SMARTFINANCIAL INC. MANAGEMENT REPORT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
The following is a discussion of our financial condition and results of our operations for the years endedDecember 31, 2021 and 2020 and our results of operations for each of the years in the three-year period endedDecember 31, 2021 , 2020 and 2019. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the "Forward-Looking Statements" and "Risk Factors" sections of this Annual Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.
Company overview
We are a bank holding company that was incorporated onSeptember 19, 1983 under the laws of theState of Tennessee , and operate primarily through our wholly-owned bank subsidiary,SmartBank . AtDecember 31, 2021 the Bank provides a comprehensive suite of commercial and consumer banking services to clients through 40 full-service bank branches and three loan production offices in select markets in East and Middle Tennessee,Alabama and the FloridaPanhandle . While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans and leases to individuals for a variety of purposes. Our principal sources of funds for loans and leases and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including checking ("NOW"), savings, money market accounts and certificates of deposit. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas. Executive Summary
The following is a summary of the Company’s financial highlights and significant events in 2021:
? Completion of acquisitions and integration of
(“Fountain”) and Sevier County Bancshares, Inc. (“SCB”).
? Continued to create approximately 1,801 paycheck protection programs
(“PPP”) loans totaling
Total net income
? fiscal year ended in 2021 compared to
share, for the same period in 2020.
? Ended 2021 with record total assets of
billion and deposits of
? Return on average assets was 0.91% for the year ended
compared to 0.79% for the year ended
? Successful completion of the facelift of an experienced banking team in the Gulf
Hiring of experienced members of the commercial banking team in
? and
? Successfully completed raising a Gulf Coast Wealth Management Team
manager
? In the
relationship managers.
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Analysis of operating results
2021 vs. 2020
Net income was$34.8 million , or$2.22 per diluted common share in 2021, compared to$24.3 million , or$1.62 per diluted common share in 2020. The tax equivalent net interest margin for 2021 was 3.24% compared to 3.61% for 2020. Noninterest income to average assets was 0.62% for 2021, increasing from 0.50% for 2020. Noninterest expense to average assets decreased to 2.38% in 2021, from 2.50% in 2020. The results above include operating effects of the Fountain and SCB acquisitions, which were completed onMay 3, 2021 , andSeptember 1, 2021 , respectively. Income tax expense was$9.5 million in 2021 with an effective tax rate of 21.5%, compared to$6.6 million in 2020 with an effective tax rate
of 21.2%. 2020 compared to 2019 Net income was$24.3 million , or$1.62 per diluted common share in 2020, compared to$26.5 million , or$1.89 per diluted common share in 2019. The tax equivalent net interest margin for 2020 was 3.61% compared to 3.95% for 2019. Noninterest income to average assets was 0.50% for 2020, decreasing from 0.65% for 2019. Noninterest expense to average assets decreased to 2.50% in 2020, from 2.70% in 2019. The results above include operating effects of the PFG acquisition, which was completed onMarch 1, 2020 . Income tax expense was$6.6 million in 2020 with an effective tax rate of 21.2%, compared to$6.9 million in 2019 with an effective tax rate of 20.6%.
Net Interest Income and Yield Analysis
The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company's total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-earning assets and interest-bearing liabilities. Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.
2021 vs. 2020
Net interest income, taxable equivalent, increased to$114.0 million in 2021 from$101.4 million in 2020. Average earning assets increased from$2.8 billion in 2020 to$3.5 billion in 2021, primarily as a result of the acquisition of PFG completedMarch 1, 2020 , the acquisition of Fountain completedMay 3, 2021 , the acquisition of SCB completedSeptember 1, 2021 , participation in the PPP and continued organic loan and lease growth. Over this period, average loan and lease balances increased by$245.4 million , average interest-earning cash and federal funds sold increased by$372.1 million and average securities increased by$93.5 million . Average interest-bearing deposits increased by$552.5 million , average noninterest-bearing deposits increased$270.5 million and average borrowings decreased$94.1 million . The tax equivalent net interest margin decreased to 3.24% for 2021, compared to 3.61% for 2020. The yield on earning assets decreased from 4.20% for 2020, to 3.57% for 2021, primarily due to the on-going effects of rate cuts by theFederal Reserve during the first quarter of 2020, to a lesser extent loan yields declining from market competition and lower yielding excess liquidity, offset by PPP fee accretion and loan fees. The cost of average interest-bearing deposits decreased from 0.71% for 2020, to 0.36% for 2021, primarily due to a lower interest rate environment during the period. 2020 compared to 2019 Net interest income, taxable equivalent, increased to$101.4 million in 2020 from$84.3 million in 2019. Net interest income was positively impacted, compared to the prior year, primarily due to increases in loan balances and a reduction in interest expense on deposits. Average earning assets increased from$2.1 billion in 2019 to$2.8 billion in 2020, primarily as a result of the acquisition of PFG completedMarch 1, 2020 , organic loan growth and the Company's participation in the PPP. Over this period, average loan balances increased by$452.6 million , average interest-bearing 35
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deposits increased by$290.3 million , average noninterest-bearing deposits increased$227.7 million and average borrowings increased$155.7 million . The tax equivalent net interest margin decreased to 3.61% for 2020, compared to 3.95% for 2019. The yield on earning assets decreased from 5.10% for 2019, to 4.20% for 2020, primarily due to rate cuts by theFederal Reserve over the past year and, to a lesser extent loan yields declining from market competition. The cost of average interest-bearing deposits decreased from 1.35% for 2019, to 0.71% for 2020, primarily due to a lower interest rate environment during the period.
Summary of average balances, interest and rates
The following table presents, for the periods indicated, information about:
(i) weighted average balances, the total dollar amount of interest income from
interest-earning assets and the resultant average yields; (ii) average balances,
the total dollar amount of interest expense on interest-bearing liabilities and
the resultant average rates; (iii) net interest income; (iv) the interest rate
spread; and (v) the net interest margin.
