SmartFinancial (SmartBank) - 10-Q quarterly report FY

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 March 31, 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 May 12, 2017 there were 8,212,602 shares of common stock, $1.00 par value per share, issued and outstanding.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

SmartFinancial, Inc. (“SmartFinancial”) 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 2016 Annual Report on Form 10-K, as well as the following: (i) the possibility that our asset quality would decline or that we experience greater loan losses than anticipated, (ii) increased levels of other real estate, primarily as a result of foreclosures, (iii) the impact of liquidity needs on our results of operations and financial condition, (iv) competition from financial institutions and other financial service providers, (v) economic conditions in the local markets where we operate, (vi) our ability to realize all of the anticipated benefits of the merger between Cornerstone Community Bank and SmartBank, (vii) the impact of negative developments in the financial industry and U.S. and global capital and credit markets, (viii) the impact of recently enacted legislation on our business, (ix) the relatively greater credit risk of commercial real estate loans and construction and land development loans in our loan portfolio, (x) adverse impact on operations and financial condition of changes in interest rates, (xi) the impact of recently enacted legislation on our business, (xii) the impact of federal and state regulations on our operations and financial performance, (xiii) our ability to retain the services of key personnel, (xiv) the impact of Tennessee’s anti-takeover statutes and certain charter provisions on potential acquisitions of the holding company, and (xv) our ability to adapt to technological changes. 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.

PART I –FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	Unaudited March 31, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	22,093,186		$	34,290,617
Interest-bearing deposits at other financial institutions	33,454,535			34,457,691
Total cash and cash equivalents	55,547,721			68,748,308

Securities available for sale	137,132,626			129,421,914
Restricted investments, at cost	5,627,950			5,627,950
Loans, net of allowance for loan losses of $5,152,261 at March 31, 2017 and $5,105,255 at December 31, 2016	802,387,400			808,271,003
Bank premises and equipment, net	30,802,210			30,535,594
Foreclosed assets	2,370,556			2,386,239
Goodwill and core deposit intangible, net	6,583,077			6,635,655
Other assets	10,634,241			10,829,622
Total assets	$	1,051,085,781		$	1,062,456,285

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	160,672,567		$	153,482,650
Interest-bearing demand deposits	167,433,130			162,702,457
Money market and savings deposits	274,993,376			274,604,724
Time deposits	286,600,177			316,275,340
Total deposits	889,699,250			907,065,171

Securities sold under agreement to repurchase	23,153,397			26,621,984
Federal Home Loan Bank advances and other borrowings	60,000			18,505,390
Accrued expenses and other liabilities	5,622,319			5,023,600
Total liabilities	918,534,966			957,216,145

Stockholders' equity:
Preferred stock - $1 par value; 2,000,000 shares authorized; None issued and outstanding in 2017. 12,000 issued and outstanding in 2016.	—			12,000
Common stock - $1 par value; 40,000,000 shares authorized; 8,211,102 and 5,896,033 shares issued and outstanding in 2017 and 2016, respectively	8,211,102			5,896,033
Additional paid-in capital	106,702,972			83,463,051
Retained earnings	18,320,147			16,871,296
Accumulated other comprehensive loss	(683,406		)	(1,002,240		)
Total stockholders' equity	132,550,815			105,240,140

Total liabilities and stockholders' equity	$	1,051,085,781		$	1,062,456,285

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME



	Unaudited Three Months Ended March 31,
	2017			2016
INTEREST INCOME
Loans, including fees	$	10,215,607		$	9,374,457
Securities and interest-bearing deposits at other financial institutions	660,819			716,580
Federal funds sold and other earning assets	72,897			63,309
Total interest income	10,949,323			10,154,346

INTEREST EXPENSE
Deposits	1,097,538			961,268
Securities sold under agreements to repurchase	15,951			16,460
Federal Home Loan Bank advances and other borrowings	15,475			45,286
Total interest expense	1,128,964			1,023,014
Net interest income before provision for loan losses	9,820,359			9,131,332
Provision for loan losses	12,450			137,557
Net interest income after provision for loan losses	9,807,909			8,993,775
NONINTEREST INCOME
Customer service fees	264,673			295,803
Gain on sale of securities	—			83,263
Gain on sale of loans and other assets	275,165			221,925
(Loss) gain on sale of foreclosed assets	(15,564		)	57,977
Other noninterest income	402,434			411,864
Total noninterest income	926,708			1,070,832

NONINTEREST EXPENSES
Salaries and employee benefits	4,646,749			4,495,008
Net occupancy and equipment expense	978,459			1,018,428
Depository insurance	153,299			135,803
Foreclosed assets	—			56,658
Advertising	164,262			173,447
Data processing	339,815			341,380
Professional services	569,841			455,173
Amortization of intangible assets	52,578			93,353
Service contracts	295,629			285,627
Other operating expenses	944,280			897,021
Total noninterest expenses	8,144,912			7,951,898
Income before income tax expense	2,589,705			2,112,709
Income tax expense	945,854			763,846
Net income	1,643,851			1,348,863
Preferred stock dividends	195,000			212,000
Net income available to common stockholders	$	1,448,851		$	1,136,863

