FB Financial Corp - Quarter Report: 2017 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☒ (Do not check if a small reporting company)

Small reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37875

FB FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Tennessee	62-1216058
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

211 Commerce Street, Suite 300 Nashville, Tennessee 37201	37201
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (615) 564-1212

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 1, 2017, the registrant had 30,489,842 shares of common stock, $1.00 par value per share, outstanding. The registrant has no other classes of common stock outstanding as of such date.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	2
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4.	Controls and Procedures	82
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	83
Item 1A.	Risk Factors	83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 6.	Exhibits	83
Signatures		84

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (unaudited)

FB Financial Corporation and subsidiaries

Consolidated balance sheets

(Unaudited)

(Amounts are in thousands except share amounts)

	June 30,		December 31,
	2017		2016
ASSETS
Cash and due from banks	$	59,112	$	50,157
Federal funds sold		16,238		13,037
Interest bearing deposits in financial institutions		110,928		73,133
Cash and cash equivalents		186,278		136,327
Investments:
Available-for-sale securities, at fair value		553,357		582,183
Federal Home Loan Bank stock, at cost		7,743		7,743
Loans held for sale, at fair value		427,416		507,442
Loans		1,970,974		1,848,784
Less: allowance for loan losses		23,247		21,747
Net loans		1,947,727		1,827,037
Premises and equipment, net		66,392		66,651
Foreclosed real estate, net		6,370		7,403
Interest receivable		7,012		7,241
Mortgage servicing rights		48,464		32,070
Goodwill		46,867		46,867
Core deposit intangible, net		4,048		4,563
Other assets		44,896		51,354
Total assets	$	3,346,570	$	3,276,881
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits
Noninterest-bearing	$	715,391	$	697,072
Interest-bearing		1,471,650		1,449,382
Savings deposits		143,951		134,077
Time deposits		396,601		391,031
Total deposits		2,727,593		2,671,562
Securities sold under agreements to repurchase		16,343		21,561
Short-term borrowings		—		150,000
Long-term debt		43,790		44,892
Accrued expenses and other liabilities		49,327		58,368
Total liabilities		2,837,053		2,946,383
Shareholders' equity:
Common stock, $1 par value; 75,000,000 shares authorized; 28,968,160 and 24,107,660 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		28,968		24,108
Additional paid-in capital		363,870		213,480
Retained earnings		115,391		93,784
Accumulated other comprehensive income (loss), net		1,288		(874	)
Total shareholders' equity		509,517		330,498
Total liabilities and shareholders' equity	$	3,346,570	$	3,276,881

See accompanying notes to consolidated financial statements (unaudited).

FB Financial Corporation and subsidiaries

Consolidated statements of income

(Unaudited)

(Amounts are in thousands except share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Interest income:
Interest and fees on loans	$	29,350		$	26,878		$	58,356		$	51,190
Interest on securities
Taxable		2,589			2,849			5,156			5,894
Tax-exempt		1,068			845			2,108			1,550
Other		271			108			547			288
Total interest income		33,278			30,680			66,167			58,922

Interest expense:
Deposits
Demand and savings accounts		1,703			1,289			3,234			2,686
Time deposits		604			441			1,187			803
Short-term borrowings		12			29			22			88
Long-term debt		532			563			1,046			1,044
Total interest expense		2,851			2,322			5,489			4,621
Net interest income		30,427			28,358			60,678			54,301
Provision for loan losses		(865	)		(789	)		(1,122	)		(798	)
Net interest income after provision for loan losses		31,292			29,147			61,800			55,099

Noninterest income:
Mortgage banking income		30,239			30,133			55,319			54,636
Service charges on deposit accounts		1,796			2,276			3,562			4,259
ATM and interchange fees		2,085			1,907			4,132			3,942
Investment services income		903			958			1,717			1,651
Gain on sale of securities		29			2,591			30			3,991
Gain (loss) on sales or write-downs of foreclosed assets		23			(131	)		771			(142	)
Gain (loss) on other assets		39			(123	)		39			17
Other income		543			745			1,174			1,037
Total noninterest income		35,657			38,356			66,744			69,391

Noninterest expenses:
Salaries, commissions and employee benefits		30,783			26,688			59,789			50,476
Occupancy and equipment expense		3,307			3,226			6,416			6,396
Legal and professional fees		1,033			856			2,461			1,888
Data processing		1,460			669			2,961			1,397
Merger and conversion		767			1,540			1,254			2,146
Amortization of core deposit intangibles		123			527			515			1,079
Amortization of mortgage servicing rights		—			1,968			—			3,425
Impairment of mortgage servicing rights		—			4,914			—			5,687
Loss on sale of mortgage servicing rights		249			—			249			—
Regulatory fees and deposit insurance assessments		494			529			929			1,016
Software license and maintenance fees		364			1,349			821			1,858
Advertising		3,343			3,601			6,275			5,851
Other expense		7,213			4,728			13,883			10,723
Total noninterest expense		49,136			50,595			95,553			91,942

Income before income taxes		17,813			16,908			32,991			32,548
Income tax expense (Note 7)		6,574			1,133			11,999			2,174
Net income	$	11,239		$	15,775		$	20,992		$	30,374
Per share information:
Basic		25,741,968			17,180,000			24,944,633			17,180,000
Fully diluted		26,301,458			17,180,000			25,450,419			17,180,000
Earnings per share
Basic	$	0.44		$	0.92		$	0.84		$	1.77
Fully diluted		0.43			0.92			0.82			1.77

Pro Forma (C Corporation basis) (Note 7):
Income tax expense	$	6,574		$	6,332		$	11,999		$	12,169
Net income	$	11,239		$	10,576		$	20,992		$	20,379
Earnings per share
Basic	$	0.44		$	0.62		$	0.84		$	1.19
Fully diluted		0.43			0.62			0.82			1.19

See accompanying notes to consolidated financial statements (unaudited).

FB Financial Corporation and subsidiaries

Consolidated statements of comprehensive income

(Unaudited)

(Amounts are in thousands except share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income	$	11,239		$	15,775		$	20,992		$	30,374
Other comprehensive income, net of tax:
Net change in unrealized gain in available-for-sale securities, net of taxes of $1,053, $226, $1,408 and $764		1,631			3,564			2,180			11,770
Reclassification adjustment for gain on sale of securities included in net income, net of tax expense of $11, $84, $12 and $241		(18	)		(2,507	)		(18	)		(3,750	)
Comprehensive income	$	12,852		$	16,832		$	23,154		$	38,394

See accompanying notes to consolidated financial statements (unaudited).

FB Financial Corporation and subsidiaries

Consolidated statements of changes in shareholders’ equity

(Unaudited)

(Amounts are in thousands except share amounts)

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income, net			Total shareholders' equity
Balance at December 31, 2015	$	17,180	$	94,544		$	122,493		$	2,457		$	236,674
Net income		—		—			30,374			—			30,374
Other comprehensive income, net of taxes		—		—			—			8,020			8,020
Cash dividends paid ($0.54 per share)		—		—			(9,300	)		—			(9,300	)
Balance at June 30, 2016	$	17,180	$	94,544		$	143,567		$	10,477		$	265,768

Balance at December 31, 2016	$	24,108	$	213,480		$	93,784		$	(874	)	$	330,498
Fair value election on mortgage servicing rights, net of taxes of $396 (See Note 1)		—		—			615			—			615
Net income		—		—			20,992			—			20,992
Other comprehensive income, net of taxes		—		—			—			2,162			2,162
Common stock issued, net of offering costs		4,807		147,914			—			—			152,721
Stock based compensation expense		6		3,148			—			—			3,154
Restricted stock units vested and distributed, net of shares withheld for taxes		47		(672	)		—			—			(625	)
Balance at June 30, 2017	$	28,968	$	363,870		$	115,391		$	1,288		$	509,517

See accompanying notes to consolidated financial statements (unaudited).