2021 2020 2019
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets:
Loans and leases, including
fees1 $ 2,535,006 $ 118,332 4.67 % $ 2,289,612 $ 111,992 4.89 % $ 1,836,963 $ 100,831 5.49 %
Loans held for sale 5,571 250 4.48 % 7,360 320 4.34 % 3,858 171 4.43 %
Taxable securities 207,459 3,813 1.84 % 122,900 2,423 1.97 % 129,705 3,289 2.54 %
Tax-exempt securities2 92,708 1,817 1.96 %
83,765 1,941 2.32% 56,458 1,972 3.49% Fed funds sold and other earning assets
680,909 1,622 0.24 % 308,843 1,509 0.49 % 110,380 2,646 2.40 % Total interest-earning assets 3,521,653 125,834 3.57 % 2,812,480 118,185 4.20 % 2,137,364 108,909 5.10 % Noninterest-earning assets 317,457 250,955 201,976 Total assets$ 3,839,110 $ 3,063,435 $ 2,339,340 Liabilities and Shareholders' Equity: Interest-bearing demand deposits$ 737,251 1,378 0.19 % $
481,050 1,013 0.21 %$ 333,100 1,883 0.57 % Money market and savings deposits 1,191,916 3,501 0.29 % 788,006 3,482 0.44 % 651,855 7,827 1.20 % Time deposits 533,994 3,970 0.74 % 641,647 9,102 1.42 % 635,451 12,205 1.92 % Total interest-bearing deposits 2,463,161 8,849 0.36 % 1,910,703 13,597 0.71 % 1,620,406 21,915 1.35 % Borrowings3 83,105 540 0.65 % 177,204 816 0.46 % 21,526 319 1.48 % Subordinated debt 40,221 2,449 6.09 % 39,301 2,334 5.94 % 39,216 2,341 5.97 % Total interest-bearing liabilities 2,586,487 11,838 0.46 % 2,127,208 16,747 0.79 % 1,681,148 24,575 1.46 % Noninterest-bearing deposits 841,746 571,282 343,611 Other liabilities 23,189 23,775 15,852 Total liabilities 3,451,422 2,722,265 2,040,611 Shareholders' equity 387,688 341,170 298,729 Total liabilities and shareholders' equity$ 3,839,110 $ 3,063,435 $ 2,339,340 Net interest income, taxable equivalent$ 113,996 $ 101,438 $ 84,334 Interest rate spread 3.12 % 3.41 % 3.64 % Tax equivalent net interest margin 3.24 % 3.61 % 3.95 % Percentage of average interest-earning assets to average interest-bearing liabilities 136.16 % 132.21 % 127.14 % Percentage of average equity to average assets 10.10 % 11.14 % 12.77 % 1Loans include PPP loans with an average balance of$196.1 million and$201.5 million for the years endedDecember 31, 2021 , and 2020, respectively. No PPP loans are included in year endingDecember 31, 2019 . Loan fees included in loan income were$11.1 million ,$9.8 million , and$3.2 million for 2021, 2020 and 2019, respectively. Loan fee income for the years endedDecember 31, 2021 , and 2020, respectively, includes$9.1 million and$5.9 million accretion of loan fees on PPP loans. No loan fees on PPP loans are included in year endedDecember 31, 2019 . 2Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rate of 21.0% in 2021, 2020 and 2019. The taxable-equivalent adjustment was$602 thousand ,$572 thousand and$454 thousand for 2021, 2020 and 2019, respectively. 3Includes average balance of$91,190 in Paycheck Protection Liquidity Facility ("PPLF") funding in the twelve month period endedDecember 31, 2020 . No PPLF funding was used the twelve month periods endedDecember 31, 2021 , and 2019. 36 Table of Contents Rate and Volume Analysis
Increases and decreases in interest income and interest expense result from changes in the average balances (volume) of interest-bearing assets and interest-bearing liabilities, as well as changes in average interest rates.
Report
interest income, taxable equivalent, increased by$12.6 million between the years endedDecember 31, 2021 and 2020 and by$17.1 million between the years endedDecember 31, 2020 and 2019. The following is an analysis of the changes in net interest income comparing the changes attributable to rates and those attributable to volumes (in thousands): 2021 Compared to 2020 2020 Compared to 2019 Increase (decrease) due to Increase (decrease) due to Rate Volume Net Rate Volume Net Interest-earning assets: Loans and leases$ (5,664) $ 12,004 $ 6,340 $ (13,644) $ 24,805 $ 11,161 Loans held for sale 8 (78) (70) (9) 158 149 Taxable Securities (324) 1,714 1,390 (693) (173) (866) Tax-exempt securities (397) 273 (124) (985) 954 (31) Federal funds and other earning assets (1,013) 1,126 113 (5,214) 4,077 (1,137) Total interest-earning assets (7,390) 15,039 7,649
(20,545) 29,821 9,276
Interest-bearing sight deposits (173) 538 365
(1,706) 836 (870) Money market and savings deposits (1,765) 1,784 19 (5,980) 1,635 (4,345) Time deposits (3,605) (1,527) (5,132) (3,222) 119 (3,103)
Total interest-bearing deposits (5,543) 795 (4,748)
(10,908) 2,590 (8,318) Borrowings 163 (439) (276) (2,632) 3,129 497 Subordinated debt 59 56 115 (12) 5 (7) Total interest-bearing liabilities (5,321) 412 (4,909) (13,552) 5,724 (7,828) Net interest income$ (2,069) $ 14,627 $ 12,558 $ (6,993) $ 24,097 $ 17,104
Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is considered above as a change in volume. Noninterest Income
Non-interest revenue is an important component of our total revenue. A significant portion of our non-interest income comes from service charges associated with deposit accounts and bank charges related to mortgage loans.
