Cover Page - shares	3 Months Ended
Cover Page - shares	Mar. 31, 2023	May 05, 2023
Cover page [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2023
Document Transition Report	false
Entity File Number	001-37661
Entity Registrant Name	SMARTFINANCIAL INC.
Entity Incorporation, State or Country Code	TN
Entity Tax Identification Number	62-1173944
Entity Address, Address Line One	5401 Kingston Pike, Suite 600
Entity Address, City or Town	Knoxville
Entity Address, State or Province	TN
City Area Code	865
Entity Address, Postal Zip Code	37919
Local Phone Number	437-5700
Title of 12(b) Security	Common Stock, par value $1.00
Trading Symbol	SMBK
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		17,004,092
Amendment Flag	false
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q1
Entity Central Index Key	0001038773
Current Fiscal Year End Date	--12-31

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2023	Dec. 31, 2022
ASSETS:
Cash and due from banks	$ 35,158	$ 44,265
Interest-bearing deposits with banks	205,166	206,849
Federal funds sold	66,610	15,310
Total cash and cash equivalents	306,934	266,424
Securities available-for-sale, at fair value	560,418
Securities available-for-sale, at fair value		483,893
Securities held-to-maturity, at amortized cost	284,776
Securities held-to-maturity, at amortized cost		285,949
Other investments	14,059	15,530
Loans held for sale	3,324	1,752
Loans and leases	3,281,787
Less: Allowance for credit losses	(32,279)
Loans and leases, net	3,249,508
Loans and leases		3,253,627
Less: Allowance for loan and lease losses		(23,334)
Loans and leases, net		3,230,293
Premises and equipment, net	92,190	92,511
Other real estate owned	1,708	1,436
Goodwill and other intangibles, net	109,114	109,772
Bank owned life insurance	81,938	81,470
Other assets	65,836	68,468
Total assets	4,769,805	4,637,498
Deposits:
Noninterest-bearing demand	989,753	1,072,449
Interest-bearing demand	989,738	965,911
Money market and savings	1,761,847	1,583,481
Time deposits	488,208	455,259
Total deposits	4,229,546	4,077,100
Borrowings	16,546	41,860
Subordinated debt	42,036	42,015
Other liabilities	38,278	44,071
Total liabilities	4,326,406	4,205,046
Shareholders' equity:
Preferred stock, $1 par value; 2,000,000 shares authorized; No shares issued and outstanding
Common stock, $1 par value; 40,000,000 shares authorized; 17,004,092 and 16,900,805 shares issued and outstanding, respectively	17,004	16,901
Additional paid-in capital	294,930	294,330
Retained earnings	160,085	156,545
Accumulated other comprehensive income (loss)	(28,620)	(35,324)
Total shareholders' equity	443,399	432,452
Total liabilities and shareholders' equity	$ 4,769,805	$ 4,637,498

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2023	Dec. 31, 2022
Statement of Financial Position [Abstract]
Securities held to maturity, fair value	$ 263,172	$ 260,613
Preferred stock, par value (in dollars per share)	$ 1	$ 1
Preferred stock, shares authorized (in shares)	2,000,000	2,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized (in shares)	40,000,000	40,000,000
Common stock, shares issued (in shares)	17,004,092	16,900,805
Common stock, shares outstanding (in shares)	17,004,092	16,900,805

CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended
CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	Mar. 31, 2023	Mar. 31, 2022
Interest income:
Loans and leases, including fees	$ 44,728	$ 29,643
Securities:
Taxable	3,651	2,418
Tax-exempt	353	368
Federal funds sold and other earning assets	4,446	486
Total interest income	53,178	32,915
Interest expense:
Deposits	16,346	2,014
Borrowings	224	157
Subordinated debt	626	626
Total interest expense	17,196	2,797
Net interest income	35,982	30,118
Provision for credit losses	550	1,006
Net interest income after provision for credit losses	35,432	29,112
Noninterest income:
Service charges on deposit accounts	1,445	1,319
Mortgage banking	172	834
Investment services	1,005	1,070
Insurance commissions	1,259	901
Interchange and debit card transaction fees, net	1,383	1,284
Other	1,661	1,703
Total noninterest income	6,925	7,111
Noninterest expense:
Salaries and employee benefits	16,742	15,046
Occupancy and equipment	3,208	3,059
FDIC insurance	541	641
Other real estate and loan related expense	572	729
Advertising and marketing	355	369
Data processing and technology	2,163	1,586
Professional services	807	1,242
Amortization of intangibles	659	637
Merger related and restructuring expenses		439
Other	2,482	1,970
Total noninterest expense	27,529	25,718
Income before income tax expense	14,828	10,505
Income tax expense	3,328	2,246
Net income	$ 11,500	$ 8,259
Earnings per common share:
Basic (in dollars per share)	$ 0.69	$ 0.49
Diluted (in dollars per share)	$ 0.68	$ 0.49
Weighted average common shares outstanding:
Basic (in shares)	16,791,406	16,718,371
Diluted (in shares)	16,896,494	16,858,288

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Net income	$ 11,500	$ 8,259
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale	8,276	(20,348)
Tax effect	(2,138)	5,256
Reclassification of unrealized gain (loss) on securities transferred from available-for-sale to held-to-maturity		(2,009)
Tax effect		519
Amortization of unrealized gains on investment securities transferred from available-for-sale to held-to-maturity	40	(11)
Tax effect	(10)	3
Unrealized gains (losses) on securities available-for-sale, net of tax	6,168	(16,590)
Total other comprehensive income (loss)	6,704	(16,999)
Comprehensive income (loss)	18,204	(8,740)
Fair Value Hedging [Member]
Other comprehensive income (loss):
Unrealized gains (losses) on fair value municipal security hedges and cash flow hedges		(551)
Tax effect		142
Unrealized gains (losses) on fair value municipal security and cash flow hedge instruments arising during the period, net of tax		(409)
Unrealized gains (losses) on cash flow hedges		$ (551)
Cash Flow Hedging [Member]
Other comprehensive income (loss):
Unrealized gains (losses) on fair value municipal security hedges and cash flow hedges	722
Tax effect	(186)
Unrealized gains (losses) on fair value municipal security and cash flow hedge instruments arising during the period, net of tax	536
Unrealized gains (losses) on cash flow hedges	$ 722

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - USD ($) $ in Thousands	Common Stock [Member] Cumulative Effect, Period of Adoption, Adjusted Balance [Member]	Common Stock [Member]	Additional Paid-in Capital [Member] Cumulative Effect, Period of Adoption, Adjusted Balance [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member] Cumulative Effect, Period of Adoption, Adjusted Balance [Member]	Retained Earnings [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member] Cumulative Effect, Period of Adoption, Adjusted Balance [Member]	AOCI Attributable to Parent [Member]	Cumulative Effect, Period of Adoption, Adjusted Balance [Member]	Cumulative Effect, Period of Adoption, Adjustment [Member]	Total
BALANCE at Dec. 31, 2021		$ 16,803		$ 292,937			$ 118,247		$ 1,443			$ 429,430
BALANCE (in shares) at Dec. 31, 2021		16,802,990
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income							8,259					8,259
Other comprehensive income (loss)									(16,999)			(16,999)
Stock options exercised		$ 27		190								$ 217
Stock options exercised (in shares)		27,550										27,550
Restricted stock		$ 63		(63)
Restricted stock (in shares)		62,742
Stock compensation expense				312								$ 312
Common stock dividends							(1,177)					(1,177)
BALANCE at Mar. 31, 2022		$ 16,893		293,376			125,329		(15,556)			420,042
BALANCE (in shares) at Mar. 31, 2022		16,893,282
BALANCE (Accounting Standards Update 2016-13 [Member]) at Dec. 31, 2022						$ (6,606)					$ (6,606)
BALANCE at Dec. 31, 2022		$ 16,901		294,330			156,545		(35,324)			432,452
BALANCE (in shares) at Dec. 31, 2022	16,900,805	16,900,805	294,330,000		149,939,000			(35,324,000)		425,846,000
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income							11,500					11,500
Other comprehensive income (loss)									6,704			6,704
Stock options exercised		$ 15		150								$ 165
Stock options exercised (in shares)		15,705										15,705
Restricted stock		$ 88		(88)
Restricted stock (in shares)		87,582
Stock compensation expense				538								$ 538
Common stock dividends							(1,354)					(1,354)
BALANCE at Mar. 31, 2023		$ 17,004		$ 294,930			$ 160,085		$ (28,620)			$ 443,399
BALANCE (in shares) at Mar. 31, 2023		17,004,092

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY [Abstract]
Common stock dividend, per share	$ 0.08	$ 0.07