FB Financial Corporation and subsidiaries

Consolidated statements of cash flows

(Unaudited)

(Amounts are in thousands except share amounts)

	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	20,992		$	30,374
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		1,993			2,022
Amortization of core deposit intangibles		515			1,079
Capitalization of mortgage servicing rights		(29,659	)		(19,783	)
Amortization of mortgage servicing rights		—			3,425
Change in fair value of mortgage servicing rights		2,341			—
Impairment of mortgage servicing rights		—			5,687
Stock-based compensation expense		3,154			—
Provision for loan losses		(1,122	)		(798	)
Provision for mortgage loan repurchases		384			703
Accretion of yield on purchased loans		(848	)		(2,381	)
Accretion of discounts and amortization of premiums on securities, net		1,290			761
Gain on sales of securities		(30	)		(3,991	)
Origination of loans held for sale		(2,944,481	)		(1,762,143	)
Proceeds from sale of loans held for sale		3,071,027			1,759,546
Gain on sale and change in fair value of loans held for sale		(52,165	)		(49,985	)
Gain on sale of mortgage servicing rights		(17	)		—
Net (gain) loss on sales or write-downs of foreclosed assets		(771	)		142
Gain on other assets		(39	)		(17	)
Provision for deferred income taxes		7,952			1,046
Changes in:
Other assets and interest receivable		6,303			(22,018	)
Accrued expenses and other liabilities		(19,410	)		7,837
Net cash provided by (used in) operating activities		67,409			(48,494	)
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		12,158			268,995
Maturities, prepayments and calls		41,851			44,172
Purchases		(22,885	)		(202,762	)
Net increase in loans		(114,201	)		(43,551	)
Proceeds from sale of mortgage servicing rights		11,952			—
Purchases of premises and equipment		(1,734	)		(2,515	)
Proceeds from the sale of premises and equipment		39			—
Proceeds from the sale of foreclosed assets		2,930			3,514
Net cash (used in) provided by investing activities		(69,890	)		67,853
Cash flows from financing activities:
Net increase in demand and savings deposits		50,461			1,800
Net increase in time deposits		5,570			74,023
Net decrease in securities sold under agreements to repurchase		(5,218	)		(75,855	)
Decrease in short-term borrowings		(150,000	)		(18,000	)
Payments on long-term debt		(1,102	)		(831	)
Net proceeds from sale of common stock		152,721			—
Dividends paid		—			(9,300	)
Net cash provided by (used in) financing activities		52,432			(28,163	)
Net change in cash and cash equivalents		49,951			(8,804	)
Cash and cash equivalents at beginning of the period		136,327			97,723
Cash and cash equivalents at end of the period	$	186,278		$	88,919

Supplemental cash flow information:
Interest paid	$	5,608		$	4,680
Taxes paid		18,122			1,307
Supplemental noncash disclosures:
Transfers from loans to foreclosed real estate	$	1,162		$	2,176
Transfers from foreclosed real estate to loans		36			259
Transfers from loans held for sale to loans		5,645			3,529
Fair value election of mortgage servicing rights		1,011			—

See accompanying notes to consolidated financial statements (unaudited)

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Note (1)—Basis of presentation:

FB Financial Corporation (the “Company”) is a bank holding company, headquartered in Nashville, Tennessee. FB Financial operates through its wholly-owned banking subsidiary, FirstBank (the “Bank”), with 45 full-service bank branches across Tennessee, north Alabama and north Georgia, and a national mortgage business with office locations across the Southeast.

The consolidated financial statements, including the notes thereto of the Company, formerly First South Bancorp, Inc. until the Company name was changed in 2016, have been prepared in accordance with United States generally accepted accounting principles (“GAAP’) interim reporting requirements, and therefore do not include all information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K.

The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.

The accompanying consolidated financial statements have been prepared in conformity with GAAP and general banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported results of operations for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the determination of the fair value of financial instruments, including investment securities, derivatives and mortgage servicing rights. In connection with the determination of the estimated fair value of foreclosed real estate and impaired loans, management obtains independent appraisals for significant properties.

Certain prior period amounts have been reclassified to conform to the current period presentation without any impact on the reported amounts of net income or shareholders’ equity.

On June 28, 2016, the Company declared a 100-for-1 stock split, increasing the number of issued and authorized shares from 171,800 to 17,180,000 and 250,000 to 25,000,000, respectively. Additional shares issued as a result of the stock split were distributed immediately upon issuance to the shareholder on that date. Share and per share amounts included in the consolidated financial statements and notes thereto reflect the effect of the split for all periods presented. Additionally, in July 2016, the Company increased the number of authorized shares from 25,000,000 to 75,000,000.

On August 19, 2016, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (“SEC”) which was declared effective by the SEC on September 15, 2016. The Company sold and issued 6,764,704 shares of common stock at $19 per share pursuant to that Registration Statement. Total proceeds received by the Company, net of offering costs, were approximately $115,525. The proceeds were used to fund a $55,000 distribution to the majority shareholder and to repay all $10,075 aggregate principal amount of subordinated notes held by the majority shareholder, plus any accrued and unpaid interest thereon.

The Company terminated its S-Corporation status and became a taxable corporate entity (“C Corporation”) on September 16, 2016 in connection with its initial public offering. Pro forma amounts for income tax expense and basic and diluted earnings per share have been presented assuming the Company’s pro forma combined effective tax rate of 37.45% and 37.39% for the three and six months ended June 30, 2016, respectively, as if it had been a C Corporation during that period.

On May 26, 2017, the Company entered into Securities Purchase Agreements (the “Securities Purchase Agreements”) with accredited investors (the “Purchasers”) pursuant to which the Company agreed to sell in a private placement (the “Private Placement”) an aggregate of 4,806,710 shares of the Company’s common stock, par value $1.00 (the “Private Placement Shares”), at a purchase price of $33.00 per share. Total proceeds received from the sale of such Private Placement Shares, net of placement agent and other offering costs, was approximately $152.7 million.

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that occurred through the date of issuance of these financial statements. On July 31, 2017, the Bank completed its previously announced

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

acquisitions of Clayton Bank and Trust and American City Bank headquartered in Knoxville, TN and Tullahoma, TN, respectively. In connection with the acquisition, the Company borrowed $100,000 from the FHLB under short-term borrowing with fixed rates arrangement and entered into certain derivative instruments as discussed in Note 9. See Note 2, “Mergers and acquisitions” in the Notes to the consolidated unaudited financial statements for further details regarding the terms and conditions of the Bank’s acquisitions. Additionally, subsequent to June 30, 2017, the Company began hedging a portion of the mortgage servicing rights portfolio as discussed in Note 6.

The Company has determined that there were no other subsequent events, other than what has been disclosed above, that occurred after June 30, 2017, but prior to the issuance of these financial statements that would have a material impact on the Company’s consolidated financial statements.

As of June 30, 2017, the Company is considered a “controlled company” and is controlled by the Company’s Executive Chairman and former sole shareholder, James W. Ayers. The Company qualifies as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (“JOBS Act”).

Basic earnings per common share are net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under the restricted stock units granted but not yet vested and distributable. Unearned compensation plus assumed proceeds from the applicable tax benefits are used to repurchase common stock at the average market price. There were no dilutive instruments outstanding during the three and six months ended June 30, 2016; therefore, diluted net income per common share is the same as basic net income per share for these periods.

The following is a summary of the basic and diluted earnings per common share calculation for each of the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Basic earnings per share calculation:
Net income	$	11,239	$	15,775	$	20,992	$	30,374
Weighted-average basic shares outstanding		25,741,968		17,180,000		24,944,633		17,180,000
Basic earnings per share	$	0.44	$	0.92	$	0.84	$	1.77
Diluted earnings per share:
Net income	$	11,239	$	15,775	$	20,992	$	30,374
Weighted-average basic shares outstanding		25,741,968		17,180,000		24,944,633		17,180,000
Average diluted common shares outstanding		559,490		—		505,786		—
Weighted-average diluted shares outstanding		26,301,458		17,180,000		25,450,419		17,180,000
Diluted earnings per share	$	0.43	$	0.92	$	0.82	$	1.77
Pro forma earnings per share:
Pro forma net income	$	11,239	$	10,576	$	20,992	$	20,379
Weighted-average basic shares outstanding		25,741,968		17,180,000		24,944,633		17,180,000
Pro forma basic earnings per share	$	0.44	$	0.62	$	0.84	$	1.19
Pro forma diluted earnings per share:
Pro forma net income	$	11,239	$	10,576	$	20,992	$	20,379
Weighted-average diluted shares outstanding		26,301,458		17,180,000		25,450,419		17,180,000
Pro forma diluted earnings per share	$	0.43	$	0.62	$	0.82	$	1.19

Except as set forth below, the Company did not adopt any new accounting policies that were not disclosed in the Company’s 2016 audited financial statements included on Form 10-K.

As of January 1, 2017, the Company elected to account for its mortgage servicing rights under the fair value option as permitted under ASC 860-50-35, Transfers and Servicing. The change in accounting policy resulted in a one-time adjustment to retained earnings of $615 for the after-tax increase in fair value above book value at January 1, 2017.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

There are currently no new accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption that were not disclosed in the Company’s 2016 audited financial statements included on Form 10-K.

Note (2)—Mergers and acquisitions:

Clayton Bank and Trust and American City Bank

On July 31, 2017, the Bank completed its previously-announced merger with Clayton Bank and Trust (“CBT”) and American City Bank (“ACB” and together with CBT, the “Clayton Banks”), pursuant to the Stock Purchase Agreement with Clayton HC, Inc., a Tennessee Corporation (“Seller”) and James L. Clayton, the majority shareholder of Seller dated February 8, 2017 with a purchase price of approximately $236,484. The Company issued 1,521,200 shares of common stock and paid approximately $184,200 to purchase all of the outstanding shares of the Clayton Banks. At closing, the Clayton Banks merged with and into FirstBank, with FirstBank continuing as the surviving banking corporation. Substantially, all of the operations of the Clayton Banks will be included in Banking segment in future periods.