The following table provides a summary of non-interest revenue for the periods presented (in thousands of dollars):
Year Ended Year Ended
December 31, 2021 - 2020 December 31, 2020 - 2019
2021 2020 Change 2019 Change
Service charges on deposit accounts$ 4,650 $ 3,403 $ 1,247 $ 2,902 $ 501 Gain on sale of securities 45 6 39 34 (28) Mortgage banking 4,040 3,875 165 1,566 2,309 Investment services 2,167 1,566 601 946 620 Insurance commissions 3,285 1,850 1,435 - 1,850 Interchange and debit card transaction fees, net 4,284 2,413 1,871 628 1,785 Merger termination fee - - - 6,400 (6,400) Other 5,478 2,313 3,165 2,839 (526) Total noninterest income$ 23,949 $ 15,426 $ 8,523 $ 15,315 $ 111 37 Table of Contents 2021 compared to 2020 Noninterest income increased$8.5 million to$23.9 million in 2021, compared to$15.4 million in 2020. The primary components of the changes in noninterest income were as follows:
? Increased service charges on deposit accounts, linked to PFG and SCB
acquisitions, deposit growth and transaction volume;
? Increase in investment services, arising from increased production;
Increase in insurance commissions, mainly from a full year of insurance
? commissions in 2021 and placement of life insurance contracts on the first
quarter 2021;
? Increase in interchange and debit card transaction fees, linked to the increase
the volume, deposit growth and acquisitions of PFG and SCB; and
Increase in others, mainly related to; 1.) added new rental fee income
from the acquisition of Fountain, 2.) the proceeds of the redemption value of
? life insurance held by the bank from the additional BOLI purchased during the first
quarter of 2021 and 3.) Newly Created Capital Markets Swap Fee Income
program in the second quarter of 2021.
2020 vs. 2019
Non-interest income increased
? Increased service charges on deposit accounts, linked to PFG
acquisition, deposit growth and transaction volume;
? Increase in mortgage banking, due to increased volume due to low rate
environment;
? Increase in investment services, resulting from the increase in the production of
hiring of staff in 2019;
? Added insurance commissions from an acquired insurance agency in the PFG
acquisition;
? Increase in net interchange and debit card transaction fees, linked to the
increased volume resulting from the acquisition of PFG and growth in deposits; and
? Decrease in the merger termination indemnity, recorded in the second quarter of 2019.
Noninterest Expense
The following table provides a summary of non-interest expenses for the periods presented (in thousands of dollars):
Year Ended Year Ended
December 31, 2021 - 2020 December 31, 2020 - 2019
2021 2020 Change 2019 Change
Salaries and employee benefits $ 51,656 $ 42,911 $ 8,745 $ 36,635 $ 6,276
Occupancy and equipment 10,196 8,348 1,848 6,716 1,632
FDIC insurance 1,833 1,190 643 140 1,050
Other real estate and loan
related expense 2,098 2,050 48 1,320 730
Advertising and marketing 830 834 (4) 983 (149)
Data processing and technology 6,364 4,476 1,888 4,190 286
Professional services 3,147 2,958 189 2,375 583
Amortization of intangibles 2,256 1,740 516 1,368 372
Merger related and restructuring
expenses 3,701 4,565 (864) 3,219 1,346
Other 9,310 7,647 1,663 6,205 1,442
Total noninterest expense $ 91,391 $ 76,719 $ 14,672
$ 63,151 $ 13,568 2021 compared to 2020 Noninterest expense increased$14.7 million to$91.4 million in 2021, compared to$76.7 million in 2020. The primary components of the changes in noninterest expense were as follows: 38 Table of Contents
Increase in salaries and benefits related to the acquisition of PFG
completed
? acquisition completed
talents hired in
? Increased occupancy and equipment, due to ongoing infrastructure and
facilities added to accommodate growth in operations;
? Increase in
? Increase in data processing and technology, mainly
infrastructure construction and overall growth; and
? The others were up, mainly due to an investment in a start-up fintech company and
other expenses related to the continued growth of the franchise.
2020 vs. 2019
Noninterest expense increased$13.6 million to$76.7 million in 2020, compared to$63.2 million in 2019. The primary components of the changes in noninterest expense were as follows:
? Increase in wages and benefits, due to overall franchise growth,
including the acquisition of PFG;
Increased occupancy and equipment, associated with infrastructure and
? facilities added to accommodate the growth of our business and the
branches of the acquisition of PFG;
Increase in
growth resulting from our acquisition of PFG, the growth of deposits and the production of
? PPP loans. The Company recognized a credit in 2019 from the
result of the
2019;
? Increase in other actual and loan-related expenses, mainly due to
increased activity in loan-related production;
? Increase in professional services, due to increased volume of services
carried out ;
? Increase in merger and restructuring charges, following the acquisition of
PFG and the consolidation and termination of two leased properties; and
? Increase in other non-interest expense due to overall franchise growth.
Income Taxes 2021 compared to 2020 In 2021, income tax expense totaled$9.5 million compared to$6.6 million in 2020. The effective tax rate was approximately 21.5% for 2021 compared to 21.2% in 2020. 2020 compared to 2019 In 2020, income tax expense totaled$6.6 million compared to$6.9 million in 2019. The effective tax rate was approximately 21.2% for 2020 compared to 20.6% in 2019.
Composition of the loan and lease portfolio
Our loans and leases represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan and lease portfolio is an important consideration when reviewing our financial condition. The Company had total net loans and leases outstanding, including organic and purchased loans and leases, of approximately$2.67 billion atDecember 31, 2021 and$2.36 billion atDecember 31, 2020 . Loans secured by real estate, consisting of commercial or residential property, are the principal component of our loan
and lease portfolio. Organic Loans and Leases
Our organic net loans and leases, which excludes loans and leases purchased through acquisitions, increased by$242.9 million , or 12.3% fromDecember 31, 2020 , to$2.22 billion atDecember 31, 2021 . Included in the growth was$50.9 million of PPP loans that were originated and funded during 2021. 39 Table of Contents Purchased Loans and Leases Net purchased non-credit impaired loans and leases of$408.6 million atDecember 31, 2021 increased by$57.9 million fromDecember 31, 2020 . SinceDecember 31, 2020 , our net purchased credit impaired ("PCI") loans and leases increased by$9.4 million to$41.2 million atDecember 31, 2021 . The increase in net purchased non-credit impaired loans and leases and PCI loans and leases is related to the acquisitions of Fountain and SCB and offset by maturities, paydowns and payoffs.