EARNINGS PER COMMON SHARE
Basic	$	0.19		$	0.20
Diluted	0.19			0.19

Weighted average common shares outstanding
Basic	7,524,830			5,807,488
Diluted	7,631,219			6,108,087
Dividends per share	—			—

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Unaudited Three Months Ended March 31,
	2017		2016
Net income	$	1,643,851	$	1,348,863

Other comprehensive income, net of tax:
Unrealized holding gains arising during the period, net of tax expense of $197,831 and $381,291 in 2017 and 2016, respectively	318,834		614,708

Reclassification adjustment for gains included in net income, net of tax expense of $- and $31,640 in 2017 and 2016, respectively	—		(51,623		)

Total other comprehensive income	318,834		563,085

Comprehensive income	$	1,962,685	$	1,911,948

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

For the Three Months Ended March 31, 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	—		—	—			—		—			1,643,851			—			1,643,851

Other comprehensive income	—		—	—			—		—			—			318,834			318,834

Issuance of common stock	—		1,840,000	—			1,840,000		31,383,653			—			—			33,223,653

Issuance of stock grants	—		1,511	—			1,511		30,280			—			—			31,791

Exercise of stock options	—		473,558	—			473,558		3,787,176			—			—			4,260,734

Cash dividend on preferred stock	—		—	—			—		—			(195,000		)	—			(195,000		)

Redemption of preferred stock	(12,000	)		(12,000		)			(11,988,000		)							(12,000,000		)

Stock compensation expense	—		—	—			—		26,812			—			—			26,812

BALANCE, March 31, 2017	—		8,211,102	$	—		$	8,211,102	$	106,702,972		$	18,320,147		$	(683,406	)	$	132,550,815

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

SMARTFINANICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Unaudited Three Months Ended March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,643,851		$	1,348,863
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	549,186			525,809
Provision for loan losses	12,450			137,557
Stock compensation expense	26,812			33,635
Gains from sale of securities	—			(83,263		)
Net gains from sale of loans and other assets	(275,165		)	(221,925		)
Net loss (gains) from sale of foreclosed assets	15,564			(57,977		)
Changes in other assets and liabilities:
Accrued interest receivable	160,042			106,932
Accrued interest payable	2,373			10,061
Other assets and liabilities	486,433			2,061,243
Net cash provided by operating activities	2,621,546			3,860,935

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from security sales, maturities, and paydowns	5,152,054			9,652,595
Purchase of securities	(12,507,860		)	—
Purchase of restricted investments	—			(200		)
Loan originations and principal collections, net	6,106,801			(12,967,236		)
Purchase of bank premises and equipment	(654,044		)	(971,967		)
Proceeds from sale of foreclosed assets	39,636			283,221
Net cash used in investing activities	(1,863,413		)	(4,003,587		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits	(17,365,921		)	628,670
Net decrease in securities sold under agreements to repurchase	(3,468,587		)	(7,321,193		)
Issuance of common stock	37,516,178			77,707
Redemption of preferred stock	(12,000,000		)	—
Payment of dividends on preferred stock	(195,000		)	(212,000		)
Proceeds from Federal Home Loan Bank advances and other borrowings	60,375			18,000,000
Repayment of Federal Home Loan Bank advances and other borrowings	(18,505,765		)	(22,062,293		)
Net cash used in financing activities	(13,958,720		)	(10,889,109		)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(13,200,587		)	(11,031,761		)
CASH AND CASH EQUIVALENTS, beginning of year	68,748,308			79,964,633
CASH AND CASH EQUIVALENTS, end of period	$	55,547,721		$	68,932,872

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest	$	1,126,591		$	1,012,953
Cash paid during the period for taxes	—			—

NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized losses on securities available for sale	$	(516,665	)	$	(912,736	)
Acquisition of real estate through foreclosure	39,517			—
Financed sales of foreclosed assets	—			—

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, SmartBank (the “Bank”). The Company provides a variety of financial services to individuals and corporate customers through its offices in 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.

Interim Financial Information (Unaudited):

The financial information in this report for March 31, 2017 and March 31, 2016 has not been audited. The information included herein should be read in conjunction with the Company’s 2016 annual consolidated financial statements and footnotes included elsewhere. 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 the in the 2016 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 United States of America, 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.

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.

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 and are determined using the treasury stock method.

Note 2. Earnings per share

The following is a summary of the basic and diluted earnings per share for the three month periods ended March 31, 2017 and March 31, 2016.



	Three Months Ended March 31,
	2017		2016
Net income available to common shareholders	$	1,448,851	$	1,136,863
Weighted average common shares outstanding	7,524,830		5,807,488
Effect of dilutive stock options	106,389		300,599
Diluted shares	7,631,219		6,108,087
Basic earnings per common share	$	0.19	$	0.20
Diluted earnings per common share	$	0.19	$	0.19

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2. Earnings per share, Continued

For the three months ended March 31, 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 14,604 and 18,100 antidilutive stock options as of March 31, 2017 and 2016, respectively.