Prior to the determination of purchase accounting adjustments, as of June 30, 2017, the Clayton Banks had approximately $1,200,000 in assets, $1,100,000 in loans, $900,000 in deposits, and 18 banking locations across Tennessee. The Company is finalizing the fair value of certain assets and liabilities as part of the acquisition and as such, purchase accounting is not yet complete.

In connection with the transaction, the Company incurred $767 and $1,254 in merger and conversion expenses during the three and six months ended June 30, 2017, respectively.

Northwest Georgia Bank

On September 18, 2015, the Bank completed its acquisition of Northwest Georgia Bank (NWGB), a bank headquartered in Ringgold, Georgia, pursuant to that certain Agreement and Plan of Merger dated April 27, 2015 by and between the Bank and NWGB. Pursuant to the Agreement and Plan of Merger, NWGB was merged with and into the Bank, with the Bank as the surviving entity. Prior to the acquisition, NWGB operated six banking locations in Georgia and Tennessee. The acquisition of NWGB allowed the Company to further its strategic initiatives by expanding its geographic footprint into certain markets of Georgia and Tennessee. The Company acquired NWGB in a $1,500 cash purchase.

The Company recorded a bargain purchase gain of $2,794 and a core deposit intangible asset of $4,931. The fair value of the core deposit intangible is being amortized on a straight-line basis over the estimated useful life, currently expected to be approximately 10 years.

In connection with the transaction, the Company incurred $1,540 and $2,146 in merger and conversion expenses during the three and six months ended June 30, 2016, respectively.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Note (3)—Investment securities:

The amortized cost of securities and their fair values at June 30, 2017 and December 31, 2016 are shown below:

	June 30, 2017
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Securities Available-for-Sale
Debt securities
U.S. government agency securities	$	999	$	—	$	(9	)	$	990
Mortgage-backed securities - residential		416,011		679		(5,982	)		410,708
Municipals, tax exempt		119,960		3,617		(879	)		122,698
Treasury securities		10,325		—		(15	)		10,310
Total debt securities		547,295		4,296		(6,885	)		544,706
Equity securities		8,780		1		(130	)		8,651
Total securities available-for-sale	$	556,075	$	4,297	$	(7,015	)	$	553,357

	December 31, 2016
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Securities Available-for-Sale
Debt securities
U.S. government agency securities	$	998	$	—	$	(13	)	$	985
Mortgage-backed securities - residential		450,874		939		(7,905	)		443,908
Municipals, tax exempt		116,034		3,003		(2,114	)		116,923
Treasury securities		11,809		—		(52	)		11,757
Total debt securities		579,715		3,942		(10,084	)		573,573
Equity securities		8,744		1		(135	)		8,610
Total securities available-for-sale	$	588,459	$	3,943	$	(10,219	)	$	582,183

Securities pledged at June 30, 2017 and December 31, 2016 had a carrying amount of $380,751 and $390,814, respectively, and were pledged to secure Federal Home Loan Bank advances, a Federal Reserve Bank line of credit, public deposits and repurchase agreements.

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2017 and December 31, 2016 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgage underlying the security may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

	June 30, 2017				December 31, 2016
	Available-for-sale				Available-for-sale
	Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	$	7,798	$	7,870	$	9,290	$	9,352
Due in one to five years		32,299		33,470		25,520		26,340
Due in five to ten years		23,761		24,748		31,122		32,248
Due in over ten years		67,426		67,910		62,909		61,725
		131,284		133,998		128,841		129,665
Mortgage-backed securities - residential		416,011		410,708		450,874		443,908
	$	547,295	$	544,706	$	579,715	$	573,573

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Sales of available-for-sale securities were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Proceeds from sales	$	12,158	$	166,732	$	12,158	$	268,995
Gross realized gains		77		2,939		77		4,339
Gross realized losses		48		348		48		348

The Company also recognized $1 in gains related to the early call of available for sale securities during the six months ended June 30, 2017.

The following tables show gross unrealized losses at June 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	June 30, 2017
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized loss
U.S. government agency securities	$	990	$	9	$	—	$	—	$	990	$	9
Mortgage-backed securities - residential		366,265		5,402		17,527		580		383,792		5,982
Municipals, tax exempt		32,832		868		219		11		33,051		879
Treasury securities		10,310		15		—		—		10,310	$	15
Total debt securities		410,397		6,294		17,746		591		428,143		6,885
Equity securities		—		—		3,033		130		3,033		130
	$	410,397	$	6,294	$	20,779	$	721	$	431,176	$	7,015

	December 31, 2016
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized loss
U.S. government agency securities	$	985	$	13	$	—	$	—	$	985	$	13
Mortgage-backed securities - residential		390,595		7,230		19,073		675		409,668		7,905
Municipals, tax exempt		43,132		2,114		—		—		43,132		2,114
Treasury securities		10,256		52		—		—		10,256		52
Total debt securities		444,968		9,409		19,073		675		464,041		10,084
Equity securities		—		—		3,126		135		3,126		135
	$	444,968	$	9,409	$	22,199	$	810	$	467,167	$	10,219

As of June 30, 2017 and December 31, 2016, the Company’s securities portfolio consisted of 314 and 329 securities, 120 and 151 of which were in an unrealized loss position, respectively.

The Company evaluates securities with unrealized losses for other-than-temporary impairment (OTTI), and the Company recorded no OTTI for the three and six months ended June 30, 2017 and 2016. The unrealized losses associated with these investment securities are primarily driven by interest rates and are not due to the credit quality of the securities. For debt securities, the Company currently does not intend to sell those investments with unrealized losses, and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. For equity securities, the Company has evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and based on that evaluation has the ability and intent to hold these investments until a recovery of fair value.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Note (4)—Loans and allowance for loan losses:

Loans outstanding at June 30, 2017 and December 31, 2016, by major lending classification are as follows:

	June 30,			December 31,
	2017			2016
Commercial and industrial	$	423,704		$	386,233
Construction		282,727			245,905
Residential real estate:
1-to-4 family mortgage		307,152			294,924
Residential line of credit		177,783			177,190
Multi-family mortgage		52,810			44,977
Commercial real estate:
Owner occupied		371,462			357,346
Non-owner occupied		273,285			267,902
Consumer and other		82,051			74,307
Gross loans		1,970,974			1,848,784
Less: Allowance for loan losses		(23,247	)		(21,747	)
Net loans	$	1,947,727		$	1,827,037

As of June 30, 2017 and December 31, 2016, $390,143 and $565,717, respectively, of 1-to-4 family mortgage loans, loans held for sale and multi-family mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line.

As of June 30, 2017 and December 31, 2016, $1,295,281 and $1,072,118, respectively, of commercial and industrial , construction, residential real estate, commercial real estate, and consumer and other loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.

The following provides the allowance for loan losses by portfolio segment and the related investment in loans net of unearned interest for the three and six months ended June 30, 2017 and 2016 (in thousands):

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied			Consumer and other			Total
Three Months Ended June 30, 2017
Beginning balance - March 31, 2017	$	5,402		$	5,598		$	2,896		$	1,514		$	508	$	3,387	$	2,660		$	933		$	22,898
Provision for loan losses		(1,342	)		(48	)		99			(29	)		5		585		(210	)		75			(865	)
Recoveries of loans previously charged-off		1,511			29			14			155			—		11		2			283			2,005
Loans charged off		(131	)		—			(35	)		(195	)		—		—		—			(430	)		(791	)
Ending balance - June 30, 2017	$	5,440		$	5,579		$	2,974		$	1,445		$	513	$	3,983	$	2,452		$	861		$	23,247
Six Months Ended June 30, 2017
Beginning balance - December 31, 2016	$	5,309		$	4,940		$	3,197		$	1,613		$	504	$	3,302	$	2,019		$	863		$	21,747
Provision for loan losses		(1,163	)		587			(140	)		(184	)		9		666		(1,208	)		311			(1,122	)
Recoveries of loans previously charged-off		1,594			58			40			211			—		15		1,641			296			3,855
Loans charged off		(300	)		(6	)		(123	)		(195	)		—		—		—			(609	)		(1,233	)
Ending balance - June 30, 2017	$	5,440		$	5,579		$	2,974		$	1,445		$	513	$	3,983	$	2,452		$	861		$	23,247

