |  | $ | 115,646 |  |  | $ | 426,534 |  |  | $ | 329,499 |  |  | $ | 871,679 |  |  | $ | 492,430 |  |  | $ | 263,603 |

Nonaccrual, Past Due, and Restructured Loans
Nonperforming loans as a percentage of total gross loans, net of deferred fees, was 0.14 percent as of September 30, 2017, which was down from 0.26 percent as of December 31, 2016. Total nonperforming assets as a percentage of total assets as of September 30, 2017 totaled 0.37 percent compared to 0.42 percent as of December 31, 2016. Acquired PCI loans that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets unless the pools are 90 days or greater past due.
The following table summarizes the Company's nonperforming assets for the periods presented.

(Dollars in thousands) |  | September 30, 2017 |  | December 31, 2016
Nonaccrual loans |  | $ | 1,260 |  |  | $ | 1,415 |
Accruing loans past due 90 days or more (1) |  | 3 |  |  | 699 |
Total nonperforming loans |  | 1,263 |  |  | 2,114 |
Foreclosed assets |  | 2,888 |  |  | 2,386 |
Total nonperforming assets |  | $ | 4,151 |  |  | $ | 4,500 |
Restructured loans not included above |  | $ | 42 |  |  | $ | 166 |

(1) Balances include PCI loans past due 90 days or more that are grouped in pools which accrue interest based on pool yields.
Potential Problem Loans
At September 30, 2017 potential problem loans amounted to approximately $471 thousand or 0.05 percent of total loans outstanding. Potential problem loans, which are not included in nonperforming loans, represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank’s primary regulators, for loans classified as substandard or worse, but not considered nonperforming loans.
40

Allocation of the Allowance for Loan Losses
We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio. As of September 30, 2017 and December 31, 2016, our allowance for loan losses was $5.4 million and $5.1 million, respectively, which we deemed to be adequate at each of the respective dates. The increase in the allowance for loan losses in 2017 as compared to 2016 is the result of increases in the organic loan portfolio. Our allowance for loan loss as a percentage of total loans has decreased slightly from 0.63 percent at December 31, 2016 to 0.62 percent at September 30, 2017. As a percentage of organic loans the allowance for loan losses decreased from 0.83 percent at December 31, 2016 to 0.76 percent at September 30, 2017.
Our purchased loans were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans will be accreted into income over the life of the loans. As of September 30, 2017 the balance on PCI loans was $28.7 million while the carrying value was $22.0 million. These loans are subject to the same allowance methodology as our legacy portfolio. The calculated allowance is compared to the remaining fair value discount to determine if additional provisioning should be recognized. At September 30, 2017, there were no allowances on PCI loans.
The following table sets forth, based on our best estimate, the allocation of the allowance to types of loans as of September 30, 2017 and December 31, 2016 and the percentage of loans in each category to total loans (in thousands):

|  | September 30, 2017 |  | December 31, 2016
|  | Amount |  | Percent |  | Amount |  | Percent
Commercial real estate-mortgage |  | $ | 2,543 |  |  | 47.2 | % |  | $ | 2,369 |  |  | 46.4 | %
Consumer real estate-mortgage |  | 1,415 |  |  | 26.2 | % |  | 1,382 |  |  | 27.1 | %
Construction and land development |  | 565 |  |  | 10.5 | % |  | 717 |  |  | 14.0 | %
Commercial and industrial |  | 745 |  |  | 13.8 | % |  | 520 |  |  | 10.2 | %
Consumer and other |  | 125 |  |  | 2.3 | % |  | 117 |  |  | 2.3 | %
Total allowance for loan losses |  | $ | 5,393 |  |  | 100.0 | % |  | $ | 5,105 |  |  | 100.0 | %

The increase in the overall allowance for loan losses is due to the increased balance of organic loans offset by improvements of our loan portfolio and the reduction of nonperforming loans and net charge-offs, which is largely influenced by the overall improvement in the economies in our market areas. The allocation by category is determined based on the assigned risk rating, if applicable, and environmental factors applicable to each category of loans. For impaired loans, those loans are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired loans were approximately $4 thousand at December 31, 2016 compared to $175 thousand at September 30, 2017.
41