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2023	Mar. 31, 2022
Cash flows from operating activities:
Net income	$ 11,500	$ 8,259
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,614	2,387
Accretion of fair value purchase accounting adjustments, net		(358)
Amortization of intangible assets	659	637
Provision for credit losses	550	1,006
Stock compensation expense	538	312
Deferred income tax expense	3,475	948
Increase in cash surrender value of bank owned life insurance	(469)	(455)
Net losses from sale and write downs of other real estate owned		59
Net gains from mortgage banking	(172)	(834)
Origination of loans held for sale	(10,319)	(30,916)
Proceeds from sales of loans held for sale	8,919	30,959
Net (gain) loss from sale of fixed assets	8	(348)
Net change in:
Accrued interest receivable	(217)	(452)
Accrued interest payable	106	352
Other assets	1,674	(5,881)
Other liabilities	(7,512)	5,019
Net cash provided by operating activities	11,354	10,694
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns	7,554	10,217
Purchases	(76,606)	(257,101)
Proceeds from maturities, calls and paydowns	628
Purchases		(50,575)
Proceeds from sales of other investments	1,480
Purchases of other investments	(9)	(5)
Net increase in loans and leases	(28,943)	(112,551)
Proceeds from sale of fixed assets	623	1,224
Purchases of premises and equipment	(1,561)	(879)
Proceeds from sale of other real estate owned		108
Net cash used by investing activities	(96,834)	(409,562)
Cash flows from financing activities:
Net increase in deposits	152,493	169,591
Net decrease in securities sold under agreements to repurchase	(729)	(872)
Repayment of borrowings	(24,585)	(50,000)
Cash dividends paid	(1,354)	(1,177)
Issuance of common stock, net of restricted shares withheld for taxes	165	217
Net cash provided by financing activities	125,990	117,759
Net change in cash and cash equivalents	40,510	(281,109)
Cash and cash equivalents, beginning of period	266,424	1,045,077
Cash and cash equivalents, end of period	306,934	763,968
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	17,091	2,112
Net cash paid/received during the period for income taxes	19
Cash received from income tax refunds		(35)
Noncash investing and financing activities:
Acquisition of real estate through foreclosure	$ 272
Transfer of securities from available-for-sale to held-to-maturity		$ 162,378

Presentation of Financial Information

3 Months Ended

Mar. 31, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Presentation of Financial Information

Note 1. Presentation of Financial Information

Nature of Business:

SmartFinancial, Inc. (the "Company," “SmartFinancial,” “we,” “our” or “us”) 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 East and Middle Tennessee, Alabama, and the Florida Panhandle. The Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans.

Basis of Presentation and Accounting Estimates:

The accounting and financial reporting policies of the Company and its wholly owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements for the Company and its wholly owned subsidiary have not been audited. All material intercompany balances and transactions have been eliminated.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired, and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2022.

Allowance for Credit Losses (“ACL”):

As described below under Recently Issued and Adopted Accounting Pronouncements, the Company adopted ASU 2016-13 effective January 1, 2023, which requires the estimation of an allowance for credit losses in accordance with the Current Expected Credit Losses (“CECL”) methodology. This standard applies to all financial assets measured at amortized cost and off-balance sheet credit exposures, including loans, investment securities and unfunded commitments. We applied the standard’s provisions using the modified retrospective method as a cumulative-effect adjustment to retained earnings as of January 1, 2023. With this transition method, we did not have to restate comparative prior periods presented in the financial statements related to Topic 326, but will present comparative prior periods disclosures using the previous accounting guidance for the allowance for loan losses. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

In connection with the adoption of ASU 2016-13, the Company revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below:

ACL - Held-to-Maturity (“HTM”) Securities - The Company measures expected credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company has made the election to exclude accrued interest receivable on HTM securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. See Note 4 - Securities, for additional information related to the Company’s allowance for credit losses on HTM securities.

ACL - Available-for-Sale (“AFS”) Securities - For AFS securities in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the AFS security amortized cost basis is written down to fair value through income. If the criteria is not met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. If the assessment indicates a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on AFS securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 4 - Securities, for additional information related to the Company’s allowance for credit losses on AFS securities.

ACL – Loans and Leases – The ACL reflects management’s estimate of expected losses that will result from the inability of our clients to make required loan and lease payments. Loans and leases deemed to be uncollectible are charged against the ACL, while recoveries of previously charged-off amounts are credited to the ACL. Management uses systematic methodologies to determine its ACL for loans and leases held for investment and certain off-balance-sheet exposures. The ACL is a valuation account that is subtracted from the amortized cost basis to present the net amount expected to be collected on the loan and lease portfolio. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan and lease portfolio. The ACL recorded on the balance sheet reflects management’s best estimate of expected credit losses. The Company’s ACL is calculated using collectively assessed and individually assessed loans and leases.

The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments. The Company segmented the loan and lease portfolio by call code and risk rating. The loan portfolio reserve estimate is calculated using a non-discounted cash flow method for probability of default and loss given default values. This method utilizes the Company’s data along with peer data that is regressed against the national unemployment rate. The lease portfolio’s reserve estimate is based on the open pool methodology which is a simplified process of capturing losses by quarter over the life of a lease divided by the balance of all leases originated.

Management considers forward-looking information in estimating expected credit losses. The Company uses an average of Fannie Mae and Federal Open Market Committee projections of the national unemployment rate to determine the best estimate of expected credit losses. Management has evaluated the appropriateness of the reasonable and supportable forecast and has adjusted, as needed. For the contractual term that extends beyond the reasonable and supportable forecast period, the Company reverts to the long term mean of historical factors using a straight-line approach. The Company uses an eight-quarter forecast and a four-quarter reversion period.

Management considers the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation. The qualitative factors considered by management include: (1) effectiveness of the Company’s loan and lease policies and procedures; (2) the experience, ability and depth of lending management and other relevant staff; and (3) the quality of external and internal loan review and internal controls.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company maintains a net book balance threshold of $500,000 for individually evaluated loans unless further analysis in the future suggests a change is needed to this threshold based on the credit environment at that time. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost

basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.

Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments but is precluded from considering expected extensions, renewals, or modifications, unless the Company reasonably expects it will execute a loan modification (“LM”) with a borrower. In the event of a reasonably expected LM, the Company factors the reasonably-expected LM into the current expected credit losses estimate.

Purchased credit-deteriorated, otherwise referred to herein as PCD, assets are defined as acquired individual financial assets (or acquired groups of financial assets with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. The Company records acquired PCD loans by adding the expected credit losses (i.e. allowance for credit losses) to the purchase price of the financial assets rather than recording through the provision for credit losses in the income statement. The expected credit loss, as of the acquisition day, of a PCD loan is added to the allowance for credit losses. The non-credit discount or premium is the difference between the unpaid principal balance and the amortized cost basis as of the acquisition date. Subsequent to the acquisition date, the change in the ACL on PCD loans is recognized through the provision for credit losses. The non-credit discount or premium is accreted or amortized, respectively, into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the standard, the Company’s purchased credit-impaired loans (“PCI”) were treated as PCD loans.

The Company follows its nonaccrual policy by reversing contractual interest income in the income statement when the Company places a loan on nonaccrual status. Therefore, Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an allowance for credit losses on accrued interest receivable. As of March 31, 2023, and December 31, 2022, the accrued interest receivables for loans recorded in other assets were $10.3 million and $9.8 million, respectively.

ACL – Off- Balance Sheet Credit Exposures - The Company has a variety of assets that have a component that qualifies as an off-balance sheet exposure. These primarily include undrawn portions of revolving lines of credit and standby letters of credit. The expected losses associated with these exposures within the unfunded portion of the expected credit loss will be recorded as a liability on the balance sheet with an offsetting income statement expense. Management has determined that all of the Company’s off-balance-sheet credit exposures are not unconditionally cancellable. As of March 31, 2023, the liability recorded for expected credit losses on unfunded commitments in Other Liabilities was $3.0 million. The current adjustment to the ACL for unfunded commitments is recognized through the provision for credit losses in the Statement of Operations.

Recently Issued and Adopted Accounting Pronouncements:

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) (“ASU 2016-13”), and has issued subsequent amendments thereto, which introduces the current expected credit losses (“CECL”) methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets, including loans and held-to-maturity debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model requires institutions to calculate and estimable losses that are expected to be incurred through the financial asset's contractual life through a provision for

credit losses, including loans obtained as a result of any acquisition not deemed to be PCD. ASU 2016-13 also requires the allowance for credit losses for PCD loans to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance determined at acquisition is added to the purchase price rather than recorded as provision expense. In accordance with ASU 2016-13A, the disclosure of credit quality indicators related to the amortized cost of financing receivables is further disaggregated by year of origination (or vintage). The Company adopted ASU 2016-13 and all subsequent amendments thereto effective January 1, 2023, using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. Amounts for periods beginning on or after January 1, 2023, are presented under ASU 2016-13 and all prior period information is presented in accordance with previously applicable GAAP. At January 1, 2023, the Company recognized a cumulative adjustment to retained earnings of $6.6 million, net of tax, attributable to an increase in the allowance for credit losses (“ACL”) of $8.7 million, an increase in the allowance for off balance sheet credit exposures of $3.0 million, and an increase in deferred tax assets of $2.3 million. Included in the $8.7 million increase in the allowance for credit losses is $2.9 million that was recognized on PCD loans previously classified as purchased credit impaired (“PCI”) with a corresponding adjustment to the gross carrying amount of the loans. The Company adopted ASU 2016-13 using the prospective transition approach for PCD loans, which did not require re-evaluation of whether loans previously classified as PCI loans met the criteria of PCD assets at the date of adoption. The remaining noncredit discount will be accreted into interest income over the life of the individual loans beginning January 1, 2023.

The following table illustrates the impact of ASU 2016-13 (in thousands):


		December 31, 2022		Adoption impact of ASU 2016-13		Impact of PCD Gross Up		January 1, 2023
Allowance for credit losses:
Commercial real estate	$	10,821	$	879		2,652	$	14,352
Consumer real estate		4,028		1,952		166		6,146
Construction and land development		3,059		2,145		25		5,229
Commercial and industrial		3,997		1,451		27		5,475
Leases		1,293		(683)		28		638
Consumer and other		136		13		-		149
Total allowance for credit losses	$	23,334	$	5,757	$	2,898	$	31,989

Unfunded lending commitments⁽¹⁾	$	-	$	3,029	$	-	$	3,029

⁽¹⁾ The unfunded lending commitments is recorded within other liabilities on the Consolidated Statements of Financial Condition. The related expense for unfunded lending commitments is recorded within loan loss provision on the Consolidated Statements of Income.