Note 3. Securities

The amortized cost and fair value of securities available-for-sale at March 31, 2017 and December 31, 2016 are summarized as follows (in thousands):



	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government-sponsored enterprises (GSEs)	$	18,261	$	5	$	(468	)	$	17,798
Municipal securities	8,434		23		(119		)	8,338
Other debt securities	972		—		(26		)	946
Mortgage-backed securities	110,573		228		(750		)	110,051
	$	138,240	$	256	$	(1,363	)	$	137,133



	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 March 31, 2017, securities with a fair value totaling approximately $81,068,000 were pledged to secure public funds and securities sold under agreements to repurchase.

For the three months ended March 31, 2017, there were no available-for-sale securities sold. For the three months ended March 31, 2016 there were available-for-sale securities sold with proceeds totaling $5,072,500 which resulted in gross gains realized of $83,263 and gross losses of $-.

The amortized cost and estimated fair value of securities at March 31, 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	$	3,011	$	3,011
Due from one year to five years	12,391		12,048
Due from five years to ten years	8,543		8,341
Due after ten years	3,722		3,682
	27,667		27,082
Mortgage-backed securities	110,573		110,051
	$	138,240	$	137,133

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3. Securities, Continued

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 March 31, 2017 and December 31, 2016 (in thousands):



	As of March 31, 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)	14,379	(468	)	—	—		14,379	(468	)
Municipal securities	5,115	(118	)	254	(1	)	5,369	(119	)
Other debt securities	945	(26	)	—	—		945	(26	)
Mortgage-backed securities	62,827	(380	)	12,129	(370	)	74,956	(750	)
	83,266	(992	)	12,383	(371	)	95,649	(1,363	)



	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 March 31, 2017, the categories of temporarily impaired securities, and management’s evaluation of those securities, are as follows:

U.S. Government-sponsored enterprises: At March 31, 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 March 31, 2017.

Municipal securities: At March 31, 2017, 13 (or thirteen) 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 March 31, 2017.

Other debt securities: At March 31, 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 March 31, 2017.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3. Securities, Continued

Mortgage-backed securities: At March 31, 2017, 57 (or fifty seven) 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 March 31, 2017.

Note 4. Loans and Allowance for Loan Losses

Portfolio Segmentation:

At March 31, 2017 and December 31, 2016, loans are summarized as follows (in thousands):



	March 31, 2017								December 31, 2016
	PCI Loans		All Other Loans			Total			PCI Loans		All Other Loans			Total
Commercial real estate	$	14,683	$	393,216		$	407,899		$	14,943	$	400,265		$	415,208
Consumer real estate	8,874		177,471			186,345			9,004		178,798			187,802
Construction and land development	1,506		114,168			115,674			1,678		116,191			117,869
Commercial and industrial	1,538		89,169			90,707			1,568		83,454			85,022
Consumer and other	—		6,914			6,914			—		7,475			7,475
Total loans	26,601		780,938			807,539			27,193		786,183			813,376
Less: Allowance for loan losses	—		(5,152		)	(5,152		)	—		(5,105		)	(5,105		)
Loans, net	$	26,601	$	775,786		$	802,387		$	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.

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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Portfolio Segmentation (continued):

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.

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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

The composition of loans by loan classification for impaired and performing loan status at March 31, 2017 and December 31, 2016, is summarized in the tables below (amounts in thousands):



	March 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	392,978	$	176,478	$	113,534	$	88,960	$	6,914	$	778,864
Impaired loans	238		993		634		209		—		2,074
	393,216		177,471		114,168		89,169		6,914		780,938
PCI loans	14,683		8,874		1,506		1,538		—		26,601
Total	$	407,899	$	186,345	$	115,674	$	90,707	$	6,914	$	807,539



	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 March 31, 2017 and December 31, 2016 (amounts in thousands):



	March 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	2,329	$	1,398	$	706	$	554	$	93	$	5,080
Impaired loans	—		68		—		4		—		72
Total	$	2,329	$	1,466	$	706	$	558	$	93	$	5,152



	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 March 31, 2017 or December 31, 2016.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

The following tables detail the changes in the allowance for loan losses for the three month period ending March 31, 2017 and year ending December 31, 2016, by loan classification (amounts in thousands):



	March 31, 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	—			—		—			(3		)	(22		)	(25		)
Recoveries of loans charged off	5			17		5			16			17			60
Provision (reallocation) charged to operating expense	(45		)	67		(16		)	25			(19		)	12
Ending balance	$	2,329		$	1,466	$	706		$	558		$	93		$	5,152



	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.