The following tables summarize the composition of our loan and lease portfolio at
2021
Purchased Purchased % of
Non-Credit Credit Total Gross
Organic Impaired Impaired Amount Total
Commercial real estate-mortgage$ 1,157,702 $ 205,579 $ 20,875 $ 1,384,156 51.4 % Consumer real estate-mortgage 346,322 119,117 11,833 477,272 17.7 % Construction and land development 258,196 17,308 2,882 278,386 10.3 % Commercial and industrial 449,909 35,599
2,516 488,024 18.1 % Leases 18,067 32,471 3,170 53,708 2.0 % Consumer and other 10,536 1,244 71 11,851 0.4 % Total gross loans and leases receivable, net of deferred fees 2,240,732 411,318 41,347 2,693,397 100.0 % Allowance for loan and leases losses (16,441)$ (2,732) (179) (19,352) Total loans and leases, net$ 2,224,291 $ 408,586 $
41,168$ 2,674,045 2020 Purchased Purchased % of Non-Credit Credit Total Gross Organic Impaired Impaired Amount Total
Commercial real estate-mortgage$ 807,913 $ 188,940 $ 16,123 $ 1,012,976 42.5 % Consumer real estate-mortgage 313,582 120,090 10,258 443,930 18.6 % Construction and land development 259,622 13,105 5,348 278,075 11.7 % Commercial and industrial 607,212 26,926
308 634,446 26.6 % Leases - - - - - % Consumer and other 9,250 3,539 27 12,816 0.5 % Total gross loans and leases receivable, net of deferred fees 1,997,579 352,600 32,064 2,382,243 100.0 % Allowance for loan and lease losses (16,154) (1,883)
(309) (18,346) Total loans and leases, net$ 1,981,425 $ 350,717 $ 31,755 $ 2,363,897
Loan and lease portfolio maturities
The following table shows the maturity distribution of our loans and leases, including interest rate sensitivity for loans and leases maturing after one year (in thousands of dollars):
Rate Structure for Loans and Leases
Maturing Over One Year
One Year One through Five through Over Fifteen Fixed Floating
or Less Five Years Fifteen Years Years Total Rate Rate
Commercial real estate-mortgage
656,868$ 14,734 $ 1,384,156 $ 836,124 $
422 296
Consumer real estate-mortgage 33,421 171,730 181,159 90,962 477,272 219,344
224,507
Construction and land development 77,540 116,704
62,188 21,954 278,386 96,468 104,378 Commercial and industrial 133,794 239,676 107,040 7,514 488,024 284,513 69,717 Leases 2,157 51,551 - - 53,708 51,551 - Consumer and other 5,270 5,978 546 57 11,851 6,327 254 Total loans and leases$ 377,918 $ 1,172,457 $ 1,007,801 $ 135,221 $ 2,693,397 $ 1,494,327$ 821,152
Delinquent, unexpired and restructured loans and leases
Loans and leases are considered past due when the contractual amounts due with
respect to principal and interest are not received within 30 days of the
contractual due date. Loans and leases are generally classified as nonaccrual if
they are past
40
Table of Contents
due for a period of 90 days or more, unless such loans and leases are well
secured and in the process of collection. If a loan or lease, or a portion of a
loan or lease is classified as doubtful or as partially charged off, the loan or
lease is generally classified as nonaccrual. Loans and leases that are on a
current payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and interest is in doubt. Loans and
leases may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance of
interest and principal by the borrower in accordance with the contractual terms.
PCI loans and leases with common risk characteristics are grouped in pools at
acquisition and performance is based on our ability to reasonably estimate the
amount and timing of future cash flows rather than a borrower's ability to repay
contractual loan or lease amounts. Since we are able to reasonably estimate the
amount and timing of future cash flows on the Company's PCI loan and lease
pools, none of these loans and leases have been identified as nonaccrual.
While a loan or lease is classified as nonaccrual and the future collectability
of the recorded loan or lease balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal outstanding,
except in the case of loans and leases with scheduled amortizations where the
payment is generally applied to the oldest payment due. When the future
collectability of the recorded loan and lease balance is expected, interest
income may be recognized on a cash basis. In the case where a nonaccrual loan
and lease had been partially charged off, recognition of interest on a cash
basis is limited to that which would have been recognized on the recorded loan
and lease balance at the contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for loan and lease losses
until prior charge-offs have been fully recovered.
Assets acquired as a result of foreclosure are recorded at estimated fair value
in other real estate owned. Any excess of cost over estimated fair value at the
time of foreclosure is charged to the allowance for loan losses. Valuations are
periodically performed on these properties, and any subsequent write-downs are
charged to earnings. Routine maintenance and other holding costs are included in
noninterest expense.
Loans, excluding pooled PCI loans, are classified as troubled debt
restructurings ("TDR") by the Company when certain modifications are made to the
loan terms and concessions are granted to the borrowers due to financial
difficulty experienced by those borrowers. The Company grants concessions by
(1) reduction of the stated interest rate for the remaining original life of the
debt or (2) extension of the maturity date at a stated interest rate lower than
the current market rate for new debt with similar risk. The Company does not
generally grant concessions through forgiveness of principal or accrued
interest. The Company's policy with respect to accrual of interest on loans
restructured in a TDR follows relevant supervisory guidance. That is, if a
borrower has demonstrated performance under the previous loan terms and shows
capacity to perform under the restructured loan terms, continued accrual of
interest at the restructured interest rate is likely. If a borrower was
materially delinquent on payments prior to the restructuring but shows the
capacity to meet the restructured loan terms, the loan will likely continue as
nonaccrual until there is demonstrated performance under new terms. Lastly, if
the borrower does not perform under the restructured terms, the loan is placed
on non-accrual status. The Company closely monitors these loans and ceases
accruing interest on them if we believe that the borrowers may not continue
performing based on the restructured note terms.
PCI loans that were classified as TDRs prior to acquisition are not classified
as TDRs by the Company after the acquisition date. Subsequent modification of a
PCI loan accounted for in a pool that would otherwise meet the definition of a
TDR is not reported, or accounted for, as a TDR since pooled PCI loans are
excluded from the scope of TDR accounting. A PCI loan not accounted for in a
pool would be reported, and accounted for, as a TDR if modified in a manner that
meets the definition of a TDR after the acquisition date.