In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020, through December 31, 2022. In December 2022, the FASB issued an update to Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting with Accounting Standards Update 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which updated the effective date to be March 12, 2020, through December 31, 2024. The Company has implemented a transition plan to identify and modify its loans and other financial instruments, including certain indebtedness, with attributes that are either directly or indirectly influenced by LIBOR. The Company has begun negotiating loans using its preferred replacement index, the Secured Overnight Financing Rate ("SOFR"). For the Company’s currently outstanding LIBOR-based loans,

the timing and manner in which each customer's contract transitions to SOFR will vary on a case-by-case basis. The Company expects to complete all loan transitions by June 30, 2023.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method, which allows multiple hedged layers to be designated for a single closed portfolio of financial assets resulting in a greater portion of the interest rate risk in the closed portfolio being eligible to be hedged. The amendments allow the flexibility to use different types of derivatives or combinations of derivatives to better align with risk management strategies. Furthermore, among other things, the amendments clarify that basis adjustments of hedged items in the closed portfolio should be allocated at the portfolio level and not the individual assets within the portfolio. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-01 prospectively. If an entity elects to early adopt ASU 2022-01 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. ASU 2022-01 did not have an impact on the Company’s Consolidated Financial Statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which removes the accounting guidance for troubled debt restructurings and requires entities to evaluate whether a modification provided to a borrower result in a new loan or continuation of an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-02 when it adopted ASU 2016-13 in January 2023. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2022, as filed in its Annual Report on Form 10-K with the Securities and Exchange Commission ("SEC"). The following is a summary of recent authoritative pronouncements issued but not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance is effective for public companies for fiscal years beginning after December 15, 2023. All other entities have an extra year to adopt; early adoption is permitted. The Company is assessing ASU 2022-03 and its impact on its accounting and disclosures.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is assessing ASU 2023-02 and its impact on its accounting and disclosures.

Business Combinations

3 Months Ended

Mar. 31, 2023

Business Combinations [Abstract]

Business Combinations

Note 2. Business Combinations

Sunbelt Group, LLC

On September 1, 2022, Rains Agency Inc. (“Rains Agency”), an indirect wholly-owned subsidiary of SmartFinancial, Inc., completed the acquisition of substantially all the assets of Sunbelt Group, LLC (“Sunbelt”), a Tennessee limited liability company, pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated September 1, 2022, by and among Rains Agency, Sunbelt, and A. Mark Slater, the sole member of Sunbelt.

In connection with the acquisition, Rains Agency acquired $349 thousand of assets and assumed $364 thousand of liabilities from Sunbelt. Pursuant to the Purchase Agreement, Rains Agency paid an aggregate amount of consideration to Sunbelt of $6.5 million, of which $5.2 million was paid in cash at the closing and the remainder of which will be payable in equal cash installments on September 1, 2023, and September 1, 2024 (the “Deferred Payments”). The Deferred Payments are subject to acceleration in certain circumstances involving a change in control of Rains Agency and are subject to set-off for any indemnification or other obligations of the Sunbelt and its sole member to Rains Agency under the terms of the Purchase Agreement.

The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $4.6 million, representing the intangible value of Sunbelt’s business and reputation within the markets it served. The goodwill recognized is expected to be deductible for income tax purposes. The Company established an intangible asset related to customer relationships of $1.9 million, amortizing sum-of-the-years digits over 168 months (14 years).

The purchased assets and assumed liabilities were recorded at their acquisition date fair values ⁽¹⁾ and are summarized in the table below (in thousands).


			Initial
	As recorded		Fair value		Subsequent		As recorded
	by Sunbelt		adjustments		Adjustments		by the Company
Assets:
Cash & cash equivalents	$	319	$	—	$	—	$	319
Customer list intangible		—		1,948		—		1,948
Equipment, net		13		(13)		—		—
Other assets		17		—		—		17
Total assets acquired	$	349	$	1,935	$	—	$	2,284

Liabilities:
Payables and other liabilities	$	364	$	—	$	—	$	364
Total liabilities assumed		364		—		—		364
Excess of liabilities acquired over assets assumed	$	(15)
Aggregate fair value adjustments			$	1,935	$	—
Total identifiable net assets								1,920
Consideration transferred:
Purchase price								6,500
Total fair value of consideration transferred								6,500

Goodwill							$	4,580

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

Earnings Per Share

3 Months Ended

Mar. 31, 2023

Earnings Per Share [Abstract]

Earnings Per Share

Note 3. Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding stock options and restricted stock. The effect from the stock options and restricted stock on incremental shares from the assumed conversions for net income per share-basic and net income per share-diluted are

presented below. There were no antidilutive shares for the three months ended March 31, 2023, and March 31, 2022, respectively.

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


	Three Months Ended
	March 31,
	2023		2022
Basic earnings per share computation:
Net income available to common shareholders	$	11,500	$	8,259
Average common shares outstanding – basic		16,791,406		16,718,371
Basic earnings per share	$	0.69	$	0.49
Diluted earnings per share computation:
Net income available to common shareholders	$	11,500	$	8,259
Average common shares outstanding – basic		16,791,406		16,718,371
Incremental shares from assumed conversions:
Stock options and restricted stock		105,088		139,917
Average common shares outstanding - diluted		16,896,494		16,858,288
Diluted earnings per common share	$	0.68	$	0.49

Securities

3 Months Ended

Mar. 31, 2023

Securities [Abstract]

Securities

Note 4. Securities

Available-for-sale securities (“AFS”), which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the individual security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in accumulated other comprehensive income (loss). Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the estimated life of the security. Prepayments are anticipated for mortgage-backed and Small Business Administration (“SBA”) securities. Premiums on callable securities are amortized to their earliest call date.

Held-to-maturity securities (“HTM”), which include any security for which the Company has both the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the constant effective yield method over the security’s estimated life. Prepayments are anticipated for mortgage-backed and SBA securities. Premiums on callable securities are amortized to their earliest call date.

The amortized cost, gross unrealized gains and losses and fair value of securities AFS and HTM are summarized as follows (in thousands):


	March 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	241,002	$	—	$	(14,496)	$	226,506
U.S. Government-sponsored enterprises (GSEs)		63,723		1,783		(28)		65,478
Municipal securities		19,022		94		(412)		18,704
Other debt securities		32,952		—		(2,396)		30,556
Mortgage-backed securities (GSEs)		240,767		34		(21,627)		219,174
Total	$	597,466	$	1,911	$	(38,959)	$	560,418


	March 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,243	$	—	$	(4,178)	$	146,065
U.S. Government-sponsored enterprises (GSEs)		50,240		—		(6,983)		43,257
Municipal securities		53,455		—		(6,657)		46,798
Mortgage-backed securities (GSEs)		30,838		—		(3,786)		27,052
Total	$	284,776	$	—	$	(21,604)	$	263,172


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available-for-sale:	Cost		Gains		Losses		Value
U.S. Treasury	$	241,506	$	—	$	(17,853)	$	223,653
U.S. Government-sponsored enterprises (GSEs)		1,593		—		(18)		1,575
Municipal securities		19,210		17		(616)		18,611
Other debt securities		32,959		—		(2,408)		30,551
Mortgage-backed securities (GSEs)		233,948		6		(24,451)		209,503
Total	$	529,216	$	23	$	(45,346)	$	483,893


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Held-to-maturity:	Cost		Gains		Losses		Value
U.S. Treasury	$	150,295	$	—	$	(5,613)	$	144,682
U.S. Government-sponsored enterprises (GSEs)		50,539		—		(8,037)		42,502
Municipal securities		53,694		—		(7,550)		46,144
Mortgage-backed securities (GSEs)		31,421		—		(4,136)		27,285
Total	$	285,949	$	—	$	(25,336)	$	260,613

At March 31, 2023 and December 31, 2022, securities with a carrying value totaling approximately $349.1 million and $304.8 million, respectively, were pledged to secure public funds and securities sold under agreements to repurchase.

The amortized cost and estimated fair value of securities at March 31, 2023 by contractual maturity for non-mortgage backed securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2023
	Amortized		Fair
Available-for-sale:	Cost		Value
Due in one year or less	$	110,981	$	108,256
Due from one year to five years		111,416		103,219
Due from five years to ten years		123,988		119,631
Due after ten years		10,314		10,138
		356,699		341,244
Mortgage-backed securities		240,767		219,174
Total	$	597,466	$	560,418

Held-to-maturity:
Due in one year or less	$	99,946	$	97,148
Due from one year to five years		50,297		48,916
Due from five years to ten years		37,828		33,309
Due after ten years		65,867		56,747
		253,938		236,120
Mortgage-backed securities		30,838		27,052
Total	$	284,776	$	263,172

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


	March 31, 2023
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	3,955	$	(34)	1	$	222,553	$	(14,462)	19	$	226,508	$	(14,496)	20
U.S. Government-sponsored enterprises (GSEs)		8,225		(24)	3		286		(4)	2		8,511		(28)	5
Municipal securities		5,455		(96)	6		8,086		(316)	15		13,541		(412)	21
Other debt securities		13,895		(989)	9		16,660		(1,407)	17		30,555		(2,396)	26
Mortgage-backed securities (GSEs)		51,558		(1,086)	44		164,308		(20,541)	71		215,866		(21,627)	115
Total	$	83,088	$	(2,229)	63	$	411,893	$	(36,730)	124	$	494,981	$	(38,959)	187