Analysis of the Allowance for Loan Losses
The following is a summary of changes in the allowance for loan losses for the periods ended September 30, 2017 and December 31, 2016 including the ratio of the allowance for loan losses to total loans as of the end of each period (in thousands):

|  | September 30, 2017 |  | December 31, 2016
Balance at beginning of period |  | $ | 5,105 |  |  | $ | 4,354 |
Provision for loan losses |  | 340 |  |  | 788 |
Charged-off loans: |  |  |  |  |  |
Commercial real estate-mortgage |  | — |  |  | — |
Consumer real estate-mortgage |  | (110 | ) |  | (102 | )
Construction and land development |  | — |  |  | (14 | )
Commercial and industrial |  | (18 | ) |  | (35 | )
Consumer and other |  | (106 | ) |  | (155 | )
Total charged-off loans |  | (234 | ) |  | (306 | )
Recoveries of previously charged-off loans: |  |  |  |  |  |
Commercial real estate-mortgage |  | 8 |  |  | 45 |
Consumer real estate-mortgage |  | 58 |  |  | 76 |
Construction and land development |  | 10 |  |  | 22 |
Commercial and industrial |  | 55 |  |  | 58 |
Consumer and other |  | 51 |  |  | 68 |
Total recoveries of previously charged-off loans |  | 182 |  |  | 269 |
Net charge-offs |  | (52 | ) |  | (37 | )
Balance at end of period |  | $ | 5,393 |  |  | $ | 5,105 |
Ratio of allowance for loan losses to total loans outstanding at end of period |  | 0.62 | % |  | 0.63 | %
Ratio of net charge-offs (recoveries) to average loans outstanding for the period |  | 0.01 | % |  | — | %

We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan portfolio, past loan loss experience, known and inherent risks in the portfolio, the views of the Bank’s regulators, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
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Investment Portfolio
Our investment portfolio, consisting primarily of Federal agency bonds, mortgage-backed securities, and state and municipal securities amounted to fair values of $115.5 million and $129.4 million at September 30, 2017 and December 31, 2016, respectively. Our investments to assets ratio decreased from 12.2 percent at December 31, 2016 to 10.2 percent at September 30, 2017 as we reduced reinvestments when the five year treasury rate, and other fixed income investments of a similar term, fell during the quarter. Our investment portfolio serves many purposes including serving as a potential liquidity source, collateral for public funds, and as a stable source of income.
The following table shows the amortized cost of the Company’s investment securities. In the periods ended September 30, 2017 and December 31, 2016 all investment securities were classified as available for sale.

Book Value of Investment Securities |  |  |  |
(in thousands) |  | September 30, 2017 |  | December 31, 2016
U.S. Government agencies |  | $ | 16,217 |  |  | $ | 18,279 |
State and political subdivisions |  | 8,341 |  |  | 8,182 |
Mortgage-backed securities |  | 90,610 |  |  | 104,585 |
Other debt securities |  | 973 |  |  | — |
Total securities |  | $ | 116,141 |  |  | $ | 131,046 |

The following table presents the contractual maturity of investment securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis). The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.

Contractual Maturity of Investment Securities |  |  |  |  |  |  |  |  |  |
September 30, 2017 |  |  |  |  |  |  |  |  |  |
(in thousands) |  | Maturity By Years
|  | 1 or Less |  | 1 to 5 |  | 5 to 10 |  | Over 10 |  | Total
Available for Sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 1,995 |  |  | $ | 11,000 |  |  | $ | 3,222 |  |  | $ | — |  |  | $ | 16,217 |
State and political subdivisions |  | 178 |  |  | 607 |  |  | 4,116 |  |  | 3,440 |  |  | 8,341 |
Mortgage-backed securities |  | — |  |  | 6,076 |  |  | 28,474 |  |  | 56,060 |  |  | 90,610 |
Other debt securities |  | — |  |  | — |  |  | 973 |  |  | — |  |  | 973 |
Total securities available for sale |  | $ | 2,173 |  |  | $ | 17,683 |  |  | $ | 36,785 |  |  | $ | 59,500 |  |  | $ | 116,141 |
Weighted average yield (1) |  | 1.55 | % |  | 1.75 | % |  | 1.94 | % |  | 2.08 | % |  | 2.00 | %

(1) Based on amortized cost, taxable equivalent basis
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Deposits
Deposits are the primary source of funds for the Company's lending and investing activities. The Company provides a range of deposit services to businesses and individuals, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market accounts, IRAs and CDs. These accounts generally earn interest at rates the Company establishes based on market factors and the anticipated amount and timing of funding needs. The establishment or continuity of a core deposit relationship can be a factor in loan pricing decisions. While the Company's primary focus is on establishing customer relationships to attract core deposits, at times, the Company uses brokered deposits and other wholesale deposits to supplement its funding sources. As of September 30, 2017, brokered deposits represented approximately 10.3 percent of total deposits.
Over the last two years the overall mix of average deposits has shifted to a higher percentage of noninterest-bearing and money market and savings deposits, with reductions in the percentage of deposits held in interest-bearing demand accounts. The Company believes its deposit product offerings are properly structured to attract and retain core low-cost deposit relationships. The average cost of interest-bearing deposits for the three and nine months ended September 30, 2017 was 0.68 percent and 0.65 percent, compared to 0.58 percent and 0.56 percent for the same period in 2016. The increase in the costs were due to changes in deposit mix and higher rates on interest-bearing deposit accounts.
Total deposits as of September 30, 2017 were $960.2 million, which was an increase of $53.1 million from December 31, 2016. As of September 30, 2017 the Company had outstanding time deposits under $100,000 with balances of $131.6 million, time deposits over $100,000 with balances of $179.7 million, and a fair value premium for time deposits of approximately $158 thousand.
The following table summarizes the maturities of time deposits $100,000 or more as of September 30, 2017.