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage			Commercial real estate owner occupied			Commercial real estate non-owner occupied			Consumer and other			Total
Three Months Ended June 30, 2016
Beginning balance - March 31, 2016	$	5,242		$	4,518		$	4,280		$	2,075		$	590		$	4,013		$	2,739		$	974		$	24,431
Provision for loan losses		416			(207	)		(661	)		(126	)		(137	)		(161	)		(106	)		193			(789	)
Recoveries of loans previously charged-off		462			64			45			70			—			5			1			99			746
Loans charged off		(196	)		(2	)		(53	)		(75	)		—			(93	)		—			(235	)		(654	)
Ending balance - June 30, 2016	$	5,924		$	4,373		$	3,611		$	1,944		$	453		$	3,764		$	2,634		$	1,031		$	23,734
Six Months Ended June 30, 2016
Beginning balance - December 31, 2015	$	5,135		$	5,143		$	4,176		$	2,201		$	311		$	3,682		$	2,622		$	1,190		$	24,460
Provision for loan losses		515			(873	)		(619	)		(289	)		142			164			7			155			(798	)
Recoveries of loans previously charged-off		472			105			107			107			—			11			5			171			978
Loans charged off		(198	)		(2	)		(53	)		(75	)		—			(93	)		—			(485	)		(906	)
Ending balance - June 30, 2016	$	5,924		$	4,373		$	3,611		$	1,944		$	453		$	3,764		$	2,634		$	1,031		$	23,734

The following table provides the allocation of the allowance for loan losses by loan category broken out between loans individually evaluated for impairment and loans collectively evaluated for impairment as of June 30, 2017 and December 31, 2016:

													June 30, 2017
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Amount of allowance allocated to:
Individually evaluated for impairment	$	38	$	—	$	17	$	—	$	—	$	85	$	62	$	—	$	202
Collectively evaluated for impairment		5,402		5,579		2,957		1,445		513		3,898		2,390		861		23,045
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—
Ending balance - June 30, 2017	$	5,440	$	5,579	$	2,974	$	1,445	$	513	$	3,983	$	2,452	$	861	$	23,247

													December 31, 2016
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Amount of allowance allocated to:
Individually evaluated for impairment	$	135	$	—	$	23	$	—	$	—	$	113	$	242	$	—	$	513
Collectively evaluated for impairment		5,174		4,940		3,174		1,613		504		3,189		1,777		863		21,234
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—		—
Ending balance - December 31, 2016	$	5,309	$	4,940	$	3,197	$	1,613	$	504	$	3,302	$	2,019	$	863	$	21,747

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table provides the amount of loans by loan category broken between loans individually evaluated for impairment and loans collectively evaluated for impairment as of June 30, 2017 and December 31, 2016:

													June 30, 2017
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Loans, net of unearned income
Individually evaluated for impairment	$	1,222	$	299	$	2,191	$	—	$	1,001	$	2,374	$	2,103	$	24	$	9,214
Collectively evaluated for impairment		422,242		278,077		302,961		177,783		51,785		365,087		266,068		82,024		1,946,027
Acquired with deteriorated credit quality		240		4,351		2,000		—		24		4,001		5,114		3		15,733
Ending balance - June 30, 2017	$	423,704	$	282,727	$	307,152	$	177,783	$	52,810	$	371,462	$	273,285	$	82,051	$	1,970,974

													December 31, 2016
	Commercial and industrial		Construction		1-to-4 family residential mortgage		Residential line of credit		Multi- family residential mortgage		Commercial real estate owner occupied		Commercial real estate non-owner occupied		Consumer and other		Total
Loans, net of unearned income
Individually evaluated for impairment	$	1,476	$	2,686	$	2,471	$	311	$	1,027	$	2,752	$	2,201	$	27	$	12,951
Collectively evaluated for impairment		384,279		238,900		290,346		176,879		43,922		350,812		260,361		74,276		1,819,775
Acquired with deteriorated credit quality		478		4,319		2,107		—		28		3,782		5,340		4		16,058
Ending balance - December 31, 2016	$	386,233	$	245,905	$	294,924	$	177,190	$	44,977	$	357,346	$	267,902	$	74,307	$	1,848,784

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company’s risk rating definitions include:

Watch. Loans rated as watch includes loans in which management believes conditions have occurred, or may occur, which could result in the loan being downgraded to a worse rated category. Also included in watch are loans rated as special mention, which have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans rated as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so rated have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Also included in this category are purchased credit impaired loans and loans considered doubtful, which have all the weaknesses previously described and management believes those weaknesses may make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above are considered to be pass rated loans.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table shows credit quality indicators by portfolio class at June 30, 2017 and December 31, 2016:

June 30, 2017	Pass		Watch		Substandard		Total
Commercial and industrial	$	382,189	$	39,404	$	2,111	$	423,704
Construction		275,094		2,701		4,932		282,727
Residential real estate:
1-to-4 family mortgage		291,280		5,135		10,737		307,152
Residential line of credit		174,178		1,424		2,181		177,783
Multi-family mortgage		51,642		143		1,025		52,810
Commercial real estate:
Owner occupied		353,275		9,293		8,894		371,462
Non-owner occupied		259,588		6,216		7,481		273,285
Consumer and other		81,107		447		497		82,051
Total	$	1,868,353	$	64,763	$	37,858	$	1,970,974

December 31, 2016	Pass		Watch		Substandard		Total
Commercial and industrial	$	351,046	$	31,074	$	4,113	$	386,233
Construction		236,588		4,612		4,705		245,905
Residential real estate:
1-to-4 family mortgage		277,948		6,945		10,031		294,924
Residential line of credit		173,011		1,875		2,304		177,190
Multi-family mortgage		43,770		152		1,055		44,977
Commercial real estate:
Owner occupied		338,698		10,459		8,189		357,346
Non-owner occupied		249,877		10,273		7,752		267,902
Consumer and other		73,454		417		436		74,307
Total	$	1,744,392	$	65,807	$	38,585	$	1,848,784

Loans acquired in business combinations that exhibited at the date of acquisition evidence of deterioration of credit quality since origination such that it was probable that all contractually required payments would not be collected are considered to be purchased credit impaired and were as follows at June 30, 2017 and December 31, 2016:

	June 30, 2017		December 31, 2016
Commercial and industrial	$	240	$	478
Construction		4,351		4,319
Residential real estate:
1-to-4 family mortgage		2,000		2,107
Residential line of credit		—		—
Multi-family mortgage		24		28
Commercial real estate:
Owner occupied		4,001		3,782
Non-owner occupied		5,114		5,340
Consumer and other		3		4
Total	$	15,733	$	16,058

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table presents the current carrying value of loans determined to be impaired at the time of acquisition at June 30, 2017 and December 31, 2016:

	June 30, 2017			December 31, 2016
Contractually-required principal and interest	$	21,042		$	22,961
Nonaccretable difference		(3,464	)		(4,459	)
Cash flows expected to be collected		17,578			18,502
Accretable yield		(1,845	)		(2,444	)
Carrying value	$	15,733		$	16,058

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Changes in accretable yield and nonaccretable difference of purchased loans were as follows:

	Accretable yield						Nonaccretable Difference
	Purchased Credit Impaired			Purchased Non-impaired			Purchased Credit Impaired			Purchased Non-impaired			Total
Balance at March 31, 2017	$	(2,142	)	$	(1,103	)	$	(3,756	)	$	—		$	(7,001	)
Principal reductions/ pay-offs		(292	)		—			292			—			—
Charge-offs		—			—			—			—			—
Recoveries		—			—			—			—			—
Accretion		589			259			—			—			848
Balance at June 30, 2017	$	(1,845	)	$	(844	)	$	(3,464	)	$	—		$	(6,153	)

Balance at March 31, 2016	$	(1,460	)	$	(1,729	)	$	(7,698	)	$	—		$	(10,887	)
Principal reductions/ pay-offs		(1,227	)		—			1,227			—			—
Charge-offs		—			—			32			—			32
Sale of credit card portfolio		—			—			—			—			—
Accretion		1,439			116			—			—			1,555
Balance at June 30, 2016	$	(1,248	)	$	(1,613	)	$	(6,439	)	$	—		$	(9,300	)

	Accretable yield						Nonaccretable Difference
	Purchased Credit Impaired			Purchased Non-impaired			Purchased Credit Impaired			Purchased Non-impaired			Total
Balance at December 31, 2016	$	(2,444	)	$	(1,240	)	$	(4,459	)	$	—		$	(8,143	)
Principal reductions/ pay-offs		(990	)		—			990			—			—
Charge-offs		—			—			5			—			5
Recoveries		(23	)		—			—			—			(23	)
Accretion		1,612			396			—			—			2,008
Balance at June 30, 2017	$	(1,845	)	$	(844	)	$	(3,464	)	$	—		$	(6,153	)

Balance at December 31, 2015	$	(1,637	)	$	(2,147	)	$	(8,369	)	$	(70	)	$	(12,223	)
Principal reductions/ pay-offs		(1,458	)		—			1,458			—			—
Charge-offs		—			—			472			—			472
Sale of credit card portfolio		—			—			—			70			70
Accretion		1,847			534			—			—			2,381
Balance at June 30, 2016	$	(1,248	)	$	(1,613	)	$	(6,439	)	$	—		$	(9,300	)

Nonperforming loans include loans that are no longer accruing interest (non-accrual loans) and loans past due ninety or more days and still accruing interest. Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. Loans acquired with deteriorated credit quality amounting to $15,733 and $16,058, respectively, at June 30, 2017 and December 31, 2016 have been excluded from the tables below in accordance with ASC-310-10-50, Receivables- Overall- Disclosure.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table provides the period-end amounts of loans that are past due thirty to eighty-nine days, past due ninety or more days and still accruing interest, loans not accruing interest and loans current on payments accruing interest by category at June 30, 2017 and December 31, 2016:

June 30, 2017	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Total
Commercial and industrial	$	388	$	29	$	1,089	$	421,958	$	423,464
Construction		82		194		244		277,856		278,376
Residential real estate:
1-to-4 family mortgage		2,435		720		2,261		299,736		305,152
Residential line of credit		777		515		541		175,950		177,783
Multi-family mortgage		—		—		—		52,786		52,786
Commercial real estate:
Owner occupied		739		10		1,874		364,838		367,461
Non-owner occupied		—		—		2,293		265,878		268,171
Consumer and other		343		151		25		81,529		82,048
Total	$	4,764	$	1,619	$	8,327	$	1,940,531	$	1,955,241

December 31, 2016	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Total
Commercial and industrial	$	262	$	127	$	1,297	$	384,069	$	385,755
Construction		441		17		254		240,874		241,586
Residential real estate:
1-to-4 family mortgage		3,130		697		2,289		286,701		292,817
Residential line of credit		1,139		433		601		175,017		177,190
Multi-family mortgage		—		—		—		44,949		44,949
Commercial real estate:
Owner occupied		186		—		2,007		351,371		353,564
Non-owner occupied		158		—		2,251		260,153		262,562
Consumer and other		433		55		30		73,785		74,303
Total	$	5,749	$	1,329	$	8,729	$	1,816,919	$	1,832,726

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Impaired loans recognized in conformity with ASC 310 at June 30, 2017 and December 31, 2016, segregated by class, were as follows:

June 30, 2017	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	730	$	445	$	38
Construction		—		—		—
Residential real estate:
1-to-4 family mortgage		96		362		17
Residential line of credit		—		—		—
Multi-family mortgage		—		—		—
Commercial real estate:
Owner occupied		609		648		85
Non-owner occupied		507		1,036		62
Consumer and other		—		—		—
Total	$	1,942	$	2,491	$	202
With no related allowance recorded
Commercial and industrial	$	492	$	631	$	—
Construction		299		315		—
Residential real estate:
1-to-4 family mortgage		2,095		2,097		—
Residential line of credit		—		—		—
Multi-family mortgage		1,001		1,000		—
Commercial real estate:
Owner occupied		1,765		2,222		—
Non-owner occupied		1,596		2,333		—
Consumer and other		24		24		—
Total	$	7,272	$	8,622	$	—
Total impaired loans	$	9,214	$	11,113	$	202

December 31, 2016	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	854	$	854	$	135
Construction		—		—		—
Residential real estate:
1-to-4 family mortgage		103		369		23
Residential line of credit		—		—		—
Multi-family mortgage		—		—		—
Commercial real estate:
Owner occupied		635		654		113
Non-owner occupied		1,151		1,678		242
Consumer and other		1		1		—
Total	$	2,744	$	3,556	$	513
With no related allowance recorded:
Commercial and industrial	$	622	$	746	$	—
Construction		2,686		2,694		—
Residential real estate:
1-to-4 family mortgage		2,368		2,370		—
Residential line of credit		311		321		—
Multi-family mortgage		1,027		1,027		—
Commercial real estate:
Owner occupied		2,117		3,205		—
Non-owner occupied		1,050		1,781		—
Consumer and other		26		26		—
Total	$	10,207	$	12,170	$	—
Total impaired loans	$	12,951	$	15,726	$	513

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Average recorded investment and interest income on a cash basis recognized during the three and six months ended June 30, 2017 and 2016 on impaired loans, segregated by class, were as follows:

	Three Months Ended				Six Months Ended
June 30, 2017	Average recorded investment		Interest income recognized (cash basis)		Average recorded investment		Interest income recognized (cash basis)
With a related allowance recorded:
Commercial and industrial	$	729	$	5	$	792	$	10
Construction		—		—		—		—
Residential real estate:
1-to-4 family mortgage		98		—		100		—
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		616		8		622		20
Non-owner occupied		514		2		829		2
Consumer and other		—		—		1		—
Total	$	1,956	$	15	$	2,343	$	32
With no related allowance recorded
Commercial and industrial	$	519	$	7	$	557	$	16
Construction		302		4		1,493		9
Residential real estate:
1-to-4 family mortgage		2,106		15		2,232		32
Residential line of credit		—		—		156		—
Multi-family mortgage		1,008		12		1,014		23
Commercial real estate:
Owner occupied		1,801		23		1,941		61
Non-owner occupied		1,602		5		1,323		5
Consumer and other		25		—		25		1
Total	$	7,361	$	66	$	8,740	$	147
Total impaired loans	$	9,317	$	81	$	11,083	$	179
June 30, 2016
With a related allowance recorded:
Commercial and industrial	$	848	$	6	$	1,051	$	11
Construction		—		—		154		—
Residential real estate:
1-to-4 family mortgage		481		10		2,130		26
Residential line of credit		160		2		160		2
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		431		1		1,271		1
Non-owner occupied		1,652		2		2,878		8
Consumer and other		—		—		—		—
Total	$	3,571	$	21	$	7,644	$	48
With no related allowance recorded
Commercial and industrial	$	578	$	—	$	488	$	4
Construction		1,549		31		2,676		62
Residential real estate:
1-to-4 family mortgage		2,661		38		1,746		96
Residential line of credit		—		—		—		—
Multi-family mortgage		1,030		11		1,060		12
Commercial real estate:
Owner occupied		1,799		7		943		43
Non-owner occupied		1,389		—		1,110		1
Consumer and other		13		—		—		—
Total	$	9,018	$	87	$	8,023	$	218
Total impaired loans	$	12,589	$	108	$	15,667	$	266

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

As of June 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $8,488 and $8,802, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one lower than the current market rate. The Company has allocated $189 and $402 of specific reserves for those loans at June 30, 2017 and December 31, 2016, respectively, and has committed to lend additional amounts totaling up to $1 and $1, respectively to these customers. Of these loans, $4,295 and $4,265 were classified as non-accrual loans as of June 30, 2017 and December 31, 2016.

The following table presents the financial effect of TDRs recorded during the periods indicated:


Three Months Ended June 30, 2016	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Residential real estate:
1-to-4 family mortgage	2	$	14	$	14	$	—
Total	2	$	14	$	14	$	—

Six Months Ended June 30, 2017	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Commercial and industrial	1	$	5	$	5	$	—
Commercial real estate:
Owner occupied	1		377		377		—
Non-owner occupied	2		711		711		—
Total	4	$	1,093	$	1,093	$	—

Six Months Ended June 30, 2016	Number of loans	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Residential real estate:
1-4 family mortgage	4	$	722	$	722	$	39
Total	4	$	722	$	722	$	39

There were no TDR’s recorded during the three months ended June 30, 2017. Additionally, there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2017 or 2016.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The terms of certain other loans were modified during the six months ended June 30, 2017 and 2016 that did not meet the definition of a troubled debt restructuring. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Note (5)—Foreclosed real estate:

The amount reported as real estate acquired through foreclosure proceedings is carried at fair value less estimated cost to sell the property. The following table summarizes the foreclosed real estate for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Balance at beginning of period	$	6,811		$	10,533		$	7,403		$	11,641
Transfers from loans		274			1,646			1,162			2,176
Properties sold		(702	)		(1,954	)		(2,930	)		(3,514	)
Gain on sale of foreclosed assets		77			12			948			69
Transferred to loans		(36	)		(192	)		(36	)		(259	)
Write-downs and partial liquidations		(54	)		(143	)		(177	)		(211	)
Balance at end of period	$	6,370		$	9,902		$	6,370		$	9,902

Foreclosed residential real estate properties included in the table above totaled $2,255 and $2,265 as of June 30, 2017 and December 31, 2016, respectively. The recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $349 and $44 at June 30, 2017 and December 31, 2016, respectively.