	March 31, 2023
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	—	$	—	—	$	146,064	$	(4,178)	4	$	146,064	$	(4,178)	4
U.S. Government-sponsored enterprises (GSEs)		—		—	—		43,257		(6,983)	13		43,257		(6,983)	13
Municipal securities		250		(20)	1		46,549		(6,637)	34		46,799		(6,657)	35
Mortgage-backed securities (GSEs)		—		—	—		27,052		(3,786)	5		27,052		(3,786)	5
Total	$	250	$	(20)	1	$	262,922	$	(21,584)	56	$	263,172	$	(21,604)	57


	December 31, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Available-for-sale:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	134,414	$	(7,610)	9	$	89,239	$	(10,243)	11	$	223,653	$	(17,853)	20
U.S. Government-sponsored enterprises (GSEs)		1,266		(14)	1		309		(4)	2		1,575		(18)	3
Municipal securities		13,146		(616)	20		—		—	—		13,146		(616)	20
Other debt securities		25,044		(1,866)	20		5,506		(542)	6		30,550		(2,408)	26
Mortgage-backed securities (GSEs)		111,598		(8,968)	86		96,285		(15,483)	28		207,883		(24,451)	114
Total	$	285,468	$	(19,074)	136	$	191,339	$	(26,272)	47	$	476,807	$	(45,346)	183

	December 31, 2022
	Less than 12 Months					12 Months or Greater					Total
			Gross		Number			Gross		Number			Gross		Number
	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized		of
Held-to-maturity:	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Securities
U.S. Treasury	$	144,683	$	(5,613)	4	$	—	$	—	—	$	144,683	$	(5,613)	4
U.S. Government-sponsored enterprises (GSEs)	$	13,048	$	(2,503)	3	$	29,451	$	(5,534)	10	$	42,499	$	(8,037)	13
Municipal securities		40,770		(6,387)	28		5,375		(1,163)	7		46,145		(7,550)	35
Mortgage-backed securities (GSEs)		—		—	—		27,285		(4,136)	5		27,285		(4,136)	5
Total	$	198,501	$	(14,503)	35	$	62,111	$	(10,833)	22	$	260,612	$	(25,336)	57

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

Based on this evaluation, the Company concluded that any unrealized losses at March 31, 2023, represented a temporary impairment, as these unrealized losses are primarily attributable to changes in interest rates and current market conditions, and not credit deterioration of the issuers. As of March 31, 2023, the Company does not intend, and will not be required, to sell any of the securities, and expects to recover the entire amortized cost of all of the securities.

Allowance for Credit Losses

The Company adopted ASU 2016-13 on January 1, 2023, and based on the analysis of the underlying risk characteristics of its AFS and HTM portfolios, including credit ratings and other qualitative factors, there was no provision for credit losses related to AFS or HTM securities recorded during the three months ended March 31, 2023, because ACL was deemed immaterial.

Other Investments:

Our other investments consist of restricted non-marketable equity securities that have no readily determinable market value. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value. As of March 31, 2023, the Company determined that there was no impairment on its other investment securities.

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


	March 31,		December 31,
	2023		2022
Federal Reserve Bank stock	$	9,792	$	9,783
Federal Home Loan Bank stock		3,917		5,397
First National Bankers Bank stock		350		350
Total	$	14,059	$	15,530

Loans and Leases and Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

Loans and Leases and Allowance for Loan and Lease Losses

Note 5. Loans and Leases and Allowance for Credit Losses

Portfolio Segmentation:

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


	March 31,		December 31,
	2023		2022
Commercial real estate	$	1,635,534	$	1,627,761
Consumer real estate		606,343		587,977
Construction and land development		386,253		402,501
Commercial and industrial		571,153		551,867
Leases		67,701		67,427
Consumer and other		14,803		16,094
Total loans and leases		3,281,787		3,253,627
Less: Allowance for credit losses		(32,279)		(23,334)
Loans and leases, net	$	3,249,508	$	3,230,293

The loan and lease portfolio is disaggregated into segments. There are six loan and lease portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, leases, 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. 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 and financial 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.

Leases: The lease portfolio segment includes leases to small and mid-size companies for equipment financing leases. These leases are secured by a secured interest in the equipment being leased.

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.

The Bank occasionally enters into loan participation agreements with other banks in the ordinary course of business to diversify credit risk. For certain sold participation loans, the Bank has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from the Bank. GAAP requires the participated portion of these loans to be recorded as secured borrowings. The participated portions of these loans are included in the Commercial Real Estate totals above with a corresponding liability reflected in other borrowings. At March 31, 2023 and December 31, 2022, the balance of such loans totaled $0 and $24.6 million, respectively.

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


	Three Months Ended March 31, 2023
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334
Impact of adopting ASU 2016-13		879		1,952		2,145		1,451		(683)		13		5,757
PCD gross up		2,652		166		25		27		28		—		2,898
Charged-off loans and leases		—		—		—		(173)		(9)		(133)		(315)
Recoveries of charge-offs		2		5		—		20		—		28		55
Provision charged to expense		174		260		(10)		37		8		81		550
Ending balance	$	14,528	$	6,411	$	5,219	$	5,359	$	637	$	125	$	32,279


	Three Months Ended March 31, 2022
			Consumer		Construction		Commercial
	Commercial		Real		and Land		and				Consumer
	Real Estate		Estate		Development		Industrial		Leases		and Other		Total
Beginning balance	$	9,781	$	3,454	$	1,882	$	3,781	$	330	$	124	$	19,352
Charged-off loans and leases		—		(33)		—		(188)		(85)		(182)		(488)
Recoveries of charge-offs		1		7		—		17		157		26		208
Provision charged to expense		623		(40)		238		(109)		146		148		1,006
Ending balance	$	10,405	$	3,388	$	2,120	$	3,501	$	548	$	116	$	20,078

The following tables detail the allowance for credit losses and recorded investment in loans by loan classification and by impairment evaluation method as of December 31, 2022, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


					Construction		Commercial				Consumer
	Commercial		Consumer		and Land		and				and
	Real Estate		Real Estate		Development		Industrial		Leases		Other		Total
December 31, 2022:
Performing loans and leases	$	10,815	$	3,913	$	2,674	$	3,997	$	1,293	$	136	$	22,828
Impaired loans and leases		—		—		385		—		—		—		385
		10,815		3,913		3,059		3,997		1,293		136		23,213
PCI loans and leases		6		115		—		—		—		—		121
Total loans and leases	$	10,821	$	4,028	$	3,059	$	3,997	$	1,293	$	136	$	23,334


					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
December 31, 2022:
Performing loans and leases	$	1,611,815	$	578,342	$	400,114	$	549,974	$	66,459	$	16,091	$	3,222,795
Impaired loans and leases		—		1,283		858		—		—		—		2,141
		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936
PCI loans and leases		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

We maintain the allowance for credit losses at a level that we deem appropriate to adequately cover the expected credit loss in the loan and lease portfolio. Our provision for credit losses for the three ended March 31, 2023, is $550 thousand and $1.0 million during the three months ended March 31, 2022. As of March 31, 2023, and December 31, 2022, our allowance for credit losses was $32.3 million and $23.3 million, respectively, which we deemed to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total loans and leases was 0.98% at March 31, 2023, and 0.72% at December 31, 2022.

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans and leases in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan and lease obligations. Loans and leases 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.

Watch: Loans and leases in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans and leases may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans and leases in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans and leases 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 and leases 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 and leases 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 and leases in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans and leases 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 or lease has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan or lease, even though partial recovery may be obtained in the future. Charge-offs against the allowance for credit losses are taken in the period in which the loan or lease becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans or leases within this category.

The Company evaluates the loan risk grading system definitions and allowance for credit loss methodology on an ongoing basis.

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating based on year of origination (in thousands):


	March 31, 2023
	Loans Amortized Cost Basis by Origination Year
															Revolving
															Loans
													Revolving		Converted
	2023		2022		2021		2020		2019		Prior		Loans		to Term		Total
Commercial real estate
Pass	$	49,648	$	569,114	$	477,163	$	202,863	$	144,939	$	144,968	$	13,309	$	599	$	1,602,603
Watch		2,497		8,236		3,307		2,493		8,427		387		-		-		25,347
Special mention		-		375		304		-		1,656		180		642		-		3,157
Substandard		587		2		3,336		56		-		446		-		-		4,427
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial real estate		52,732		577,727		484,110		205,412		155,022		145,981		13,951		599		1,635,534
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Consumer real estate
Pass		25,091		194,860		115,389		58,731		37,562		66,410		103,080		542		601,665
Watch		319		-		179		146		326		216		451		-		1,637
Special mention		-		-		-		-		-		62		-		-		62
Substandard		202		992		-		-		-		1,723		62		-		2,979
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer real estate		25,612		195,852		115,568		58,877		37,888		68,411		103,593		542		606,343
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Construction and land development
Pass		56,857		216,188		64,077		5,791		5,786		8,545		27,452		-		384,696
Watch		178		50		-		-		-		218		-		-		446
Special mention		-		66		-		-		-		-		-		-		66
Substandard		-		-		38		620		-		387		-		-		1,045
Doubtful		-		-		-		-		-		-		-		-		-
Total construction and land development		57,035		216,304		64,115		6,411		5,786		9,150		27,452		-		386,253
YTD gross charge-offs		-		-		-		-		-		-		-		-		-

Commercial and industrial
Pass		48,067		202,708		87,842		39,714		13,566		29,975		141,902		1,544		565,318
Watch		220		1,184		3,252		168		130		148		455		-		5,557
Special mention		-		41		-		-		-		8		-		-		49
Substandard		-		229		-		-		-		-		-		-		229
Doubtful		-		-		-		-		-		-		-		-		-
Total commercial and industrial		48,287		204,162		91,094		39,882		13,696		30,131		142,357		1,544		571,153
YTD gross charge-offs		-		(65)		(50)		(58)		-		-		-		-		(173)