Remaining maturity: (Dollars in thousands) | September 30, 2017
Three months or less | $ | 41,770 |
Three to six months | 97,105 |
Six to twelve months | 28,063 |
More than twelve months | 12,745 |
Total | $ | 179,683 |

Borrowings
The Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. There were $6.0 million in short-term borrowings at September 30, 2017. Short-term borrowings totaled $18.5 million at December 31, 2016 comprised of $5 million in FHLB advances maturing within twelve months and the remainder consisted of Federal Funds purchased. There was no long-term debt outstanding at September 30, 2017 or December 31, 2016.
Capital Resources
The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Bank’s Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. At September 30, 2017 and December 31, 2016, our capital ratios, including our Bank’s capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. We believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.
Liquidity and Off-Balance Sheet Arrangements
At September 30, 2017, we had $166.8 million of pre-approved but unused lines of credit and $3.2 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions.
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Market Risk and Liquidity Risk Management
The Bank’s Asset Liability Management Committee (“ALCO”) is responsible for making decisions regarding liquidity and funding solutions based upon approved liquidity, loan, capital and investment policies. The ALCO must consider interest rate sensitivity and liquidity risk management when rendering a decision on funding solutions and loan pricing. To assist in this process the Bank has contracted with an independent third party to prepare quarterly reports that summarize several key asset-liability measurements. In addition, the third party will also provide recommendations to the Bank’s ALCO regarding future balance sheet structure, earnings and liquidity strategies. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management. We do not believe there have been any material changes to the Company’s interest rate sensitivity or liquidity risk from December 31, 2016 to the period ended September 30, 2017.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This Item is not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including SmartFinancial’s Chief Executive Officer and Chief Financial Officer, SmartFinancial has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2017 (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, SmartFinancial’s disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to SmartFinancial (including its consolidated subsidiaries) required to be included in SmartFinancial’s periodic filings under the Exchange Act.
There were no changes in SmartFinancial’s internal control over financial reporting during SmartFinancial’s fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are various claims and lawsuits in which SmartFinancial is periodically involved incidental to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
SmartFinancial and its wholly owned subsidiary, SmartBank, are periodically involved as a plaintiff or a defendant in various legal actions in the ordinary course of business. While the outcome of these matters is not currently determinable, neither SmartFinancial nor SmartBank is involved in any litigation that is expected to have a material impact on our financial position, results of operations, or cash flow. Management believes that any claims pending against SmartFinancial or SmartBank are without merit or that the ultimate liability, if any, resulting from such claims will not materially affect SmartBank’s financial condition or SmartFinancial’s consolidated financial position.
Item 1A. Risk Factors.
SmartFinancial, as a smaller reporting company, is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
On October 31, 2017, SmartFinancial entered into a Loan Agreement (the “Loan Agreement”) with CapStar Bank (the “Lender”), providing for a revolving line of credit in an amount up to $15,000,000 (the “Revolving Line of Credit”). SmartFinancial borrowed $10,000,000 under the Revolving Line of Credit on October 31, 2017, with the borrowings to be used to fund a portion of the cash consideration payable in the merger with Capstone Bancshares, Inc. ("Bancshares") to holders of Bancshares Class A voting common stock and general corporate purposes. SmartFinancial may borrow and re-borrow under the Revolving Line of Credit until January 15, 2019, after which time there can be no further advances under the Revolving Line of Credit. The Revolving Line of Credit will convert to a term loan (the “Term Loan”) on January 16, 2019.