Note (6)—Mortgage servicing rights:

Changes in the Company’s mortgage servicing rights were as follows for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Carrying value prior to policy change	$	47,593		$	36,611		$	32,070		$	29,711
Fair value impact of change in accounting policy (See Note 1)		—			—			1,011			—
Carrying value at beginning of period		47,593			36,611			33,081			29,711
Capitalization		14,646			10,653			29,659			19,783
Amortization		—			(1,968	)		—			(3,425	)
Sales		(11,935	)		—			(11,935	)		—
Impairment		—			(4,914	)		—			(5,687	)
Change in fair value:
Due to pay-offs/pay-downs		(532	)		—			(797	)		—
Due to change in valuation inputs or assumptions		(1,308	)		—			(1,544	)		—
Carrying value at June 30	$	48,464		$	40,382		$	48,464		$	40,382

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table summarizes servicing income and expense included in mortgage banking income and other noninterest expense within the Mortgage Segment operating results, respectively, for the three and six months ended June 30, 2017 and 2016, respectively:

	Three Months Ended June 30,						Six Months Ended June 30,
		2017			2016			2017			2016
Servicing income:
Servicing income	$	2,747		$	2,655		$	5,495		$	4,651
Change in fair value of mortgage servicing rights		(1,840	)		—			(2,341	)		—
Gross servicing income		907			2,655			3,154			4,651
Servicing expenses:
Servicing asset amortization		—			1,968			—			3,425
Servicing asset impairment		—			4,914			—			5,687
Loss on sale of mortgage servicing rights		249			—			249			—
Other servicing expenses		1,204			538			2,138			946
Gross servicing expenses		1,453			7,420			2,387			10,058
Net servicing (loss) income	$	(546	)	$	(4,765	)	$	767		$	(5,407	)

Data and key economic assumptions related to the Company’s mortgage servicing rights as of June 30, 2017 and December 31, 2016 are as follows:

	June 30,			December 31,
		2017			2016
Unpaid principal balance	$	4,245,457		$	2,833,958
Weighted-average prepayment speed (CPR)		9.10	%		8.40	%
Estimated impact on fair value of a 10% increase		(1,942	)		(1,256	)
Estimated impact on fair value of a 20% increase		(3,756	)		(2,434	)
Discount rate		9.87	%		9.54	%
Estimated impact on fair value of a 100 bp increase		(1,907	)		(1,394	)
Estimated impact on fair value of a 200 bp increase		(3,669	)		(2,679	)
Weighted-average coupon interest rate		3.88	%		3.59	%
Weighted-average servicing fee (basis points)		28			27
Weighted-average remaining maturity (in months)		337			328

From time to time, the Company enters agreements to sell certain tranches of mortgage servicing rights. Upon consummation of the sale, the Company continues to subservice the underlying mortgage loans until they can be transferred to the purchaser. During the three and six months ended June 30, 2017, the Company sold $11,935 of mortgage servicing rights on $1,086,465 of serviced mortgage loans. As of June 30, 2017, the Company subserviced $1,065,761 related to this transaction. At December 31, 2016, the Company subserviced $3,332,903 relating to mortgage servicing rights sold during the last half of 2016.

Subsequent to June 30, 2017, the Company began hedging approximately 50% of the mortgage servicing rights portfolio with various derivative instruments to offset changes in the fair value of the related mortgage servicing rights.

Note (7)—Income taxes:

In connection with the initial public offering, as discussed in Note 1, the Company terminated its S-Corporation status and became a taxable entity (C Corporation) on September 16, 2016. As such, periods prior to September 16, 2016 will only reflect an effective state income tax rate. During the third quarter of 2016, the net deferred tax liability increased $13,181 from the conversion in the taxable status. The net deferred tax liability is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (GAAP) and tax purposes. The consolidated statements of income present pro forma statements of income for the prior year periods.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Allocation of federal and state income taxes between current and deferred portions is as follows:

	For the three months ended
	June 30,
	2017		2016
Current	$	4,047	$	1,036
Deferred		2,527		97
Total	$	6,574	$	1,133

	For the six months ended
			June 30,
	2017		2016
Current	$	4,047	$	1,128
Deferred		7,952		1,046
Total	$	11,999	$	2,174

Federal income tax expense for the three and six months ended June 30, 2017 and 2016 differs from the statutory federal rate of 35% due to the following:

	For the three months ended
	June 30,
	2017			2016
Federal taxes calculated at statutory rate	$	6,234		$	—
Increase (decrease) resulting from:
State taxes, net of federal benefit		741			1,082
Benefit of equity based compensation		(1	)		—
Other		(400	)		51
Income tax expense, as reported	$	6,574		$	1,133

	For the six months ended
				June 30,
	2017			2016
Federal taxes calculated at statutory rate	$	11,539		$	—
Increase (decrease) resulting from:
State taxes, net of federal benefit		1,351			2,083
Benefit of equity based compensation		(196	)		—
Other		(695	)		91
Income tax expense, as reported	$	11,999		$	2,174

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The components of the net deferred tax liability at June 30, 2017 and December 31, 2016, are as follows:

	June 30,			December 31,
	2017			2016
Deferred tax assets:
Allowance for loan losses	$	9,103		$	8,516
Amortization of core deposit intangible		962			996
Compensation related		5,648			7,552
Unrealized loss on securities		1,066			2,462
Other		2,279			2,430
Subtotal		19,058			21,956
Deferred tax liabilities:
FHLB stock dividends		(827	)		(827	)
Depreciation		(6,449	)		(6,548	)
Mortgage servicing rights		(18,979	)		(12,558	)
Other		(6,331	)		(6,203	)
Subtotal		(32,586	)		(26,136	)
Net deferred tax liability	$	(13,528	)	$	(4,180	)

In recording the impact of the conversion to a C Corporation during the third quarter of 2016, the Company recorded a deferred income tax expense of $2,955 related to the unrealized gain on available for sale securities through the income statement in accordance with ASC 740-20-45-8; therefore, the amount shown in other comprehensive income has not been reduced by the above expense. This difference will remain in OCI until the underlying securities are sold or mature in accordance with the portfolio approach allowed under ASC 740.

Tax periods for all fiscal years after 2012 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

Note (8)—Commitments and contingencies:

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.

Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

	June 30,		December 31,
	2017		2016
Commitments to extend credit, excluding interest rate lock commitments	$	666,372	$	579,879
Letters of credit		19,007		22,547
Balance at end of period	$	685,379	$	602,426

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

In connection with the sale of mortgage loans to third party investors, the Bank makes usual and customary representations and warranties as to the propriety of its origination activities. Occasionally, the investors require the Bank to repurchase loans sold to them under the terms of the warranties. When this happens, the loans are recorded at fair value with a corresponding charge to a valuation reserve. The total principal amount of loans repurchased (or indemnified for) was $921 and $1,418 and $1,770 and $3,445 for the three and six months ended June 30, 2017 and 2016, respectively. The Bank has established a reserve associated with loan repurchases. This reserve is recorded in accrued expenses and other liabilities on the consolidated balance sheet. The following table summarizes the activity in the repurchase reserve:

	For the three months ended					For the six months ended
	June 30,					June 30,
	2017			2016		2017			2016
Balance at beginning of period	$	2,842		$	2,546	$	2,659		$	2,156
Provision for loan repurchases or indemnifications		201			313		384			703
Recoveries on previous losses		—			—		—			—
Losses on loans repurchased or indemnified		(6	)		—		(6	)		—
Balance at end of period	$	3,037		$	2,859	$	3,037		$	2,859

Note (9)—Derivatives:

The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure as well as the exposure for its customers. Derivative financial instruments are included in the Consolidated Balance Sheets line item “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Under such commitments, interest rates for a mortgage loan are typically locked in for up to forty-five days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. The notional amount of commitments to fund fixed-rate mortgage loans was $546,520 and $532,920 at June 30, 2017 and December 31, 2016, respectively. The Company also enters into mandatory delivery forward commitments to sell residential mortgage loans to secondary market investors. The notional amount of commitments to sell residential mortgage loans to secondary market investors was $751,500 and $829,000 at June 30, 2017 and December 31, 2016, respectively. Gains and losses arising from changes in the valuation of the commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.

The Company has entered into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into an offsetting derivative contract position. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At June 30, 2017 and December 31, 2016, the Company had notional amounts of $92,142 and $22,243, respectively, on interest rate contracts with corporate customers and $92,142 and $22,243, respectively, in offsetting interest rate contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts and certain fixed-rate loans. The fair value on the swaps was $1,350 and $586 at June 30, 2017 and December 31, 2016, respectively. Additionally, on June 30, 2017 the Company began hedging interest rate exposure on the outstanding subordinated debentures included in long-term debt amounting to $30,930 though interest rate swaps with a total notional amount of $30,000. As of June 30, 2017, the fair value of these swaps was $0.

Certain financial instruments, including derivatives, may be eligible for offset in the Consolidated Balance Sheet when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. The Company has not elected to offset such financial instruments in the Consolidated Balance Sheets.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table provides details on the Company’s derivative financial instruments as of the dates presented:

	Balance Sheet Classification	Fair Value
		June 30,		December 31,
		2017		2016
Derivative assets:
Not designated as hedging:
Interest rate swaps	Other Assets	$	1,350	$	586
Forward commitments	Other Assets		1,604		12,731
Interest rate-lock commitments	Other Assets		7,937		6,428
Total		$	10,891	$	19,745

Derivative liabilities:
Not designated as hedging:
Interest rate swaps	Other Liabilities	$	1,350	$	586
Forward commitments	Other Liabilities		—		—
Total		$	1,350	$	586

Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Derivatives not designated as hedging instruments:
Interest rate lock commitments:
Included in mortgage banking income	$	(1,433	)	$	4,697		$	1,509		$	11,965
Forward commitments:
Included in mortgage banking income		(3,928	)		(8,022	)		(7,248	)		(16,775	)
Total	$	(5,361	)	$	(3,325	)	$	(5,739	)	$	(4,810	)

On July 28, 2017, the Company entered into three separate interest rate swaps with Wells Fargo Bank with notional amounts of $30,000, $35,000 and $35,000 for a period of three, four and five years, respectively, to swap shorter-term FHLB advance borrowings of $100,000 obtained on the same date from floating-to-fixed interest rate structures as a part of the funding strategy associated with the Clayton Banks acquisition.