Leases
Pass		7,703		36,564		13,881		6,875		1,918		760		-		-		67,701
Watch		-		-		-		-		-		-		-		-		-
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Total leases		7,703		36,564		13,881		6,875		1,918		760		-		-		67,701
YTD gross charge-offs		-		-		-		-		(9)		-		-		-		(9)

Consumer and other
Pass		2,012		4,179		1,544		959		200		277		5,614		-		14,785
Watch		-		-		-		-		16		-		-		-		16
Special mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		2		-		-		-		-		2
Doubtful		-		-		-		-		-		-		-		-		-
Total consumer and other		2,012		4,179		1,544		961		216		277		5,614		-		14,803
YTD gross charge-offs		-		(64)		(22)		(14)		(13)		(20)		-		-		(133)

Total loans
Pass		189,378		1,223,613		759,896		314,933		203,971		250,935		291,357		2,685		3,236,768
Watch		3,214		9,470		6,738		2,807		8,899		969		906		-		33,003
Special mention		-		482		304		-		1,656		250		642		-		3,334
Substandard		789		1,223		3,374		678		-		2,556		62		-		8,682
Doubtful		-		-		-		-		-		-		-		-		-
Total loans	$	193,381	$	1,234,788	$	770,312	$	318,418	$	214,526	$	254,710	$	292,967	$	2,685	$	3,281,787
Total YTD gross charge-offs	$	-	$	(129)	$	(72)	$	(72)	$	(22)	$	(20)	$	-	$	-	$	(315)

The following tables outline the amount of each loan and lease classification and the amount categorized into each risk rating as of December 31, 2022, prior to the adoption of ASU 2016-13 (in thousands):


	December 31, 2022
					Construction		Commercial
	Commercial		Consumer		and Land		and				Consumer
Non PCI Loans and Leases:	Real Estate		Real Estate		Development		Industrial		Leases		and Other		Total
Pass	$	1,579,387	$	576,428	$	399,846	$	545,210	$	66,459	$	16,057	$	3,183,387
Watch		29,810		1,496		224		4,523		—		19		36,072
Special mention		2,539		35		—		61		—		—		2,635
Substandard		79		1,666		902		180		—		15		2,842
Doubtful		—		—		—		—		—		—		—
Total		1,611,815		579,625		400,972		549,974		66,459		16,091		3,224,936

PCI Loans and Leases:
Pass		11,924		6,927		1,054		1,893		968		3		22,769
Watch		1,439		188		46		—		—		—		1,673
Special mention		11		54		—		—		—		—		65
Substandard		2,572		1,183		429		—		—		—		4,184
Doubtful		—		—		—		—		—		—		—
Total		15,946		8,352		1,529		1,893		968		3		28,691
Total loans and leases	$	1,627,761	$	587,977	$	402,501	$	551,867	$	67,427	$	16,094	$	3,253,627

Past Due Loans and Leases:

A loan or lease 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 or lease agreement. Generally, management places a loan or lease 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 or lease is 90 days past due.

The following tables present an aging analysis of our loan and lease portfolio (in thousands):


	March 31, 2023
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	274	$	423	$	—	$	697	$	1,634,837	$	1,635,534
Consumer real estate		2,467		250		—		2,717		603,626		606,343
Construction and land development		634		—		—		634		385,619		386,253
Commercial and industrial		388		53		—		441		570,712		571,153
Leases		490		4		—		494		67,207		67,701
Consumer and other		17		—		—		17		14,786		14,803
Total	$	4,270	$	730	$	—	$	5,000	$	3,276,787	$	3,281,787


	December 31, 2022
					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans Not		Total
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial real estate	$	54	$	—	$	—	$	54	$	1,627,707		1,627,761
Consumer real estate		594		—		—		594		587,383		587,977
Construction and land development		—		—		—		—		402,501		402,501
Commercial and industrial		185		18		—		203		551,664		551,867
Leases		1,024		84		143		1,251		66,176		67,427
Consumer and other		103		4		—		107		15,987		16,094
Total	$	1,960	$	106	$	143	$	2,209	$	3,251,418	$	3,253,627

The table below presents the amortized cost basis of loans on nonaccrual status and loans past due 90 or more days and still accruing interest at March 31, 2023 and December 31, 2022. Also presented is the balance of loans on nonaccrual status at March 31, 2023 for which there was no related allowance for credit losses recorded (in thousands):


	March 31, 2023						December 31, 2022
	Total		Nonaccrual		Loans Past Due		Total		Loans Past Due
	Nonaccrual		With No Allowance		Over 90 Days		Nonaccrual		Over 90 Days
	Loans		for Credit Losses		Still Accruing		Loans		Still Accruing
Commercial real estate	$	324	$	—	$	—	$	—	$	—
Consumer real estate		1,825		991		—		1,665		—
Construction and land development		686		—		—		920		—
Commercial and industrial		410		—		—		180		—
Leases		—		—		—		28		143
Consumer and other		2		1		—		15		—
Total	$	3,247	$	992	$	—	$	2,808	$	143

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses (in thousands):


	March 31, 2023
	Real Estate		Other		Total
Commercial real estate	$	3,898	$	—	$	3,898
Consumer real estate		1,373		—		1,373
Construction and land development		1,411		—		1,411
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
Total	$	6,682	$	—	$	6,682

Impaired Loans and Leases:

The following table presents impaired loans at December 31, 2022, as determined under ASC 310 prior to the adoption of ASU 2016-13. A loan or lease held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan or lease agreement. Presented are the recorded investment, unpaid principal balance and related allowance of impaired loans at December 31, 2022, by loan classification (in thousands):


	December 31, 2022
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—	$	—
Consumer real estate		1,283		1,282		—
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,283		1,282		—
Impaired loans and leases with a valuation allowance:
Commercial real estate		—		—		—
Consumer real estate		—		—		—
Construction and land development		858		858		385
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		858		858		385
PCI loans and leases:
Commercial real estate		500		580		6
Consumer real estate		684		646		115
Construction and land development		—		—		—
Commercial and industrial		—		—		—
Leases		—		—		—
Consumer and other		—		—		—
		1,184		1,226		121
Total impaired loans and leases	$	3,325	$	3,366	$	506

The following table details the average recorded investment and the amount of interest income recognized on a cash basis for the three months ended March 31, 2022, respectively, of impaired loans by loan classification as determined under ASC 310 prior to the adoption of ASU 2016-13 (in thousands):


	Three Months Ended March 31,
	2022
	Average		Interest
	Recorded		Income
	Investment		Recognized
Impaired loans and leases without a valuation allowance:
Commercial real estate	$	—	$	—
Consumer real estate		1,937		17
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		—		—
		1,937		17
Impaired loans and leases with a valuation allowance:
Commercial real estate		858		—
Consumer real estate		130		—
Construction and land development		—		—
Commercial and industrial		49		—
Leases		—		—
Consumer and other		—		—
		1,037		—
PCI loans and leases:
Commercial real estate		1,231		24
Consumer real estate		901		16
Construction and land development		—		—
Commercial and industrial		—		—
Leases		—		—
Consumer and other		3		—
		2,135		40
Total impaired loans and leases	$	5,109	$	57

Loan Modifications to Borrowers Experiencing Financial Difficulty:

The Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

At March 31, 2023, the Company had $97 thousand of loan modifications to borrowers experiencing financial difficulty, including $94 thousand of consumer real estate and $3 thousand in consumer and other, none of which were on nonaccrual. These modifications generally consist of payment delay and term extensions.

There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023. There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023, that subsequently defaulted.

As of December 31, 2022, prior to the adoption ASU 2022-02, management had approximately $101 thousand that meet the criteria of trouble debt restructured (“TDR”), none of which were on nonaccrual.

There was one loan for $516 that was modified as a TDR during the three months ended March 31, 2022.

Foreclosure Proceedings and Balances:

As of March 31, 2023, there were two residential real estate properties totaling $314 thousand secured by real estate included in other real estate owned and there were no residential real estate loan in the process of foreclosure.

Goodwill and Intangible Assets

3 Months Ended

Mar. 31, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Note 6. Goodwill and Intangible Assets

In accordance with FASB ASC 350, Goodwill and Other, regarding testing goodwill for impairment provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company performs its annual goodwill impairment test as of December 31 of each year. For 2022, the results of the qualitative assessment provided no indication of potential impairment.

The Company’s other intangible assets consist of core deposit, customer relationships and tradename. They are initially recognized based on a valuation performed as of the consummation date. The core deposit intangible is amortized over the average remaining life of the acquired customer deposits, the customer relationships are amortized over a weighted average of 10.4 years and the tradename is amortized over five years.

The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands):


	March 31,		December 31,
	2023		2022
Goodwill:
Balance, beginning of period	$	96,145	$	91,565
Acquisition of Sunbelt		—		4,580
Balance, end of the period	$	96,145	$	96,145


	Core Deposit		Customer Relationships		Tradename
Amortized other intangible assets:	Intangibles		Intangibles		Intangibles		Total
March 31, 2023:
Beginning balance January 1, 2023, gross	$	17,470	$	5,670	$	63	$	23,203
Less: accumulated amortization		(8,461)		(1,734)		(39)		(10,234)
Balance, March 31, 2023, other intangible assets, net	$	9,009	$	3,936	$	24	$	12,969

December 31, 2022:
Beginning balance January 1, 2022, gross	$	17,470	$	3,722	$	63	$	21,255
Acquisition of Sunbelt		-		1,948		-		1,948
Balance, December 31, 2022, other intangible assets, gross		17,470		5,670		63		23,203
Less: accumulated amortization		(8,021)		(1,519)		(36)		(9,576)
Balance, December 31, 2022, other intangible assets, net	$	9,449	$	4,151	$	27	$	13,627

The aggregate amortization expense for other intangible assets for the three months ended March 31, 2023, and 2022, was $659 thousand and $637 thousand, respectively.

