Business Combinations

3 Months Ended

Mar. 31, 2020

Acquisition of Progressive Financial Inc.

On March 1, 2020, the Company completed the merger of Progressive Financial Group, Inc., a Tennessee corporation ("PFG"), pursuant to an Agreement and Plan of Merger dated October 29, 2019 (the "Merger Agreement").

In connection with the merger, the Company acquired $301 million of assets and assumed $272 million of liabilities. Pursuant to the Merger Agreement, each outstanding share of Progressive common stock was converted into and cancelled in exchange to the right to receive $474.82 in cash, and 62.3808 shares of SmartFinancial common stock. SmartFinancial issued 1,292,578 shares of SmartFinancial common stock and paid $9.8 million in cash as consideration for the Merger. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $8.3 million, representing the intangible value of Progressive's business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company is amortizing the related core deposit intangible of $1.4 million using the effective yield method over 120 months (10 years), which represents the expected useful life of the asset.

The Company's operating results for the period ended March 31, 2020, include the operating results of the acquired business for the period subsequent to the merger date of March 1, 2020.

The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands).


	As recorded		Fair value		As recorded
	by PFG		adjustments ⁽¹⁾		by the Company
Assets:
Cash & cash equivalents	$	55,971	$	—	$	55,971
Investment securities available-for-sale	27,054		203		27,257
Restricted investments	692		—		692
Loans	191,672		(3,691)		187,981
Allowance for loan losses	(2,832)		2,832		—
Premises and equipment, net	15,681		(2,919)		12,762
Bank owned life insurance	5,560		—		5,560
Deferred tax asset, net	—		813		813
Intangibles	—		1,370		1,370
Other real estate owned	3,695		(100)		3,595
Interest Receivable	1,061		(280)		781
Prepaids	375		(174)		201
Goodwill	231		(231)		—
Other assets	1,881		—		1,881
Total assets acquired	$	301,041	$	(2,177)	$	298,864

Liabilities:
Deposits	$	271,276	$	—	$	271,276
Time deposit premium	—		729		729
Payables and other liabilities	776		—		776
Total liabilities assumed	272,052		729		272,781
Excess of assets assumed over liabilities assumed	$	28,989
Aggregate fair value adjustments			$	(2,906)
Total identifiable net assets					26,083
Consideration transferred:
Cash					9,838
Common stock issued (1,292,578 shares)					24,547
Total fair value of consideration transferred					34,385

Goodwill					$	8,302
⁽¹⁾ Fair values are preliminary and are subject to refinement for a period of one year after the closing date of an acquisition as information relative to the closing date fair value becomes available.

The following table presents additional information related to the acquired loan portfolio at the acquisition date (in thousands):


	March 1, 2020
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	21,107
Non-accretable differences	4,706
Cash flows expected to be collected	16,401
Accretable yield	2,515
Fair value	$	13,886

The following table discloses the impact of the merger with PFG since the acquisition date through March 31, 2020. The table also presents certain pro forma information (net interest income and noninterest income ("Revenue") and net income) as if the PFG acquisition had occurred on January 1, 2019. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of these dates.

Merger-related cost from the PFG acquisition of $2.1 million have been excluded from the three months period of 2020 pro- forma information presented below and included in the three months period of 2019 pro-forma information below. The actual results and pro-forma information were as follows (in thousands):


	Three Months Ended March 31,
	Revenue		Net Income
2020:
Actual PFG results included in statement of income since acquisition date	$	505	$	117
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019	28,050		4,013

2019:
Supplemental consolidation pro-forma as if PFG had been acquired January 1, 2019	$	26,766	$	3,513