Note (10)—Fair value of financial instruments:

ASC 820-10 establishes a framework for measuring the fair value of assets and liabilities according to a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The hierarchy is broken down into the following three levels, based on the reliability of inputs:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as 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.

Level 3: Significant unobservable inputs for assets or liabilities that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the assets or liabilities.

The Company records the fair values of financial assets and liabilities on a recurring and non-recurring basis using the following methods and assumptions:

Available-for-sale securities—Available-for-sale securities are recorded at fair value on a recurring basis. Fair values for securities are based on quoted market prices, where available. If quoted prices are not available, fair values are based on quoted market prices of similar instruments or are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the pricing relationship or correlation among other benchmark quoted securities. Available-for-sale securities valued using quoted market prices of similar instruments or that are valued using matrix pricing are classified as Level 2. When significant inputs to the valuation are unobservable, the available-for-sale securities are classified within Level 3 of the fair value hierarchy.

Where no active market exists for a security or other benchmark securities, fair value is estimated by the Company with reference to discount margins for other high risk securities.

Loans held for sale—Loans held for sale are carried at fair value. Fair value is used is determined using current secondary market prices for loans with similar characteristics, that is, using Level 2 inputs.

Derivatives—The fair value of the interest rate swaps are based upon fair values provided from entities that engage in interest rate swap activity and is based upon projected future cash flows and interest rates. Fair value of commitments is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, the difference between current levels of interest rates and the committed rates is also considered. These financial instruments are classified as Level 2.

Foreclosed real estate—Foreclosed real estate (“REO”) is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations. REO acquired in settlement of indebtedness is recorded at the lower of the carrying amount of the loan or the fair value of the real estate less costs to sell. Fair value is determined on a nonrecurring basis based on appraisals by qualified licensed appraisers and is adjusted for management’s estimates of costs to sell and holding period discounts. The valuations are classified as Level 3.

Mortgage servicing rights—Servicing rights are carried at fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. Mortgage servicing rights are disclosed as Level 3.

Impaired loans—Loans considered impaired under FASB ASC 310, Receivables, are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value adjustments for impaired loans are recorded on a non-recurring basis as either partial write downs based on observable market prices or current appraisal of the collateral. Impaired loans are classified as Level 3.

The following methods were used to estimate the fair value of the Company’s financial instruments which were not previously presented:

Cash and cash equivalents—Cash and cash equivalents consist of cash and due from banks with other financial institutions and federal funds sold. The carrying amount reported in the consolidated balance sheets approximates the fair value based upon the short-term nature of these assets. Also included are interest-bearing deposits in financial institutions. Interest bearing deposits in financial institutions consist of interest bearing accounts at the Federal Reserve

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Bank and Federal Home Loan Bank. The carrying value reported in the consolidated balance sheets approximates the fair value based upon the short-term nature of the assets.

Federal Home Loan Bank stock—The carrying value of Federal Home Loan Bank stock reported in the consolidated balance sheets approximates the fair value as the stock is redeemable at the carrying value.

Loans—For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based upon carrying values. Fixed rate loan fair values are estimated using a discounted cash flow analysis based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits—The fair value disclosed for demand deposits (both interest bearing and noninterest bearing) and savings deposits are equal to the amount payable on demand as of the reporting date. The fair value of the time deposits is estimated using a discounted cash flow method based upon current rates for similar types of accounts.

Short term borrowings—The fair value of the lines of credit which represent federal funds purchased approximate the carrying value of the amounts reported on the balance sheet due to the short-term nature of these liabilities.

Securities sold under agreement to repurchase—The fair value of the securities sold under agreement to repurchase approximate the carrying value of the amounts reported on the balance sheet due to the short-term nature of these liabilities.

Long-term debt—The fair value of long-term debt is determined using discounted cash flows using current rates.

Accrued interest payable and receivable – The carrying amounts of accrued interest approximate fair value.

The estimated fair values of the Company’s financial instruments are as follows:

			Fair Value
June 30, 2017	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	186,278	$	186,278	$	—	$	—	$	186,278
Available-for-sale securities		553,357		—		548,808		4,549		553,357
Federal Home Loan Bank Stock		7,743		—		—		7,743		7,743
Loans, net		1,947,727		—		1,933,996		518		1,934,514
Loans held for sale		427,416		—		427,416		—		427,416
Interest receivable		7,012		—		7,012		—		7,012
Mortgage servicing rights		48,464		—		—		48,464		48,464
Derivatives		10,891		—		10,891		—		10,891
Financial liabilities:
Deposits:
Without stated maturities	$	2,330,992	$	2,330,992	$	—	$	—	$	2,330,992
With stated maturities		396,601		—		393,788		—		393,788
Securities sold under agreement to repurchase		16,343		16,343		—		—		16,343
Interest payable		501		65		436		—		501
Long-term debt		43,790		—		48,426		—		48,426
Derivatives		1,350		—		1,350		—		1,350

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

			Fair Value
December 31, 2016	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	136,327	$	136,327	$	—	$	—	$	136,327
Available-for-sale securities		582,183		—		577,634		4,549		582,183
Federal Home Loan Bank Stock		7,743		—		—		7,743		7,743
Loans, net		1,827,037		—		1,822,054		1,281		1,823,335
Loans held for sale		507,442		—		507,442		—		507,442
Interest receivable		7,241		—		7,241		—		7,241
Mortgage servicing rights, net		32,070		—		—		33,081		33,081
Derivatives		19,745		—		19,745		—		19,745
Financial liabilities:
Deposits:
Without stated maturities	$	2,280,531	$	2,280,531	$	—	$	—	$	2,280,531
With stated maturities		391,031		—		390,484		—		390,484
Securities sold under agreement to repurchase		21,561		21,561		—		—		21,561
Short term borrowings		150,000		150,000		—		—		150,000
Interest payable		620		237		383		—		620
Long-term debt		44,892		—		47,377		—		47,377
Derivatives		586		—		586		—		586

The balances and levels of the assets measured at fair value on a recurring basis at June 30, 2017 are presented in the following tables:

At June 30, 2017	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities	$	—	$	990	$	—	$	990
Mortgage-backed securities		—		410,708		—		410,708
Municipals, tax-exempt		—		122,698		—		122,698
Treasury securities		—		10,310		—		10,310
Equity securities		—		4,102		4,549		8,651
Total	$	—	$	548,808	$	4,549	$	553,357
Loans held for sale		—		427,416		—		427,416
Mortgage servicing rights		—		—		48,464		48,464
Derivatives		—		10,891		—		10,891
Financial Liabilities:
Derivatives	$	—	$	1,350	$	—	$	1,350

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The balances and levels of the assets measured at fair value on a non-recurring basis at June 30, 2017 are presented in the following tables:

At June 30, 2017	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Non-recurring valuations:
Financial assets:
Foreclosed assets	$	—	$	—	$	1,434	$	1,434
Impaired loans:
Commercial and industrial		—		—		367		367
Commercial real estate:
Non-owner occupied		—		—		151		151
Total	$	—	$	—	$	518	$	518

The balances and levels of the assets measured at fair value on a recurring basis at December 31, 2016 are presented in the following tables:

At December 31, 2016	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities	$	—	$	985	$	—	$	985
Mortgage-backed securities		—		443,908		—		443,908
Municipals, tax-exempt		—		116,923		—		116,923
Treasury securities		—		11,757		—		11,757
Equity securities		—		4,061		4,549		8,610
Total	$	—	$	577,634	$	4,549	$	582,183
Loans held for sale		—		507,442		—		507,442
Derivatives		—		19,745		—		19,745
Financial Liabilities:
Derivatives	$	—	$	586	$	—	$	586

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2016 are presented in the following tables:

At December 31, 2016	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Non-recurring valuations:
Financial assets:
Foreclosed assets	$	—	$	—	$	2,315	$	2,315
Mortgage servicing rights		—		—		32,070		32,070
Impaired Loans:
Commercial and industrial		—		—		542		542
Commercial real estate:
Owner occupied		—		—		635		635
Non-owner occupied		—		—		—		—
Construction		—		—		—		—
Residential real estate:
1-4 family mortgage		—		—		103		103
Multifamily		—		—		—		—
Consumer and other		—		—		1		1
Total	$	—	$	—	$	1,281	$	1,281

There were no transfers between Level 1, 2 or 3 during the periods presented.

There was no change in fair value on available-for-sale securities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, during either of the three or six months ended June 30, 2017 and 2016.