As of March 31, 2023, the estimated aggregate amortization expense for future periods for intangibles is as follows (in thousands):


Remainder of 2023	$	1,951
2024		2,438
2025		2,258
2026		2,086
2027		1,904
Thereafter		2,332
Total	$	12,969

Borrowings, Line of Credit and Subordinated Debt

3 Months Ended

Mar. 31, 2023

Borrowings, Line of Credit and Subordinated Debt [Abstract]

Borrowings, Line of Credit and Subordinated Debt

Note 7. Borrowings, Line of Credit and Subordinated Debt

Borrowings:

At March 31, 2023, total borrowings were $16.5 million compared to $41.9 million at December 31, 2022. Borrowings consist of the following (dollars in thousands):


	March 31,		December 31,
	2023		2022
Securities sold under customer repurchase agreements	$	4,046	$	4,775
Loan participation agreements⁽¹⁾		—		24,585
Other borrowings		12,500		12,500
Total	$	16,546	$	41,860

(1)

During the three month period ending March 31, 2023, the loan participation agreements were amended to permit sales accounting treatment and removed from other borrowings.

Securities Sold Under Agreements to Repurchase:

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis.

The Company had securities sold under agreements to repurchase with commercial checking customers which were secured by government agency securities. The carrying value of investment securities pledged as collateral under repurchase agreements was $8.6 million and $9.2 million at March 31, 2023 and December 31, 2022, respectively. The average balance during the three month period March 31, 2023, and 2022 was $4.4 million and $5.0 million, respectively. The maximum month-end outstanding balance for the three month period ended March 31, 2023, and 2022 was $4.2 million and $5.5 million, respectively.

Other Borrowings:

The Company has a Loan and Security Agreement and revolving line of credit for an aggregate amount of $35 million. The maturity of the line of credit is February 1, 2025. At March 31, 2023, $12.5 million was outstanding under the line of credit, and $22.5 million of the line of credit remained available to the Company.

Subordinated Debt:

On September 28, 2018, the Company issued $40 million of 5.625% fixed-to-floating rate subordinated notes (the "Notes"), which was outstanding as of March 31, 2023 and December 31, 2022. Unamortized debt issuance cost was $464 thousand and $485 thousand at March 31, 2023 and December 31, 2022, respectively.

The Notes initially bears interest at a rate of 5.625% per annum from and including September 28, 2018, to but excluding October 2, 2023, with interest during this period payable semi-annually in arrears. From and including October 2, 2023, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, or an alternative rate determined in accordance with the terms of the Notes if three-month LIBOR cannot be determined, plus 255 basis points, with interest during this period payable quarterly in arrears. In relation to the three-month LIBOR rate being no longer available in the future, the Company anticipates using the three-month term SOFR rate in future repricing. The Notes are redeemable by the Company, in whole or in part, on or after October 2, 2023, and at any time, in whole but not in part, upon the occurrence of certain events. The Notes have been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

The Notes’ unamortized debt issuance costs totaled $464 thousand at March 31, 2023, and will be amortized through the Notes’ maturity date. Amortization expense totaled $21 thousand for the three months ended March 31, 2023, and 2022, respectively.

On September 1, 2021, the Company acquired $2.5 million of subordinated notes (“sub-debt”) from the acquisition of SCB. The sub-debt bears interest at a rate of 6.75% per annum until August 14, 2024, with the interest during this period payable semi-annually in arrears. From and including August 14, 2024, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month LIBOR, or an alternative rate determined in accordance with the terms of the sub-debt if three-month LIBOR cannot be determined, plus 530.25 basis points, with interest during this period payable quarterly in arrears. In relation to the three-month LIBOR rate being no longer available in the future, the Company anticipates using the three-month term SOFR rate in future repricing. The sub-debt is redeemable by the Company, in whole or in part, on or after August 14, 2024, and at any time, in whole but not in part, upon the occurrence of certain events. The sub-debt has been structured to qualify initially as Tier 2 capital for the Company for regulatory capital purposes.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-URI https://asc.fasb.org/topic&trid=2208564

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1B
-Subparagraph (h)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611

Reference 3: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1C
-Subparagraph (c)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611

Reference 4: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1I
-Subparagraph (a)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611

Reference 5: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1I
-Subparagraph (d)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611

Reference 6: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08(c))
-URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690

Reference 7: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1B
-Subparagraph (g)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611

Reference 8: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1C
-Subparagraph (b)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611

Reference 9: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1C
-Subparagraph (a)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611

Reference 10: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1E
-Subparagraph (b)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495348-112611

Reference 11: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1B
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611

Reference 12: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1I
-Subparagraph (b)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611

Reference 13: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 470
-SubTopic 20
-Section 50
-Paragraph 1B
-Subparagraph (i)
-URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611

+ Details

Employee Benefit Plans

3 Months Ended

Mar. 31, 2023

Defined Benefit Plan [Abstract]

Employee Benefit Plans

Note 8. 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 90 days of service, the Company matches 100% of employee contributions up to 3% of compensation and 50% of employee contributions on the next 2% of compensation. The Company’s contribution to the Plan for the three month periods ending March 31, 2023 and 2022, respectively, was $466 thousand and $393 thousand.

Equity Incentive Plans:

The Compensation Committee of the Company’s Board of Directors may grant or award eligible participants stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards or any combination of awards (collectively referred to herein as "Rights"). At March 31, 2023, the Company had one active equity incentive plan available for future grants, the 2015 Stock Incentive Plan, which has 1,676,663 Rights available for future grants or awards.

The Company’s 2015 Stock Incentive Plan has 11,840 Rights issued. In addition, the Company has 4,500 Rights issued from the Cornerstone Non-Qualified Plan Options, which does not have any Rights available for future grants or awards.

Stock Options:

A summary of the status of stock option plans is presented in the following table:


		Weighted
		Average
		Exercisable
	Number	Price
Outstanding at December 31, 2022	32,045	$	12.04
Granted	—		—
Exercised	(15,705)		10.47
Forfeited	—		—
Outstanding at March 31, 2023	16,340	$	13.55

Information pertaining to stock options outstanding at March 31, 2023, is as follows:


		Options Outstanding				Options Exercisable
			Weighted-
			Average	Weighted-			Weighted-
			Remaining	Average			Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life	Price		Exercisable	Price
$	9.60	4,500	0.92 years	$	9.60	4,500	$	9.60
	15.05	11,840	2.50 years		15.05	11,840		15.05
Outstanding, end of period		16,340	2.07 years	$	13.55	16,340	$	13.55

The Company did not recognize any stock option-based compensation expense during the three months ended March 31, 2023 and 2022, respectively, as all stock options issued are fully vested, and no future compensation cost will be recognized related to nonvested stock-based compensation arrangements granted under the Plans.

The intrinsic value of options exercised during the three months ended March 31, 2023, and 2022, was $242 thousand and $506 thousand, respectively. The aggregate intrinsic value of total options outstanding and exercisable options at March 31, 2023, was $157 thousand. Cash received from options exercised under all share-based payment arrangements for the three months ended March 31, 2023, was $165 thousand.

Stock options of 15,705 and 27,550 shares were exercised during the three month periods ended March 31, 2023, and 2022, respectively. The income tax benefit recognized for the exercise of options during the three months ended March 31, 2023, and 2022, was a $65 thousand and $76 thousand, respectively.

Restricted Stock Awards:

A summary of the activity of the Company’s unvested restricted stock awards for the period ended March 31, 2023, is presented below:


		Weighted
		Average
		Grant-Date
	Number	Fair Value
Balance at December 31, 2022	129,836	$	19.61
Granted	89,582		26.23
Vested	(13,913)		25.82
Forfeited/expired	(2,000)		17.56
Balance at March 31, 2023	203,505	$	22.12

The Company measures the fair value of restricted stock awards based on the price of the Company’s common stock on the grant date, and compensation expense is recorded over the vesting period. The compensation expense for restricted stock awards during the three months ended March 31, 2023, and 2022, was $538 thousand and $312 thousand, respectively. As of March 31, 2023, there was $2.5 million of unrecognized compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of 2.35 years. The grant-date fair value of restricted stock awards vested was $359 thousand for the three months ended March 31, 2023.

Stock Appreciation Rights ("SARs"):

A summary of the status of SARs plans is presented in the following table:


		Weighted
		Average
	Number	Exercisable Price
Outstanding at December 31, 2022	36,000	$	18.25
Granted	—		—
Exercised	(2,000)		15.19
Forfeited	—		—
Outstanding at March 31, 2023	34,000	$	18.43

Information pertaining to SARs outstanding at March 31, 2023, is as follows:


		SARs Outstanding				SARs Exercisable
			Weighted-
			Average	Weighted-
			Remaining	Average			Weighted- Average
Exercise		Number	Contractual	Exercise		Number	Exercise
Prices		Outstanding	Life		Price	Exercisable	Price
$	15.19	14,000	0.75 years	$	15.19	14,000	$	15.19
	20.70	20,000	1.76 years		20.70	—		—
	Outstanding, end of period	34,000	1.34 years	$	18.43	14,000	$	15.19

SARs compensation expense of ($95) thousand and ($26) thousand was recognized for the three month periods ended March 31, 2023, and 2022, respectively. The credit in expense for the three month periods ended March 31, 2023, and 2022, respectively, was due to adjustments related to the fair value evaluation of SARs.