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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

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 March 31, 2017 and December 31, 2016 (amounts in thousands):

Non PCI Loans



	March 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	392,338	$	176,001	$	113,447	$	88,723	$	6,685	$	777,194
Watch	635		514		87		237		—		1,473
Special mention	—		103		—		—		229		332
Substandard	243		853		634		209		—		1,939
Doubtful	—		—		—		—		—		—
Total	$	393,216	$	177,471	$	114,168	$	89,169	$	6,914	$	780,938

PCI Loans



	March 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	11,617	$	6,816	$	848	$	1,309	$	—	$	20,590
Watch	890		1,280		645		19		—		2,834
Special mention	—		—		—		183		—		183
Substandard	2,176		778		13		—		—		2,967
Doubtful	—		—		—		27		—		27
Total	$	14,683	$	8,874	$	1,506	$	1,538	$	—	$	26,601
Total loans	$	407,899	$	186,345	$	115,674	$	90,707	$	6,914	$	807,539

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

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

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 March 31, 2017 and December 31, 2016 (amounts in thousands):



	March 31, 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	$	196	$	—	$	124	$	320	$	14,683	$	392,896	$	407,899
Consumer real estate	1,180		—		523		1,703		8,874		175,768		186,345
Construction and land development	34		—		634		668		1,506		113,500		115,674
Commercial and industrial	359		27		164		550		1,538		88,619		90,707
Consumer and other	20		—		—		20		—		6,894		6,914
Total	$	1,789	$	27	$	1,445	$	3,261	$	26,601	$	777,677	$	807,539

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 March 31, 2017 and December 31, 2016 (amounts in thoudands):



							For the three months ended
	At March 31, 2017						March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	238	$	241	$	—	$	179	$	3
Consumer real estate	368		383		—		595		6
Construction and land development	634		634		—		750		—
Commercial and industrial	45		45		—		46		1
Consumer and other	—		—		—		—		—
	1,285		1,303		—		1,570		10

Impaired loans with a valuation allowance:
Commercial real estate	—		—		—		—		—
Consumer real estate	625		644		68		313		5
Construction and land development	—		—		—		—		—
Commercial and industrial	164		243		4		164		—
Consumer and other	—		—		—		—		—
	789		887		72		477		5
Total impaired loans	$	2,074	$	2,190	$	72	$	2,047	$	15

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 March 31, 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 March 31, 2017 and December 31, 2016, management had approximately, $552,000 and $608,000, respectively, in loans that met the criteria for restructured, which included approximately $251,000 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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Troubled Debt Restructurings (continued):

The following table presents a summary of loans that were modified as troubled debt restructurings during the three month period ended March 31, 2017 (amounts in thousands):



		Pre-Modification Outstanding Recorded		Post-Modification Outstanding Recorded
March 31, 2017	Number of Contracts	Investment		Investment
Consumer real estate	1	$	138	$	138

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:



	March 31, 2017			December 31, 2016
Commercial real estate	$	18,105		$	18,473
Consumer real estate	11,954			12,111
Construction and land development	2,364			2,553
Commercial and industrial	2,380			2,482
Consumer and other	—			—
Total loans	34,803			35,619
Less remaining purchase discount	(8,202		)	(8,426		)
Total loans, net of purchase discount	26,601			27,193
Less: Allowance for loan losses	—			—
Carrying amount, net of allowance	$	26,601		$	27,193

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the three months period ended March 31, 2017 and 2016:

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4. Loans and Allowance for Loan Losses, Continued

Purchased Credit Impaired Loans (continued):



	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Accretable yield, beginning of period	$	8,950		$	10,216
Additions	—			—
Accretion income	(697		)	(629		)
Reclassification to accretable	244			(41		)
Other changes, net	(15		)	60
Accretable yield	$	8,482		$	9,606

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 March 31, 2017 and 2016 respectively was $102,716 and $90,856.

Stock Option Plans:

The Company has one currently active equity incentive plan administered by the Board of Directors, and four 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 SmartBank Stock Option Plan – This plan was assumed by the Company on August 31, 2015. The plan provides for incentive stock options and nonqualified stock options. 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.

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.

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	(473,558	)	9.61
Forfeited	(18,524	)	20.27
Outstanding at March 31, 2017	225,442		$	11.78



	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

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 March 31, 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
$	6.20	750	4.0 years	$	6.20	750	$	6.20
6.60		41,500	5.0 years	6.60		41,500	6.60
6.80		19,375	3.9 years	6.80		19,375	6.80
9.48		29,375	5.9 years	9.48		29,375	9.48
9.52		525	0.3 years	9.52		525	9.52
9.60		37,625	6.9 years	9.60		37,625	9.60
10.48		20,513	0.4 years	10.48		20,513	10.48
11.67		3,250	3.8 years	11.67		3,250	11.67
14.40		15,180	1.9 years	14.40		15,180	14.40
15.05		42,745	8.5 years	15.05		4,104	15.05
31.96		13,916	0.9 years	31.96		13,916	31.96
60.80		688	0.1 years	60.80		688	60.80

Outstanding, end of period		225,442	5.1 years	11.78		186,801	11.11

The Company recognized stock-based compensation expense of $26,812 and $33,635 for the three months ended March 31, 2017 and March 31, 2016, respectively. For the three months period ended March 31, 2017, direct stock grant expense issued to local advisory board members of $31,791 was included in professional services. There was no direct grant stock grant expense for the three months period ended March 31, 2016. The total fair value of shares underlying the options which vested during the three months period ended March 31, 2017 and March 31, 2016 was $0 and $19,425 , respectively. There were no income tax benefits recognized for the exercise of options for the periods ended March 31, 2017 and March 31, 2016, respectively.