Nonperforming loans and leases as a percentage of gross loans and leases, net of
deferred fees, was 0.12% as of December 31, 2021 , and 0.24% as of December 31,
2020 , respectively. Total nonperforming assets as a percentage of total assets
as of December 31, 2021 , totaled 0.11% compared to 0.31% as of December 31,
2020 . PCI loans and leases that are included in loan pools are reclassified at
acquisition to accrual status and thus are not included as nonperforming assets.
In 2021, there was $79 thousand in interest income recognized on nonaccrual and
restructured loans compared to the $202 thousand in gross interest income that
would have been recognized if the loans had been current in accordance with
their original terms.
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The following table is a summary of our loans and leases that were past due at least 30 days but less than 89 days and 90 days or more past due as ofDecember 31, 2021 , and 2020 (dollars in thousands): Accruing Loans Accruing Loans 30-89 Days 90 Days or More Total Accruing Past Due Past Due Past Due Loans Percentage of Percentage of Percentage of Total Loans in Loans in Loans in Loans Amount Category Amount Category Amount CategoryDecember 31, 2021 Commercial real estate$ 1,384,156 $ 172 0.01 % $ - - %$ 172 0.01 % Consumer real estate 477,272 894 0.19 - - 894 0.19
Construction and land development 278,386 91 0.03
- - 91 0.03 Commercial and industrial 488,024 1,310 0.27 45 0.01 1,355 0.28 Leases 53,708 361 0.67 - - 361 0.67 Consumer and other 11,851 103 0.87 19 0.16 122 1.03 Total$ 2,693,397 $ 2,931 0.11$ 64 -$ 2,995 0.11 December 31, 2020 Commercial real estate$ 1,012,976 $ 134 0.01 %$ 67 0.01 %$ 201 0.02 % Consumer real estate 443,930 1,967 0.44 82 0.02 2,049 0.46
Construction and land development 278,075 245 0.09
- - 245 0.09 Commercial and industrial 634,446 88 0.01 - - 88 0.01 Leases - - - - - - - Consumer and other 12,816 19 0.15 - - 19 0.15 Total$ 2,382,243 $ 2,453 0.10$ 149 0.01$ 2,602 0.11
The following table is a summary of our unexpired loans and leases as of
December 31, 2021 December 31, 2020
Nonaccrual Loans Nonaccrual Loans
Percentage of Percentage of
Total Loans in Total Loans in
Loans Amount Category Loans Amount Category
Commercial real estate $ 1,384,156 $ 858 0.06 % $ 1,012,976 $ 3,740 0.37 %
Consumer real estate 477,272 2,139 0.45 443,930 1,823 0.41
Construction and land development 278,386 -
- 278,075 12 - Commercial and industrial 488,024 116 0.02 634,446 36 0.01 Leases 53,708 - - - - - Consumer and other 11,851 11 0.09 12,816 22 0.17 Total$ 2,693,397 $ 3,124 0.12$ 2,382,243 $ 5,633 0.24
Allowance for loans and leases to nonaccrual loans 619.46% 325.69%
Potentially problematic loans and leases
AtDecember 31, 2021 , problem loans and leases amounted to approximately$3.8 million or 0.14% of total loans and leases outstanding. Potential problem loans and leases, which are not included in nonperforming loans and leases, represent those loans and leases with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower's ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Bank's primary regulators, for loans classified as substandard or worse, but not considered nonperforming loans and leases.
Breakdown of provision for losses on loans and leases
The allowance for loan and lease losses is an estimate of probable incurred
losses in the loan and lease portfolio. Loans and leases are charged-off against
the allowance when management believes a loan or lease balance is uncollectible.
Subsequent recoveries, if any, are credited to the allowance for loan and lease
losses. Management's methodology for estimating the allowance balance consists
of several key elements, which include specific allowances on individual
impaired loans and leases and the formula driven allowances on pools of loans
and leases with similar risk characteristics.
42
Contents
Allowance allocations can be made for specific loans or leases, but the entire allowance is available for any loan or lease that management believes should be charged.
InOctober 2019 , theFinancial Accounting Standards Board approved a delay for the implementation of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The Board decided that CECL will be effective for larger Public Business Entities ("PBEs") that areSEC filers, excluding Smaller Reporting Companies ("SRCs") as currently defined by theSEC , for fiscal years beginning afterDecember 15, 2019 , and interim periods within those fiscal years. For calendar-year-end companies, this will beJanuary 1, 2020 . The determination of whether an entity is an SRC will be based on an entity's most recent assessment in accordance withSEC regulations and the Company meets the regulations as an SRC. For all other entities, the Board decided that CECL will be effective for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. For all entities, early adoption will continue to be permitted; that is, early adoption is allowed for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years (that is, effectiveJanuary 1, 2019 , for calendar-year-end companies). The Company does not plan to adopt this standard early. Adoption for the Company is required for fiscal years beginning afterDecember 15, 2022 , because the Company is an SRC. We assess the adequacy of the allowance at the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon our evaluation of the loan and lease portfolios, past loan and lease loss experience, known and inherent risks in the portfolio, the views of the Bank's regulators, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan and lease portfolio, economic conditions, industry and peer bank loan and lease quality indications and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans and leases that may be susceptible to significant change. We maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan and lease portfolio. As ofDecember 31, 2021 , andDecember 31, 2020 , our allowance for loan and lease losses was$19.4 million and$18.3 million , respectively, which we deemed to be adequate at each of the respective dates. Our allowance for loan and lease loss as a percentage of total loans and leases was 0.72% atDecember 31, 2021 , and 0.77% atDecember 31, 2020 . Our purchased loans and leases were recorded at fair value upon acquisition. The fair value adjustments on the performing purchased loans and leases will be accreted into income over the life of the loans or leases. AtDecember 31, 2021 , the remaining accretable yield was approximately$14.6 million . These loans and leases are subject to the same allowance methodology as our legacy portfolio. The calculated allowance is compared to the remaining fair value discount to determine if additional provisioning should be recognized. Also, at the end of 2021, the outstanding principal balance on PCI loan and leases was$56.6 million and the carrying value was$41.3 million , for a net difference of$15.3 million in discounts. AtDecember 31, 2021 , there was an allowance on PCI loans and leases of$179 thousand . The judgments and estimates associated with our allowance determination are described in Note 1 in the "Notes to Consolidated Financial Statements." The following table sets forth, based on management's best estimate, the allocation of the allowance for credit losses on loans and leases to categories of loans and leases and loan and lease balances by category and the percentage of loans and leases in each category to total loans and leases and allowance for credit losses as a percentage of total loans and leases within each loan and lease category as ofDecember 31 for each of the past two years (in thousands): Amount of Percentage of Loans in Each Total Ratio of Allowance Allocated to Allowance Allocated Category to Total Loans Loans Loans in Each CategoryDecember 31, 2021 Commercial real estate $ 9,781 51.4 %$ 1,384,156 0.71 % Consumer real estate 3,454 17.7 477,272 0.72