Commitments and Contingencies

3 Months Ended

Mar. 31, 2023

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 9. Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing and depository needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized on the balance sheet. The majority of all commitments to extend credit are variable rate instruments while the standby letters of credit are primarily fixed rate instruments. The Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

A summary of the Company’s total contractual amount for all off-balance sheet commitments are as follows (in thousands):


	March 31,		December 31,
	2023		2022
Commitments to extend credit	$	822,831	$	911,998
Standby letters of credit		15,834		6,897

At March 31, 2023, and December 31, 2022, the allowance for these off-balance sheet commitments was $3.2 million and $85 thousand, respectively. With the adoption of ASU 2016-13, effective January 1, 2023, there was an increase in the allowance of $3.0 million on these off-balance sheet commitments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit issued by the Company are conditional commitments to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary. At March 31, 2023 and December 31, 2022, the carrying amount of liabilities related to the Company’s obligation to perform under standby letters of credit was insignificant.

The Company is subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company will be material to the Company’s consolidated financial position. On an on-going basis, the Company assesses any potential liabilities or contingencies in connection with such legal proceedings. For those matters where it is deemed probable that the Company will incur losses and the amount of the losses can be reasonably estimated, the Company would record an expense and corresponding liability in its consolidated financial statements.

Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2023

Fair Value of Assets and Liabilities [Abstract]

Fair Value of Assets and Liabilities

Note 10. 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 business at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy:

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 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 methodologies were used by the Company in estimating fair value disclosures for financial instruments:

Securities available-for-sale - The fair value of U.S. Treasury, U.S. Government-sponsored enterprises, municipal securities, other debt securities and mortgage-backed securities, is estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2.

Derivative financial instruments and interest rate swap agreements - The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters. The derivative financial instruments are generally classified Level 2.

Recurring Measurements of Fair Value:

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands):


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2023:
Assets:
Securities available-for-sale:
U.S. Treasury	$	226,506	$	—	$	226,506	$	—
U.S. Government-sponsored enterprises (GSEs)		65,478		—		65,478		—
Municipal securities		18,704		—		18,704		—
Other debt securities		30,556		—		30,556		—
Mortgage-backed securities (GSEs)		219,174		—		219,174		—
Total securities available-for-sale		560,418		—		560,418		—

Derivative financial instruments and interest rate swap agreements		10,090		—		10,090		—
Total assets at fair value	$	570,508	$	—	$	570,508	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	10,639	$	—	$	10,639	$	—

December 31, 2022:
Assets:
Securities available-for-sale:
U.S. Treasury	$	223,653	$	—	$	223,653	$	—
U.S. Government-sponsored enterprises (GSEs)		1,575		—		1,575		—
Municipal securities		18,611		—		18,611		—
Other debt securities		30,551		—		30,551		—
Mortgage-backed securities (GSEs)		209,503		—		209,503		—
Total securities available-for-sale		483,893		—		483,893		—

Derivative financial instruments and interest rate swap agreements		11,834		—		11,834		—
Total assets at fair value	$	495,727	$	—	$	495,727	$	—

Liabilities:
Derivative financial instruments and interest rate swap agreements	$	13,110	$	—	$	13,110	$	—

During the three months ending March 31, 2023, 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 adjusts 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):


			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2023:
Collateral dependent loans	$	3,247	$	—	$	—	$	3,247
Other real estate owned		272		—		—		272

December 31, 2022:
Collateral dependent loans⁽¹⁾	$	1,536	$	—	$	—	$	1,536
Other real estate owned		915		—		—		915

(1)

Amount is net of valuation allowance of $506 thousand at December 31, 2022 as required by ASC 310-10, “Receivables”, prior to the adoption of ASU 2016-13.

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below (dollars in thousands):


					Weighted
			Valuation	Significant Other	Average of
	Fair Value		Technique	Unobservable Input	Input
March 31, 2023:
Collateral dependent loans	$	3,247	Appraisal	Appraisal discounts	54	%
Other real estate owned		272	Appraisal	Appraisal discounts	27	%

December 31, 2022:
Collateral dependent loans	$	1,536	Appraisal	Appraisal discounts	25	%
Other real estate owned		915	Appraisal	Appraisal discounts	29	%

Collateral dependent loans: A collateral dependent loan is measured based on the fair value of the collateral securing these loans, less selling costs. Collateral dependent 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. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Other real estate owned: Other real estate owned, 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, the difference is recognized in noninterest expense.

Carrying value and estimated fair value:

The carrying amount and estimated fair value of the Company’s financial instruments are as follows (in thousands):


	Fair Value Measurements Using
	Carrying								Estimated
	Amount		Level 1		Level 2		Level 3		Fair Value
March 31, 2023:
Assets:
Cash and cash equivalents	$	306,934	$	306,934	$	—	$	—	$	306,934
Securities available-for-sale		560,418		—		560,418		—		560,418
Securities held-to-maturity		284,776		—		263,172		—		263,172
Other investments		14,059		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,252,832		—		—		3,150,135		3,150,135
Derivative financial instruments and interest rate swap agreements		10,090		—		10,090		—		10,090

Liabilities:
Noninterest-bearing demand deposits		989,753		—		989,753		—		989,753
Interest-bearing demand deposits		989,738		—		989,738		—		989,738
Money market and savings deposits		1,761,847		—		1,761,847		—		1,761,847
Time deposits		488,208		—		486,531		—		486,531
Borrowings		16,546		—		16,546		—		16,546
Subordinated debt		42,036		—		—		40,264		40,264
Derivative financial instruments and interest rate swap agreements		10,639		—		10,639		—		10,639

December 31, 2022:
Assets:
Cash and cash equivalents	$	266,424	$	266,424	$	—	$	—	$	266,424
Securities available-for-sale		483,893		—		483,893		—		483,893
Securities held-to-maturity		285,949		—		260,613				260,613
Other investments		15,530		N/A		N/A		N/A		N/A
Loans and leases, net and loans held for sale		3,232,045		—		—		3,143,921		3,143,921
Derivative financial instruments and interest rate swap agreements		11,834		—		11,834		—		11,834

Liabilities:
Noninterest-bearing demand deposits		1,072,449		—		1,072,449		—		1,072,449
Interest-bearing demand deposits		965,911		—		965,911		—		965,911
Money market and savings deposits		1,583,481		—		1,583,481		—		1,583,481
Time deposits		455,259		—		451,899		—		451,899
Borrowings		41,860		—		41,860		—		41,860
Subordinated debt		42,015		—		—		40,439		40,439
Derivative financial instruments and interest rate swap agreements		13,110		—		13,110		—		13,110

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. 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 unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Derivatives Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Financial Instruments

Note 11.Derivatives Financial Instruments

Derivatives designated as fair value hedges:

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative net investment hedge instrument, as well as the offsetting gain or loss on the hedged asset or liability attributable to the hedged risk, are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate tax-exempt callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. The Company has adopted ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which allows such partial term hedge designations. During the fourth quarter of 2022 the Company dissolved this hedging relationship.

The effects of the Company’s fair value hedge relationships reported in interest income on tax-exempt available-for-sale securities on the consolidated income statement were as follows (in thousands):


	Three Months Ended
	March 31,
	2022
Interest income on tax-exempt securities	$	393
Effects of fair value hedge relationships		(254)
Reported interest income on tax-exempt securities	$	139


	Three Months Ended
	March 31,
Gain (loss) on fair value hedging relationship	2022
Interest rate swap agreements – securities:
Hedged items	$	(1,218)
Derivative designated as hedging instruments		1,218
Carry amount of hedged assets – securities available-for-sale		40,125

Derivatives Designated as Cash Flow Hedges:

During the third quarter of 2022, the Company entered into interest rate derivatives contracts that were designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. Specifically, the Company executed $100 million, notional amount, in interest rate collars to hedge the variable rate index on a portion of the Company’s commercial loan portfolio. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception, a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective then hedge accounting ceases and any gain or loss in accumulated other comprehensive income (“AOCI”) is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax, see - Consolidated Statements of Comprehensive Income (Loss). Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset, as future interest payments are made on the underlying assets. At March 31, 2023, he Company estimates that an additional $83 thousand will be reclassified as a decrease in interest income in the next 12 months.

At March 31, 2023 and December 31, 2022, cash flow hedges are as follows (in thousands):


		March 31, 2023				December 31, 2022
	Balance Sheet	Notional		Estimated		Notional		Estimated
	Location	Amount		Fair Value		Amount		Fair Value
Cash flow hedges:
Assets	Other assets	$	-	$	-	$	-	$	-
Liabilities	Other liabilities		100,000		(586)		100,000		(1,304)

The following table presents the effect of fair value and cash flow hedge accounting on AOCI (in thousands):



Derivatives in cash flow hedging relationships:		Amount of Gain (Loss) Recognized on OCI on Derivative		Amount of Gain or (Loss) Recognized from OCI Included	Location of Gain or (Loss) Recognized from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component
Three months ended March 31, 2023
Interest rate swaps	$	(581)	$	(581)	Interest income	$	(6)	$	(6)

Three months ended March 31, 2022
Interest rate swaps	$	—	$	—	—	$	—	$	—

The following table presents the effect of fair value and cash flow hedge accounting on the income statement (in thousands):


	Three Months Ended
	March 31,
	2023		2022
Total interest income	$	53,184	$	—
Effects of cash flow hedge relationships		(6)		—
Reported total interest income	$	53,178	$	—

Non-hedged derivatives:

During the second quarter of 2021, the Company initiated a loan hedging program to certain loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the customer will then enter into a fixed interest rate swap. Lastly, an identical offsetting swap is entered into by the Company with a dealer bank. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Since the income statement impact of the offsetting positions is limited, any changes in fair value are recognized as other noninterest income in the current period.