The intrinsic value of options exercised during the period ended March 31, 2017 was $5,024,759. The aggregate intrinsic value of total options outstanding and exercisable options at March 31, 2017 was $2,266,259 and $2,034,800, respectively. Cash received from options exercised under all share-based payment arrangements for the period ended March 31, 2017 was $4,260,734.

Information related to non-vested options for the period ended March 31, 2017, is as follows:



	Number		Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2016	47,970		$	12.31
Granted	—		—
Vested	—		—
Forfeited/expired	(9,329	)	12.31
Nonvested at March 31, 2017	38,641		$	12.31

As of March 31, 2017 , there was approximately $340,542 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 1.4 years. There were no stock options granted during the three months period ended March 31, 2017 .

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.

A summary of the Bank’s total contractual amount for all off-balance sheet commitments at March 31, 2017 is as follows:



Commitments to extend credit	$	133.4	million
Standby letters of credit	$	2.9	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 March 31, 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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Fair Value Disclosures, Continued

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:

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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Fair Value Disclosures, Continued

Fair Value Hierarchy (continued):

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 March 31, 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)	$	17,798	$	—	$	17,798	$	—
Mortgage-backed securities	110,051		—		110,051		—
Other debt securities	946				946
Municipal securities	8,338		—		8,338		—
Total securities available-for-sale	$	137,133	$	—	$	137,133	$	—



	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 March 31, 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	$	717	$	—	$	—	$	717
Foreclosed assets	2,371		—		—		2,371

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		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 March 31, 2017 and December 31, 2016 a, the significant unobservable inputs used in the fair value measurements are presented below (in thousands).



	Balance as of March 31, 2017		Valuation Technique	Significant Other Unobservable Input	Weighted Average of Input
Impaired loans	$	717	Appraisal	Discounted Cash Flow / Appraisal Discounts	9.1	%
Foreclosed assets	2,371		Appraisal	Appraisal Discounts	22.5	%



	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.

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):

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.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments at March 31, 2017 and December 31, 2016 are as follows (in thousands):



	March 31, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and cash equivalents	$	55,548	$	55,548	$	68,748	$	68,748
Securities available for sale	137,133		137,133		129,422		129,422
Restricted investments	5,628		N/A		5,628		N/A
Loans, net	802,387		795,077		808,271		803,057

Liabilities:
Noninterest-bearing demand deposits	160,673		160,673		153,483		153,483
Interest-bearing demand deposits	167,433		167,433		162,702		162,702
Money Market and Savings deposits	274,993		274,993		274,605		274,605
Time deposits	286,600		286,414		316,275		316,734
Securities sold under agreements to repurchase	23,153		23,153		26,622		26,622
Federal Home Loan Bank advances and other borrowings	60		60		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.

SMARTFINANCIAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8. Small Business Lending Fund

During 2011, the Company issued to the Secretary of the Treasury 12,000 shares of preferred stock at $1,000 per share under the Small Business Lending Fund Program (the "SBLF Program"). Subject to regulatory approval, the Company may redeem the preferred stock for $1,000 per share, plus accrued and unpaid dividends, in whole or in part at any time. The SBLF Program is a voluntary program authorized under the Business Jobs Acts of 2010, whereby the United States Treasury can make capital investments in eligible institutions; the capital investments, in turn, are designed to increase the availability of credit for small businesses and promote economic growth by providing capital to qualified community banks at favorable rates. The Company paid cash dividends at a one percent rate or $120,000 for the year ended December 31, 2015. 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 million shares of its common stock, par value $1.00 per share, with the net proceeds to the Company of approximately $33.2 million. Subsequent to the public offering the Company used proceeds from the offering to redeem the $12 million of preferred stock and pay the $195 thousand accrued dividend on March 6, 2017.

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 thirteen branches, two loan production offices, and one mortgage production office located in East Tennessee, the Florida Panhandle, and North Georgia. On February 26, 2016, the Company merged SmartBank and Cornerstone Community Bank together, with SmartBank surviving the merger. This quarter completes the fourth full quarter’s results of the merged bank.

Executive Summary

The following is a summary of the Company’s financial highlights and significant events during the first quarter of 2017:


•	Net income available to common shareholders totaled $1.4 million, or $0.19 per share, during the first quarter of 2017 compared to $1.1 million, or $0.20 per share, during the first quarter of 2016.


•	Annualized return on average assets was 0.64 percent in the first quarter of 2017, compared to 0.54 percent a year ago.


•	Net interest margin increased compared to a year ago due to increases in average loan balances, increases in yields of the securities portfolio, and reductions in FHLB advances and other borrowings.


•	Asset quality was outstanding with nonperforming assets to total assets dropping to just 0.37 percent.


•	Dividends on preferred stock dropped to $195 thousand as the company used proceeds from the capital raise to redeem the preferred stock during the quarter.