Construction and land development 1,882
10.3 278,386 0.68 Commercial and industrial 3,781 18.1 488,024 0.77 Leases 330 2.0 53,708 0.61 Consumer and other 124 0.4 11,851 1.05 Total $ 19,352 100.0 %$ 2,693,397 0.72 43 Table of Contents December 31, 2020 Commercial real estate$ 7,579 42.5 %$ 1,012,976 0.75 % Consumer real estate 3,471 18.6 443,930 0.78 Construction and land development 2,076 11.7 278,075 0.75 Commercial and industrial 5,107 26.6 634,446 0.80 Leases - - - - Consumer and other 113 0.5 12,816 0.88 Total$ 18,346 100.0 %$ 2,382,243 0.77
The allocation by category is determined based on the assigned risk rating, if applicable, and environmental factors applicable to each category of loans and leases. For impaired loans and leases, those loans and leases are reviewed for a specific allowance allocation. Specific valuation allowances related to impaired loans and leases were approximately$561 thousand atDecember 31, 2021 , compared to$237 thousand atDecember 31, 2020 . Additional information on the allocation of the allowance between performing and impaired loans and leases is provided in Note 5 - Loans and Lease and Allowance for Loan and Lease Losses to our audited consolidated financial statements.
Analysis of the allowance for losses on loans and leases
The following table presents the information relating to credit losses on loans and leases by loan segment for each of the years of the three-year period ended
Provision for Net (charge-offs)
Average net ratio (charges)
Credit Losses Recoveries Loans Recoveries to Average Loans
For the year ended December 31, 2021
Commercial real estate $ 2,119 $ 83 $ 1,213,311 0.01 %
Consumer real estate 11 (28) 450,958 (0.01)
Construction and land development (194) -
293,190 - Commercial and industrial (1,053) (273) 526,586 (0.05) Leases 455 (125) 39,408 (0.32) Consumer and other 295 (284) 11,553 (2.46) Total $ 1,633 $ (627)$ 2,535,006 (0.02) For the year endedDecember 31, 2020 Commercial real estate $ 3,052 19$ 997,660 - % Consumer real estate 879 16 449,318 - Construction and land development 947 2
266,204 - Commercial and industrial 3,456 (306) 562,254 (0.05) Leases - - - - Consumer and other 349 (311) 14,177 (2.19) Total $ 8,683 $ (580)$ 2,289,612 (0.03) Investment Portfolio Our investment portfolio is the second largest component of our interest earning assets. The portfolio serves the following purposes: (i) to optimize the Bank's income consistent with the investment portfolio's liquidity and risk objectives; (ii) to balance market and credit risks of other assets and the Bank's liability structure; (iii) to profitably deploy funds which are not needed to fulfill loan demand, deposit redemptions or other liquidity purposes; and (iv) provide collateral which the Bank is required to pledge against public funds. Our available-for-sale investment portfolio is carried at fair market value and our held-to-maturity investment portfolio is carried at amortized cost, and consists primarily of Federal agency bonds, mortgage-backed securities, state and municipal securities and other debt securities. Our investment portfolio increased from$215.6 million atDecember 31, 2020 , to$559.4 million December 31, 2021 , primarily as a result of strategically deploying a portion of the Bank's cash position. Additionally, the Bank's security portfolio increased due to the acquisition of SCB. New purchases were focused on mortgage-backed securities and Treasuries to provide cash flow and liquidity. Our investment to asset ratio has increased from 6.5% atDecember 31, 2020 , to 12.1% atDecember 31, 2021 . Over the past year the ratio of investments to our total assets has increased, primarily due growth in the Bank's cash position driven by the PPP and the desire to deploy in high quality and higher yielding assets compared to cash. 44 Table of Contents The Company purchased$436.2 million of securities during the year endedDecember 31, 2021 , which was offset by$149.5 million of sales, maturities and payments received during the same period. Net unrealized gains in our available-for-sale securities portfolio were$33 thousand as ofDecember 31, 2021 , as compared to a net unrealized gain of$4.0 million as ofDecember 31, 2020 . The decrease was primarily attributable to changes in market interest rates related to our mortgage-backed securities (GSEs) and our municipal securities portfolio, relative to when the securities were purchased. Our decision to transfer$74.6 million of available-for-sale securities to the held-to-maturity category during the fourth quarter of 2021, reflecting our intent to hold those securities to maturity, reduced the impact of these interest rate changes. The following table presents the contractual maturity of the Company's securities by contractual maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) atDecember 31, 2021 (dollars in thousands). The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs. 1 or Less 1 to 5 5 to 10 Over 10 Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Available-for-sale: Amount Yield (1) Amount Yield
(1) Amount Yield (1) Amount Yield (1) Amount Yield (1) U.S. Treasury $ - - %$ 62,463 1.11 %$ 75,749 1.31 % $ - - %$ 138,212 1.22 % U.S. Government agencies - - - - 21,898 1.55 - - 21,898 1.55 State and political subdivisions 907 1.80 3,356 1.59 8,652 2.31 54,395 3.78 67,310 3.45 Other debt securities - - 987 1.83 25,502 4.59 500 4.50 26,989 4.49 Mortgage-backed securities 65 2.02 2,188 1.62 48,864 1.31 176,894 1.48 228,011 1.45 Total securities$ 972 1.81$ 68,994 1.16$ 180,665 1.85$ 231,789 2.03$ 482,420 1.84 Held-to-maturity: U.S. Government agencies $ - - $ - -$ 3,402 1.55$ 27,621 1.82$ 31,023 1.79 State and political subdivisions - - - - 659 1.72 45,287 1.98 45,946 1.98 Total securities $ - - $ - -$ 4,061 1.58$ 72,908 1.92$ 76,969 1.90
1 Based on amortized cost, taxable equivalent
Deposits
Deposits are the primary source of funds for the Company's lending and investing
activities. The Company provides a range of deposit services to businesses and
individuals, including noninterest-bearing checking accounts, interest-bearing
checking accounts, savings accounts, money market accounts, Individual
Retirement Accounts ("IRAs") and certificates of deposit ("CDs"). These accounts
generally earn interest at rates the Company establishes based on market factors
and the anticipated amount and timing of funding needs. The establishment or
continuity of a core deposit relationship can be a factor in loan pricing
decisions. While the Company's primary focus is on establishing customer
relationships to attract core deposits, at times, the Company uses brokered
deposits and other wholesale deposits to supplement its funding sources. As of
December 31, 2021 , brokered deposits represented approximately 1.3% of total
deposits.