At March 31, 2023 and December 31, 2022, interest rate swaps related to the Company’s loan hedging program that were outstanding are presented in the following table (in thousands):


	March 31, 2023				December 31, 2022
		Notional		Estimated		Notional		Estimated
		Amount		Fair Value		Amount		Fair Value
Interest rate swap agreements:
Assets	$	233,181	$	10,090	$	216,656	$	11,834
Liabilities		233,181		(10,090)		216,656		(11,834)

The Company establishes limits and monitors exposures for customer swap positions. Any fees received to enter the swap agreements at inception are recognized in earnings when received and is included in noninterest income. Such fees were as follows (in thousands):

Collateral requirements:

These derivative rate contracts have collateral requirements, both at inception of the trade and as the value of each derivative position changes. At March 31, 2023 and December 31, 2022, collateral totaling $1.4 million, respectively, was pledged to the derivative counterparties to comply with collateral requirements.

Leases

3 Months Ended

Mar. 31, 2023

Leases [Abstract]

Leases

Note 12. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company follows the guidance of ASU No. 2016-02 and all subsequent ASUs that modified this topic (collectively referred to as "Topic 842").

Substantially all of the leases in which the Company is the lessee are comprised of real estate for branches and office space with terms extending through 2034. All of our leases are classified as operating leases. Operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.

The following table represents the consolidated balance sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet (in thousands):


		March 31,		December 31,
	Classification	2023		2022
Assets:
Operating lease right-of-use assets	Other assets	$	8,963	$	9,314
Liabilities:
Operating lease liabilities	Other liabilities	$	9,130	$	9,457

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

As of March 31, 2023, the weighted average remaining lease term was 9.07 years and the weighted average discount rate was 2.37%.

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance (in thousands).


	Three Months Ended
	March 31,
	2023		2022
Lease costs:
Operating lease costs	$	404	$	414
Variable lease costs		23		25
Total	$	427	$	439
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	379	$	396

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2023, were as follows (in thousands):


	Amounts
Remainder of 2023	$	1,021
2024		1,260
2025		1,193
2026		1,095
2027		889
Thereafter		4,772
Total future minimum lease payments		10,230
Amounts representing interest		(1,100)
Present value of net future minimum lease payments	$	9,130

Regulatory Matters

3 Months Ended

Mar. 31, 2023

Banking and Thrift [Abstract]

Regulatory Matters

Note 13. Regulatory Matters

Regulatory Capital Requirements:

The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective January 1, 2015. In order to avoid restrictions on capital distributions and discretionary bonus payments to executives, under the new rules a covered banking organization is also required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements. This buffer is required to consist solely of common equity Tier 1, and the buffer applies to all three risk-based measurements (CET1, Tier 1 capital and total capital). As of January 1, 2019, an additional amount of Tier 1 common equity equal to 2.5% of risk-weighted assets is required for compliance with the capital conservation buffer. The ratios for the Company and the Bank are currently sufficient to satisfy the fully phased-in conservation buffer. At March 31, 2023, the Company and the Bank exceeded the minimum regulatory requirements and exceeded the threshold for the "well capitalized" regulatory classification.

In December 2018, the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “agencies”) issued a final rule revising regulatory capital rules in anticipation of the adoption of ASU 2016-13 that provided an option to phase in over a three year period on a straight line basis the day-one impact of the adoption on earnings and tier one capital. The Company adopted ASU 2016-13 on January 1, 2023, and has chosen the three year phase in option.

Regulatory Restrictions on Dividends:

Pursuant to Tennessee banking law, the Bank may not, without the prior consent of the Commissioner of the Tennessee Department of Financial Institutions (the “TDFI”), pay any dividends to the Company in a calendar year in excess of the total of the Bank’s retained net income for that year plus the retained net income for the preceding two years. Because this test involves a measure of net income, any charge on the Bank’s income statement, such as an impairment of goodwill, could impair the Bank’s ability to pay dividends to the Company. Under Tennessee corporate law, the Company is not permitted to pay dividends if, after giving effect to such payment, it would not be able to pay its debts as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether to declare a dividend of any particular size, the Company’s board of directors must consider its and the Bank’s current and prospective capital, liquidity, and other needs. In addition to state law limitations on the Company’s ability to pay dividends, the Federal Reserve imposes limitations on the Company’s ability to pay dividends. Federal Reserve regulations limit dividends, stock repurchases and discretionary bonuses to executive officers if the Company’s regulatory capital is below the level of regulatory minimums plus the applicable capital conservation buffer.

During the three months ended March 31, 2023, the Bank did not pay a dividend and the Company paid a quarterly common stock dividend of $0.08 per share. The amount and timing of all future dividend payments by the Company, if any, is subject to discretion of the Company’s board of directors and will depend on the Company’s earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to the Company.

Regulatory Capital Levels:

Actual and required capital levels at March 31, 2023, and December 31, 2022 are presented below (dollars in thousands):


									Minimum to be
									well
									capitalized under
					Minimum for				prompt
					capital				corrective action
		Actual			adequacy purposes				provisions¹
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2023
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	438,163	11.77	%	$	297,854	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		370,339	9.95	%		223,391	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		370,339	9.95	%		167,543	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)²		370,339	7.91	%		187,364	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	441,097	11.85	%	$	297,853	8.00	%	$	372,316	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		415,309	11.15	%		223,390	6.00	%		297,853	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		415,309	11.15	%		167,542	4.50	%		242,005	6.50	%
Tier 1 Capital (to Average Assets)²		415,309	8.87	%		187,358	4.00	%		234,198	5.00	%

December 31, 2022
SmartFinancial:
Total Capital (to Risk Weighted Assets)	$	425,957	11.40	%	$	298,966	8.00	%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		360,608	9.65	%		224,224	6.00	%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		360,608	9.65	%		168,168	4.50	%		N/A	N/A
Tier 1 Capital (to Average Assets)		360,608	7.95	%		181,387	4.00	%		N/A	N/A

SmartBank:
Total Capital (to Risk Weighted Assets)	$	426,947	11.44	%	$	298,476	8.00	%	$	373,094	10.00	%
Tier 1 Capital (to Risk Weighted Assets)		403,613	10.82	%		223,857	6.00	%		298,476	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		403,613	10.82	%		167,892	4.50	%		242,511	6.50	%
Tier 1 Capital (to Average Assets)		403,613	8.90	%		181,383	4.00	%		226,729	5.00	%

¹The prompt corrective action provisions are applicable at the Bank level only.

²Average assets for the above calculations were based on the most recent quarter.

- Definition

The entire disclosure for regulatory capital requirement for depository and lending institutions. Institutions include, but not are not limited to, finance company, insured depository institution, bank holding company, savings and loan association holding company, bank and savings institution not federally insured, mortgage company, foreign financial institution and credit union.

+ References + Details

Other comprehensive income (loss)

3 Months Ended

Mar. 31, 2023

Equity [Abstract]

Other comprehensive income (loss)

Note 14. Other Comprehensive Income (Loss)

The changes in each component of accumulated other comprehensive income (loss), presented net of tax, were as follows (in thousands):


	Three Months Ended March 31, 2023
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2022	$	(33,616)	$	(742)	$	—	$	(966)	$	(35,324)

Other comprehensive income		6,138		—		—		536		6,674
Reclassification of amounts included in net income		—		30		—		—		30
Net other comprehensive income during period		6,138		30		—		536		6,704

Ending balance, March 31, 2023	$	(27,478)	$	(712)	$	—	$	(430)	$	(28,620)

	Three Months Ended March 31, 2022
									Accumulated
	Securities		Securities		Fair Value				Other
	Available-for-		Transferred to		Municipal		Cash Flow		Comprehensive
	Sale		Held-to-Maturity		Security Hedges		Hedges		Income (Loss)
Beginning balance, December 31, 2021	$	25	$	665	$	753	$	—	$	1,443

Other comprehensive income (loss)		(15,092)		(1,490)		(409)		—		(16,991)
Reclassification of amounts included in net income		—		(8)		—		—		(8)
Net other comprehensive income (loss) during period		(15,092)		(1,498)		(409)		—		(16,999)

Ending balance, March 31, 2022	$	(15,067)	$	(833)	$	344	$	—	$	(15,556)

Presentation of Financial Information (Policies)

3 Months Ended

Mar. 31, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of Business

Nature of Business:

SmartFinancial, Inc. (the "Company," “SmartFinancial,” “we,” “our” or “us”) 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 East and Middle Tennessee, Alabama, and the Florida Panhandle. The Bank’s primary deposit products are noninterest-bearing and interest-bearing demand deposits, savings and money market deposits, and time deposits. Its primary lending products are commercial, residential, and consumer loans.

Basis of Presentation and Accounting Estimates

Basis of Presentation and Accounting Estimates:

The accounting and financial reporting policies of the Company and its wholly owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements for the Company and its wholly owned subsidiary have not been audited. All material intercompany balances and transactions have been eliminated.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, the valuation of foreclosed assets and deferred taxes, other than temporary impairments of securities, the fair value of financial instruments, goodwill, and the fair value of assets acquired, and liabilities assumed in acquisitions. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2022.

Allowance for Credit Losses ("ACL")

Three Months Ended

March 31,

Interest rate swap agreements