Analysis of Results of Operations

First quarter of 2017 compared to 2016

Net income was $1.6 million in the first quarter of 2017, which was up from $1.3 million in the first quarter of 2016. Net income available to common shareholders was $1.4 million, or $0.19 per diluted common share, in the first quarter of 2017, an increase from $1.1 million, or $0.19 per diluted common share, in the first quarter of 2016. Net interest income to average assets of 3.81 percent in the first quarter of 2017 was up from 3.65 percent in the first quarter of 2016 primarily due to increases in loan balances. Noninterest income to average assets of 0.36 percent was down from 0.43 percent in the first quarter of 2016 primarily as a result of higher losses on the sale of foreclosed assets and the absence of securities gains. Noninterest expense to average assets decreased from 3.18 percent in the first quarter of 2016 to 3.12 percent in first quarter of 2017 primarily due to increases in average assets as the Company continues to capitalize on efficiencies of scale. The resulting pretax pre-provision income to average assets was 1.05 percent in the first quarter of 2017, an improvement from 0.90 percent in the first quarter of 2016.

Net Interest Income and Yield Analysis

First quarter of 2017 compared to 2016

Net interest income, taxable equivalent, improved to $9.8 million in the first quarter of 2017 from $9.1 million in the first quarter of 2016. The increase in net interest income was primarily due to increases in loan balances. Average earning assets increased from $926.7 million in the first quarter of 2016 to $979.5 million in the first quarter of 2017. Over this period, average loan balances increased by $76.6 million. In addition, average interest-bearing deposits increased by $9.6 million and average noninterest-bearing deposits increased $26.1 million. Net interest income to average assets of 3.81 percent for the first quarter in 2017 was up from 3.65 percent during the same period in 2016. Net interest margin, taxable equivalent, was 4.07 percent in the quarter, compared to 4.01 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 4.41 percent a year ago to 4.54 percent in the quarter 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.



	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
	Average				Yield/		Average				Yield/
	Balance		Interest *		Cost*		Balance		Interest *		Cost*
Assets
Loans (1)	$	811,522	$	10,220	5.11	%	$	734,918	$	9,378	5.13	%
Investment securities and interest-bearing due from banks (2)	161,392		677		1.70	%	182,988		730		1.60	%
Federal funds and other	6,621		73		4.47	%	8,817		63		2.87	%
Total interest-earning assets	979,535		10,970		4.54	%	926,723		10,171		4.41	%
Noninterest-earning assets	66,208						74,368
Total assets	$	1,045,743					$	1,001,091

Liabilities and Stockholders’ Equity
Interest-bearing demand deposits	$	159,255	$	93	0.24	%	$	150,538	$	66	0.18	%
Money market and savings deposits	275,576		328		0.48	%	242,125		272		0.45	%
Time deposits	302,256		677		0.91	%	334,782		623		0.75	%
Total interest-bearing deposits	737,087		1,098		0.60	%	727,445		961		0.53	%
Securities sold under agreement to repurchase	18,682		16		0.35	%	21,237		17		0.32	%
Federal Home Loan Bank advances and other borrowings	7,446		15		0.82	%	23,504		45		0.77	%
Total interest-bearing liabilities	763,215		1,129		0.60	%	772,186		1,023		0.53	%
Noninterest-bearing deposits	149,305						123,242
Other liabilities	4,580						4,160
Total liabilities	917,100						899,588
Stockholders’ equity	128,643						101,503
Total liabilities and stockholders’ equity	$	1,045,743					$	1,001,091

Net interest income, taxable equivalent			$	9,841					$	9,148
Interest rate spread (3)					3.94	%					3.88	%
Tax equivalent net interest margin (4)					4.07	%					4.01	%

Percentage of average interest-earning assets to average interest-bearing liabilities					128.34	%					120.0	%
Percentage of average equity to average assets					12.30	%					10.14	%
* Taxable equivalent basis

(1)

Loans include nonaccrual loans. Loan fees included in loan income was $594 thousand and $627 thousand for the quarters ended March 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 March 31, 2017 and $5 thousand for the period ended March 31, 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 $16 thousand for the period ended March 31, 2017 and $13 thousand for the period ended March 31, 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.

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 above as a change in volume.

First quarter of 2017 compared to 2016

Net interest income, taxable equivalent, increased by $0.7 million between the quarters ended March 31, 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 March 31,
	2017			Compared to						2016
	Increase (decrease) due to
		Days		Rate			Volume				Net
Interest-earning assets:
Loans (1)		$	114	$	(241	)	$	969			$	842
Investment securities and interest-bearing due from banks (2)		8		24			(85		)		(53		)
Federal funds and other		1		25			(16		)		10
Total interest-earning assets		123		(192		)	868				799

Interest-bearing liabilities:
Interest-bearing demand deposits		1		22			4				27
Money market and savings deposits		4		15			37				56
Time deposits		8		106			(60		)		54
Total interest-bearing deposits		13		143			(19		)		137
Securities sold under agreement to repurchase		—		1			(2		)		(1		)
Federal Home Loan Bank advances and other borrowings		—		—			(30		)		(30		)
Total interest-bearing liabilities		13		144			(51		)		106
Net interest income		$	110	$	(336	)	$	919			$	693


(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 March 31, 2017 and $5 thousand for the period ended March 31, 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 $16 thousand for the period ended March 31, 2017 and $13 thousand for the period ended March 31, 2016.