The following table summarizes the average balances outstanding and average
interest rates for each major category of deposits for 2021 and 2020 (dollars in
thousands):
2021 2020 2019
Average % of Average Average % of Average Average % of Average
Balance Total Rate Balance
Total rate Balance Total rate Non-interest bearing request
737,251 22.3 % 0.19 %
Term deposits
533,994 16.2 % 0.74 % 641,647 25.9 % 1.42 % 635,451 32.4 % 1.92 % Total average deposits$ 3,304,907 100.0 % 0.27 %$ 2,481,985 100.0 % 0.55 %$ 1,964,017 100.0 % 1.12 % 45 Table of Contents
In 2021, average deposits increased in all categories except term deposits. The Company believes that its deposit product offerings are properly structured to attract and retain low-cost, core deposit relationships. The average cost of deposits was 0.27% in 2021 compared to 0.55% in 2020.
Total deposits as ofDecember 31, 2021 , were$4.0 billion , which was an increase of$1.2 billion fromDecember 31, 2020 . The increase was primarily from organic deposit growth and the completed acquisition of SCB. As ofDecember 31, 2021 , the Company had outstanding time deposits under$250,000 of$414.7 million , time deposits over$250,000 of$160.0 million , and a time deposit fair value adjustment of$707 thousand . The following table summarizes the maturities of time deposits$250,000 or more as ofDecember 31, 2021 (dollars in thousands): December 31, 2021 Three months or less$ 35,909 Three to six months 23,996 Six to twelve months 60,635 More than twelve months 39,412 Total$ 159,952
Borrowings and Subordinated Debts
Other than deposits, the Company uses short-term borrowings and long-term debt to provide both funding and, to a lesser extent, regulatory capital using debt at the Company level which can be downstreamed as Tier 1 capital to the Bank. Total borrowings atDecember 31, 2021 and 2020, was$87.6 million and$81.2 million , respectively. Short-term borrowings, included in borrowings, totaled$5.1 million atDecember 31, 2021 and$5.8 million atDecember 31, 2020 and consisted entirely of securities sold under repurchase agreements. Long-term debt totaled$41.9 million atDecember 31, 2021 and$39.3 million atDecember 31, 2020 and consisted entirely of subordinated debt. For more information regarding our borrowings and subordinated debt, see "Part I - Item 1. Consolidated Financial Statements - Note 9 - Borrowings and Line of Credit and Note 10 - Subordinated Debt."
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and theFederal Reserve discount window. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As ofDecember 31, 2021 , we had$64.0 million of unsecured federal funds lines with no funds advanced. In addition, we have access to theFederal Reserve's discount window in the amount$116.9 million with no borrowings outstanding as ofDecember 31, 2021 . TheFederal Reserve discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling$194.5 million as of December
31,
2021.
46
Table of Contents
At December 31, 2021 , we had two FHLB advances outstanding totaling $75 million .
For more information regarding the FHLB advances, see "Part I - Item 1.
Consolidated Financial Statements - Note 9 - Borrowings and Line of Credit."
Based on the values of loans pledged as collateral, we had $164.5 million of
additional borrowing availability with the FHLB as of December 31, 2021 . We also
maintain relationships in the capital markets with brokers to issue certificates
of deposit and money market accounts.
The Company has a Loan and Security Agreement and revolving note with
ServisFirst Bank , pursuant to which ServisFirst Bank has made a $25.0 million
revolving line of credit available to the Company. The maturity of the line of
credit is March 24, 2023 . At December 31, 2021 , $7.5 million was outstanding
under the line of credit, and $17.5 million of the line of credit remained
available to the Company.