Borrowings under the Revolving Line of Credit and the Term Loan will be subject to a floating interest rate of the Lender’s prime rate minus 0.25%, subject to a floor of 3.50%. Interest on the Revolving Line of Credit and the Term Loan will be payable quarterly in arrears on January 15, April 15, July 15, and October 15. Additionally, upon conversion of the Revolving Line of Credit to the Term Loan, SmartFinancial must pay quarterly principal amortization payments of $262,500 on each interest payment date in 2019, quarterly principal amortization payments of $287,500 on each interest payment date in 2020, quarterly principal amortization payments of $312,500 on each interest payment date in 2021, and quarterly principal amortization payments of $337,500 for the first three fiscal quarters in 2022. The scheduled principal amortization payments are based on the assumption that the Revolving Line of Credit is fully drawn at the time it converts to the Term Loan, and the required payments will be reduced on a pro-rata basis relative to the amount of the Revolving Line of Credit if the Revolving Line of Credit is not fully drawn at such time. The Term Loan will mature on October 15, 2022, at which time all outstanding amounts under the Loan Agreement will become due and payable.
In connection with entering into the Loan Agreement, SmartFinancial executed in favor of the Lender a Line of Credit Note (the “Line of Credit Note”) dated as of October 31, 2017.
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The Loan Agreement contains customary representations, warranties and covenants for a revolving line of credit that converts to a term loan, including certain financial covenants and capital ratio requirements. Pursuant to the Loan Agreement, no financial institution subsidiary of SmartFinancial (a “Financial Institution Subsidiary”) may permit its non-performing assets to exceed 3.25% of its total assets at the end of a fiscal quarter. Each Financial Institution Subsidiary must not permit its Texas ratio (nonperforming assets divided by the sum of tangible equity plus the allowance for loan and lease losses) to exceed 35.00% at the end of a fiscal quarter and must not permit its liquidity ratio to be less than 9.00% at the end of a fiscal quarter (or less than 10.00% for two consecutive fiscal quarters). Each Financial Institution Subsidiary must not permit its return on average assets to be less than 0.45% at the end of a fiscal quarter through September 30, 2018, and not less than 0.50% at the end of a fiscal quarter from December 31, 2018 and thereafter. In addition, SmartFinancial will not permit its debt service coverage ratio to be less than 1.25:1.00 as of June 30 or December 31 of a fiscal year (commencing December 31, 2017).
The Loan Agreement contains customary and commercially reasonable events of default, such as non-payment, failure to perform any covenant or agreement, breach of any representation or warranty, failure to pay other material indebtedness, bankruptcy, insolvency, any ERISA event, any material judgment, any material adverse effect, any change in control, any failure to be insured by the FDIC or any action by a governmental or regulatory authority, etc. The Lender has the right to accelerate the indebtedness upon an event of default. Additionally, under the Loan Agreement, SmartFinancial may not, and may not permit any of its subsidiaries to, pay dividends on its stock if an event of default has occurred and is continuing or would be caused by such payment.
The obligations of SmartFinancial under the Loan Agreement are secured by a pledge of all of the capital stock of SmartBank pursuant to a Stock Pledge and Security Agreement dated as of October 31, 2017, between SmartFinancial and the Lender (the “Pledge Agreement”). In the event of a default by SmartFinancial under the Loan Agreement, the Lender may terminate the commitments made under the Loan Agreement, declare all amounts outstanding to be payable immediately, and exercise or pursue any other remedy permitted under the Loan Agreement or the Pledge Agreement or conferred upon the Lender by law.
The descriptions contained herein of the Loan Agreement, the Line of Credit Note, and the Pledge Agreement are qualified in their entirety by reference to the terms of such documents, which are attached as Exhibits 2.2, 2.3, and 2.4, respectively, to this Quarterly Report on Form 10-Q and are incorporated herein by reference.
Item 6. Exhibits

2.1 | Agreement and Plan of Merger, dated as of May 22, 2017, by and among SmartFinancial, Inc., SmartBank, Capstone Bancshares, Inc. and Capstone Bank(1)+
2.2 | Loan Agreement, dated as of October 31, 2017, by and between SmartFinancial, Inc. and CapStar Bank+
2.3 | Stock Pledge and Security Agreement, dated as of October 31, 2017, by and between SmartFinancial, Inc. and CapStar Bank
2.4 | Line of Credit Note, dated as of October 31, 2017, executed by SmartFinancial, Inc. in favor of CapStar Bank
31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1 | Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
32.2 | Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
101 | Interactive Data Files

+ The Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K

(1) | Incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-k filed on May 23, 2017

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  | SmartFinancial, Inc.
Date: | November 14, 2017 |  | /s/ William Y. Carroll, Jr.
|  |  | William Y. Carroll, Jr.
|  |  | President and Chief Executive Officer
|  |  | (principal executive officer)
Date: | November 14, 2017 |  | /s/ Christopher Bryan Johnson
|  |  | Christopher Bryan Johnson
|  |  | Executive Vice President and Chief Financial Officer
|  |  | (principal financial officer and accounting officer)

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