Noninterest Income

First quarter of 2017 compared to 2016

Noninterest income totaled $0.9 million in the first quarter of 2017, compared to $1.1 million in the first quarter of 2016. Noninterest income to average assets of 0.36 percent for the quarter was down from 0.43 percent in 2016 primarily due to higher losses on the sale of foreclosed assets and the absence of securities gains in the current period. Charges and fees on deposit accounts decreased $31 thousand primarily due to the discontinuation of certain product types at Cornerstone Community Bank and a decrease in overdraft income. Gains on the sale of loans, which includes mortgage and SBA loans, were $275 thousand, up from $222 thousand a year ago.



	Three months ended March 31,
(Dollars in thousands)	2017			2016
Service charges and fees on deposit accounts	$	265		$	296
Gain on sale of securities	—			83
Gain on sale of loans and other assets	275			222
Gain (loss) on sale of foreclosed assets	(15		)	58
Other noninterest income	402			412
Total noninterest income	$	927		$	1,071

Noninterest Expense

First quarter of 2017 compared to 2016

Noninterest expense totaled $8.1 million in the first quarter of 2017 compared to $8.0 million in the first quarter of 2016. Noninterest expense to average assets decreased from 3.18 percent a year ago to 3.12 percent in the quarter. The increase in noninterest expense compared to the prior year was primarily due to annual merit based salary increases and increases in professional expenses.



	Three months ended March 31,
(Dollars in thousands)	2017		2016
Salaries and employee benefits	$	4,647	$	4,495
Net occupancy and equipment expense	978		1,018
Depository insurance	153		136
Foreclosed assets	—		57
Advertising	164		174
Data processing	340		341
Professional services	570		455
Amortization of intangible assets	53		93
Service contracts	296		286
Other operating expenses	944		897
Total noninterest expense	$	8,145	$	7,952

Taxes

First quarter of 2017 compared to 2016

In the first quarter of 2017 income tax expense totaled $946 thousand compared to $764 thousand thousand a year ago. The effective tax rate was approximately 36.2 percent a year ago compared to approximately 36.5 percent in the first quarter of 2017.

Loan Portfolio Composition

The Company had total net loans outstanding, including organic and purchased loans, of approximately $802.4 million at March 31, 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 $13.8 million, or 2.2 percent, from December 31, 2016, to $625.7 million at March 31, 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.

Purchased Loans

Purchased non-credit impaired loans of $150.1 million at March 31, 2017 were down from $169.2 million at December 31, 2016 as a result of loan payoffs and renewals. Since December 31, 2015, our net purchased credit impaired (“PCI”) loans decreased by $0.6 million to $26.6 million at March 31, 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):



	March 31, 2017
	Organic Loans			Purchased Non-Credit Impaired Loans		Purchased Credit Impaired Loans		Total Amount			% of Gross Total
Commercial real estate-mortgage	$	297,721		$	95,495	$	14,683	$	407,899		50.5	%
Consumer real estate-mortgage	138,860			38,611		8,874		186,345			23.1	%
Construction and land development	109,557			4,611		1,506		115,674			14.3	%
Commercial and industrial	78,428			10,741		1,538		90,707			11.2	%
Consumer and other	6,259			655		—		6,914			0.9	%
Total gross loans receivable, net of deferred fees	630,825			150,113		26,601		807,539			100.0	%
Allowance for loan and lease losses	(5,152		)	—		—		(5,152		)
Total loans, net	$	625,673		$	150,113	$	26,601	$	802,387



	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

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	$	38,431	$	208,476	$	160,992	$	407,899	$	248,896	$	120,572
Consumer real estate-mortgage	21,323		89,247		75,775		186,345		99,501		65,521
Construction and land development	33,179		49,644		32,851		115,674		37,449		45,046
Commercial and industrial	25,854		49,473		15,380		90,707		52,961		11,892
Consumer and other	2,984		3,582		348		6,914		2,018		1,912
Total Loans	$	121,771	$	400,422	$	285,346	$	807,539	$	440,825	$	244,943

Nonaccrual, Past Due, and Restructured Loans

Nonperforming loans as a percentage of total gross loans, net of deferred fees, was 0.18 percent as of March 31, 2017, which was down from 0.26 percent as of December 31, 2016. Total nonperforming assets as a percentage of total assets as of March 31, 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 they are 90 days or greater past due.

The following table summarizes the Company's nonperforming assets for the periods presented.



(Dollars in thousands)	March 31, 2017		December 31, 2016
Nonaccrual loans	$	1,445	$	1,415
Accruing loans past due 90 days or more (1)	27		699
Total nonperforming loans	1,472		2,114
Foreclosed assets	2,371		2,386
Total nonperforming assets	$	3,843	$	4,500

Restructured loans not included above	$	164	$	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 March 31, 2017 potential problem loans amounted to approximately $995.1 thousand or 0.12 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.

