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EX-32.2 - EXHIBIT 32.2 - SMARTFINANCIAL INC.smbk_093017xex322.htm
EX-32.1 - EXHIBIT 32.1 - SMARTFINANCIAL INC.smbk_093017xex321.htm
EX-31.2 - EXHIBIT 31.2 - SMARTFINANCIAL INC.smbk_093017xex312.htm
EX-31.1 - EXHIBIT 31.1 - SMARTFINANCIAL INC.smbk_093017xex311.htm
EX-2.4 - EXHIBIT 2.4 - SMARTFINANCIAL INC.exhibit24-capstarxsmartfin.htm
EX-2.3 - EXHIBIT 2.3 - SMARTFINANCIAL INC.exhibit23-capstarxsfixpled.htm
EX-2.2 - EXHIBIT 2.2 - SMARTFINANCIAL INC.exhibit22-capstarxsmartfin.htm


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
tlogoa01.jpg 

(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
 
 


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