Capital requirements
The Company and Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy. The Company uses leverage analysis to examine the potential of the institution to increase assets and liabilities using the current capital base. The key measurements included in this analysis are the Company and Bank's Common Equity Tier 1 capital, Tier 1 capital, leverage and total capital ratios. AtDecember 31, 2021 , and 2020, our capital ratios, including our Company and Bank's capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank subsidiary. While the Company believes that it has sufficient capital to withstand the economic impact of COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods. For more information regarding our capital, leverage and total capital ratios, see "Part I - Item 1. Consolidated Financial Statements - Note 15 - Regulatory Matters." The table below summarizes the capital requirements applicable to the Company and Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as the Company and Bank's capital ratios as ofDecember 31, 2021 and 2020.The Company and Bank exceeded all regulatory capital requirements and was considered to be "well-capitalized" as ofDecember 31, 2021 and 2020. As ofDecember 31, 2021 , theFDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events sinceDecember 31, 2021 , that management believes would change this classification. While the Company believes that it has sufficient capital to withstand the economic impact of COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods. 47 Table of Contents Minimum to be well capitalized under Minimum for prompt capital corrective action Actual adequacy
provisions relating to objectives1
Amount Ratio Amount Ratio Amount Ratio
December 31, 2021
SmartFinancial:
Total Capital (to Risk Weighted
Assets) $ 386,627 12.55 % $ 246,483 8.00 % N/A N/A
Tier 1 Capital (to Risk Weighted
Assets) 325,345 10.56 % 184,862 6.00 % N/A N/A
Common Equity Tier 1 Capital (to
Risk Weighted Assets) 325,345 10.56 % 138,647 4.50 % N/A N/A
Tier 1 Capital (to Average Assets)2 325,345 7.45 % 174,578
4.00% N/A/A
Total Capital (to Risk Weighted Assets)$ 378,055 12.29 %$ 246,053 8.00 %$ 307,566 10.00 % Tier 1 Capital (to Risk Weighted Assets) 358,703 11.66 % 184,539 6.00 % 246,053 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 358,703 11.66 % 138,405 4.50 % 199,918 6.50 % Tier 1 Capital (to Average Assets)2 358,703 8.23 % 174,384
4.00% 217,980 5.00%
December 31, 2020 SmartFinancial : Total Capital (to Risk Weighted Assets)$ 329,431 14.07 %$ 187,303 8.00 % N/A N/A Tier 1 Capital (to Risk Weighted Assets) 271,739 11.61 % 140,477 6.00 % N/A N/A Common Equity Tier 1 Capital (to Risk Weighted Assets) 271,739 11.61 % 105,358 4.50 % N/A N/A Tier 1 Capital (to Average Assets) 271,739 8.70 % 125,002
4.00% N/A/A
Total Capital (to Risk Weighted Assets)$ 317,660 13.57 %$ 187,294 8.00 %$ 234,117 10.00 % Tier 1 Capital (to Risk Weighted Assets) 299,314 12.78 % 140,470 6.00 % 187,294 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 299,314 12.78 % 105,353 4.50 % 152,176 6.50 % Tier 1 Capital (to Average Assets) 299,314 9.58 % 124,969
4.00% 156,212 5.00%
1Early corrective action provisions only apply at the Bank level.
2Average assets for the above calculations were based on the most recent quarter
Contractual obligations
The following tables show, at
As of December 31, 2021, payments due in
More
Less than 1 to 3 3 to 5 than 5
1 year years years years Total
Operating leases $ 1,522 $ 2,333 $ 1,990 $ 5,250 $ 11,095
Time deposits 409,656 137,654 26,632 - 573,942
Securities sold under agreement to
repurchase 5,085 - - - 5,085
FHLB advances and other borrowings 7,500 -
- 75,000 82,500 Subordinated debt - - - 42,500 42,500 Total$ 423,763 $ 139,987 $ 28,622 $ 122,750 $ 715,122 48 Table of Contents
Off-balance sheet arrangements
AtDecember 31, 2021 , we had$669.8 million of pre-approved but unused lines of credit and$17.9 million of standby letters of credit. These commitments generally have fixed expiration dates and many will expire without being drawn upon. The total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Bank has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. Additional information about our off-balance sheet risk exposure is presented in Note 14-Commitments and Contingencies to our audited consolidated financial statements.
Critical accounting policies
The Company has identified accounting policies that are the most critical to fully understand and evaluate its reported financial results and require management's most difficult, subjective or complex judgments. Management has reviewed the following critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. These policies along with a brief discussion of the material implications of the uncertainties of each policy are below. For a full description of these critical accounting policies, see Note 1 in the "Notes to Consolidated Financial Statements." Allowance for loan losses - In establishing the allowance we take into account reserves required for impaired loans, historical charge-offs for loan types, and a variety of qualitative factors including economic outlook, portfolio concentrations, and changes in portfolio credit quality. Many of the qualitative factors are measurable but there is also a level of subjective assumptions. If those assumptions change it could have a material impact on the level of the allowance required and as a result the earnings of the Company. Fair values for acquired assets and assumed liabilities - Assets and liabilities acquired are recorded at their respective fair values as of the date of the acquisition. The excess of the purchase price over the net estimated fair values of the acquired assets and liabilities is allocated to identifiable intangible assets with the remaining excess allocated to goodwill.Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. As ofDecember 31, 2021 , there was approximately$91.6 million in goodwill. The Company performed a qualitative assessment on goodwill and the results indicated that there was no impairment as ofDecember 31, 2021 . Cash flow estimates on purchased credit-impaired loans - Purchase credit impaired loans do not have traditional loan yields and interest income; instead they have accretable yield and accretion. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized in interest income as accretion over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows. The amount expected to be accreted divided by the accretable discount is the accretable yield. Cash flow estimates are re-evaluated quarterly. If the estimated cash flows increase then the accretable yield over the life of the loan increases. If, however, the estimated cash flows decrease then impairment is generally recognized immediately. Valuation of Other Real Estate Owned - Other real estate owned properties are initially recorded at fair value less selling costs. If the fair value decreases the assets are written down and are periodically reviewed for further impairment, if needed. Valuation of deferred tax assets- Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not that the tax position will be realized or sustained upon examination. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. Deferred tax assets may be reduced by deferred tax liabilities and a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. As ofDecember 31, 2021 , there were approximately$11.2 million in net deferred tax assets. Evaluation of investment securities for other than temporary impairment- We evaluate investment securities for other than temporary impairment taking into account if we do not have the intent to sell a debt security prior to recovery and it is 49 Table of Contents
more likely than not that we will not have to sell the debt security prior to recovery, the security would not be considered other than temporarily impaired unless a credit loss has occurred in the security. Temporary impairments are recognized on the balance sheet in other comprehensive income / loss. If a security becomes permanently impaired the impairment expense would be recognized and reduce earnings. As ofDecember 31, 2021 , there was approximately$2.0 million in gross unrealized losses on investment securities that were classified as temporarily impaired.
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