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 March 31, 2017 and December 31, 2016, our allowance for loan losses was $5.2 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 increased slightly from 0.63 percent at December 31, 2016 to 0.64 percent at March 31, 2017. As a percentage of organic loans the allowance for loan losses decreased from 0.83 percent at December 31, 2016 to 0.82 percent at March 31, 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 March 31, 2017 the balance on PCI loans was $34.8 million while the carrying value was $26.6 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 March 31, 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 March 31, 2017 and December 31, 2016 and the percentage of loans in each category to total loans (in thousands):



	March 31, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
Commercial real estate-mortgage	$	2,329	45.2	%	$	2,369	46.4	%
Consumer real estate-mortgage	1,466		28.5	%	1,382		27.1	%
Construction and land development	706		13.7	%	717		14.0	%
Commercial and industrial	558		10.8	%	520		10.2	%
Consumer and other	93		1.8	%	117		2.3	%
Total allowance for loan losses	$	5,152	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 $72 thousand at March 31, 2017.

Analysis of the Allowance for Loan Losses

The following is a summary of changes in the allowance for loan losses for the periods ended March 31, 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):



	March 31, 2017			December 31, 2016
Balance at beginning of period	$	5,105		$	4,354
Provision for loan losses	12			788
Charged-off loans:
Commercial real estate-mortgage	—			—
Consumer real estate-mortgage	—			(102		)
Construction and land development	—			(14		)
Commercial and industrial	(3		)	(35		)
Consumer and other	(22		)	(155		)
Total charged-off loans	(25		)	(306		)
Recoveries of previously charged-off loans:
Commercial real estate-mortgage	5			45
Consumer real estate-mortgage	17			76
Construction and land development	5			22
Commercial and industrial	16			58
Consumer and other	17			68
Total recoveries of previously charged-off loans	60			269
Net charge-offs	35			(37		)
Balance at end of period	$	5,152		$	5,105

Ratio of allowance for loan losses to total loans outstanding at end of period	0.64		%	0.63		%
Ratio of net charge-offs (recoveries) to average loans outstanding for the period	(0.02		)%	0.09		%

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.

Investment Portfolio

Our investment portfolio, consisting primarily of Federal agency bonds, mortgage-backed securities, and state and municipal securities amounted to $137.1 million and $129.4 million at March 31, 2017 and December 31, 2016, respectively. Our investments to assets ratio has increased from 12.2 percent at December 31, 2016 to 13.0 percent at March 31, 2017 as we reduced the ratio of cash and cash equivalents to total assets on our balance sheet to allocate more funding to investments to take advantage of the increase in interest rates early in 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 March 31, 2017 and December 31, 2016 all investment securities were classified as available for sale.



Book Value of Investment Securities
(in thousands)	March 31, 2017		December 31, 2016
U.S. Government agencies	$	18,261	$	18,279
State and political subdivisions	8,434		8,182
Mortgage-backed securities	110,573		104,585
Other debt securities	972		—
Total securities	$	138,240	$	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
March 31, 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	$	3,011		$	11,993		$	3,257		$	—		$	18,261
State and political subdivisions	—			399			4,314			3,721			8,434
Mortgage-backed securities	—			6,120			28,025			76,428			110,573
Other debt securities	—			—			972			—			972
Total securities available for sale	$	3,011		$	18,512		$	36,568		$	80,149		$	138,240
Weighted average yield (1)	1.00		%	1.70		%	1.91		%	1.99		%	1.93		%

(1) Based on amortized cost, taxable equivalent basis

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 March 31, 2017, brokered deposits represented approximately 7.6 percent of total deposits.

Following the merger in 2015 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 months ended March 31, 2017 was 0.60 percent, compared to a 0.53 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 March 31, 2017 were $889.7 million, which was a decrease of $17.4 million from December 31, 2016. As of March 31, 2017 the Company had outstanding time deposits under $100,000 with balances of $121.6 million, time deposits over $100,000 with balances of $164.7 million, and a fair value premium for time deposits of approximately $243 thousand.

The following table summarizes the maturities of time deposits $100,000 or more as of March 31, 2017.



Remaining maturity: (Dollars in thousands)	March 31, 2017
Three months or less	$	35,694
Three to six months	73,657
Six to twelve months	44,569
More than twelve months	10,794
Total	$	164,714

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. Short-term borrowings totaled $0.1 million at March 31, 2017 comprised of Federal Funds purchased. 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 March 31, 2017.

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 March 31, 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 March 31, 2017, we had $133.4 million of pre-approved but unused lines of credit and $2.9 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.

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 March 31, 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 March 31, 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 March 31, 2017 that have materially affected, or are reasonably likely to materially affect, SmartFinancial’s internal control over financial reporting.

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.

None.

Item 6. Exhibits



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

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:	May 15, 2017		/s/ William Y. Carroll, Jr.
			William Y. Carroll, Jr.
			President and Chief Executive Officer
			(principal executive officer)

Date:	May 15, 2017		/s/ Christopher Bryan Johnson
			Christopher Bryan Johnson
			Executive Vice President and Chief Financial Officer
			(principal financial officer and accounting officer)

SmartFinancial (SmartBank) - 10-Q quarterly report FY

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	PART I –FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

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

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	42