The fair value of certain of the Company’s equity are determined from information derived from external parties that calculate discounted cash flows using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk and optionality. When available, broker quotes are used to validate the model. Industry research reports as well as assumptions about specific-issuer defaults and deferrals are reviewed and incorporated into the calculations. There is no established market for the Company’s equity securities, and as such, the Company has estimated that historical costs approximates market value.

The following table presents information as of June 30, 2017 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

Financial instrument

Fair Value

Valuation technique

Significant Unobservable inputs

Range of

inputs

Impaired loans

518

Valuation of collateral

Discount for comparable sales

0%-30%

Foreclosed assets

1,434

Appraised value of property less costs to sell

Discount for costs to sell

0%-10%

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table presents information as of December 31, 2016 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

Financial instrument	Fair Value		Valuation technique	Significant Unobservable inputs	Range of inputs
Impaired loans	$	1,281	Valuation of collateral	Discount for comparable sales	0%-30%
Foreclosed assets	$	2,315	Appraised value of property less costs to sell	Discount for costs to sell	0%-10%
Mortgage servicing rights, net	$	33,081	Discounted cash flows	See Note 6	See Note 6

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the lending administrative department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry wide statistics.

Fair value option

The Company elected to measure all loans originated for sale at fair value under the fair value option as permitted under ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.

Net gains of $1,864 and $5,216 and $9,470 and $6,795 resulting from fair value changes of the mortgage loans were recorded in income during the three and six months ended June 30, 2017 and 2016, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both loans held for sale and the related derivative instruments are recorded in Mortgage Banking Income in the Consolidated Statements of Income.

The Company’s valuation of loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal. Interest income on loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is reflected in loan interest income in the Consolidated Statements of Income.

The following table summarizes the differences between the fair value and the principal balance for loans held for sale measured at fair value as of June 30, 2017 and December 31, 2016:

June 30, 2017	Aggregate fair value		Aggregate Unpaid Principal Balance		Difference
Mortgage loans held for sale measured at fair value	$	427,416	$	412,007	$	15,409
Past due loans of 90 days or more		—		—		—
Nonaccrual loans		—		—		—

December 31, 2016
Mortgage loans held for sale measured at fair value	$	507,442	$	501,503	$	5,939
Past due loans of 90 days or more		—		—		—
Nonaccrual loans		—		—		—

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Note (11)—Segment reporting:

The Company and the Bank are engaged in the business of banking and provide a full range of financial services. The Company determines reportable segments based on the significance of the segment’s operating results to the overall Company, the products and services offered, customer characteristics, processes and service delivery of the segments and the regular financial performance review and allocation of resources by the Chief Executive Officer (“CEO”), the Company’s chief operating decision maker. The Company has identified two distinct reportable segments—Banking and Mortgage. The Company’s primary segment is Banking, which provides a full range of deposit and lending products and services to corporate, commercial and consumer customers. The Company offers full-service conforming residential mortgage products, including conforming residential loans and services through the Mortgage segment utilizing mortgage offices outside of the geographic footprint of the Banking operations as well as internet delivery channels. Additionally, the Mortgage Segment includes the servicing of residential mortgage loans and the packaging and securitization of loans to governmental agencies. The residential mortgage products and services originated in our Banking footprint and related revenues and expenses are included in our Banking segment. The Company’s mortgage division represents a distinct reportable segment which differs from the Company’s primary business of commercial and retail banking.

The financial performance of the Mortgage segment is assessed based on results of operations reflecting direct revenues and expenses and allocated expenses. This approach gives management a better indication of the operating performance of the segment. When assessing the Banking segment’s financial performance the CEO utilizes reports with indirect revenues and expenses including but not limited to the investment portfolio, electronic delivery channels and areas that primarily support the banking segment operations. Therefore these are included in the results of the Banking segment. Other indirect revenue and expenses related to general administrative areas are also included in the internal financial results reports of the Banking segment utilized by the CEO for analysis and are thus included for Banking segment reporting. The Mortgage segment utilizes funding sources from the Banking segment in order to fund mortgage loans that are ultimately sold on the secondary market. The Mortgage segment uses the proceeds from loan sales to repay obligations due to the Banking segment.

During 2016, the Company realigned its segment reporting structure to reclassify mortgage banking income and related expenses associated with retail mortgage originations within our Banking geographic footprint from the Mortgage segment to the Banking segment. This change was made to capture all of the product and service offerings for our Banking customer base within our banking geographic footprint into the Banking segment while capturing all of the mortgage banking activities outside of the banking footprint into the Mortgage segment to allow our CEO to better determine resource allocations and operating performance for each segment. As such, the tables below have been revised to reflect the reclassification for all periods presented.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following tables provides segment financial information for the three and six months ended June 30, 2017 and 2016 follows:

Three Months Ended June 30, 2017	Banking			Mortgage			Consolidated
Net interest income	$	29,999		$	428		$	30,427
Provision for loan loss		(865	)		—			(865	)
Mortgage banking income		7,118			24,961			32,079
Change in fair value of mortgage servicing rights (1)		—			(1,840	)		(1,840	)
Other noninterest income		5,418			—			5,418
Depreciation		861			130			991
Amortization of intangibles		123			—			123
Loss on sale of mortgage servicing rights		—			249			249
Other noninterest mortgage banking expense		5,368			19,423			24,791
Other noninterest expense		22,982			—			22,982
Income before income taxes		14,066			3,747			17,813
Income tax expense								6,574
Net income								11,239
Total assets	$	2,878,437		$	468,133		$	3,346,570
Goodwill		46,767			100			46,867
(1) Included in mortgage banking income.

Three Months Ended June 30, 2016	Banking			Mortgage			Consolidated
Net interest income	$	29,217		$	(859	)	$	28,358
Provision for loan loss		(789	)		—			(789	)
Mortgage banking income		7,215			22,918			30,133
Other noninterest income		8,223			—			8,223
Depreciation		901			106			1,007
Amortization of intangibles		527			—			527
Amortization and impairment of mortgage servicing rights		—			6,882			6,882
Other noninterest mortgage banking expense		4,072			15,463			19,535
Other noninterest expense		22,644			—			22,644
Income before income taxes		17,300			(392	)		16,908
Income tax expense								1,133
Net income								15,775
Total assets	$	2,508,867		$	409,091		$	2,917,958
Goodwill		46,767			100			46,867

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

Six Months Ended June 30, 2017	Banking			Mortgage			Consolidated
Net interest income	$	59,855		$	823		$	60,678
Provision for loan loss		(1,122	)		—			(1,122	)
Mortgage banking income		12,784			44,876			57,660
Change in fair value of mortgage servicing rights (1)		—			(2,341	)		(2,341	)
Other noninterest income		11,425			—			11,425
Depreciation		1,725			268			1,993
Amortization of intangibles		515			—			515
Loss on sale of mortgage servicing rights		—			249			249
Other noninterest mortgage banking expense		10,204			36,955			47,159
Other noninterest expense		45,637			—			45,637
Income before income taxes		27,105			5,886			32,991
Income tax expense								11,999
Net income								20,992
Total assets	$	2,878,437		$	468,133		$	3,346,570
Goodwill		46,767			100			46,867

(1)	Included in mortgage banking income

Six Months Ended June 30, 2016	Banking			Mortgage			Consolidated
Net interest income	$	55,231		$	(930	)	$	54,301
Provision for loan loss		(798	)		—			(798	)
Mortgage banking income		13,359			41,277			54,636
Other noninterest income		14,755			—			14,755
Depreciation and amortization		1,802			220			2,022
Amortization of intangibles		1,079			—			1,079
Amortization and impairment of mortgage servicing rights		—			9,112			9,112
Other noninterest mortgage banking expense		7,930			28,859			36,789
Other noninterest expense		42,940			—			42,940
Income before income taxes		30,392			2,156			32,548
Income tax expense								2,174
Net income								30,374
Total assets	$	2,508,867		$	409,091		$	2,917,958
Goodwill		46,767			100			46,867

Our Banking segment provides our Mortgage segment with a warehouse line of credit that is used to fund mortgage loans held for sale. The warehouse line of credit had a prime interest rate of 4.25% and 3.50% as of June 30, 2017 and 2016, respectively. The amount of interest paid by our Mortgage segment to our Banking segment under this warehouse line of credit is recorded as interest income to our Banking segment and as interest expense to our Mortgage segment, both of which are included in the calculation of net interest income for each segment. The amount of interest paid by our Mortgage segment to our Banking segment under this warehouse line of credit was $3,831 and $2,824 and $7,382 and $5,083 for the three and six months ended June 30, 2017 and 2016, respectively.

Note (12)—Minimum capital requirements:

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

For June 30, 2017 and December 31, 2016 Interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of June 30, 2017 and December 31, 2016, the Bank and Company met all capital adequacy requirements to which it is subject. Also, as of June 30, 2017, the most recent notification from the FDIC, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The table below includes new regulatory capital ratio requirements that became effective on January 1, 2015. Beginning in 2016, an additional conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservative buffer will be fully phased in January 1, 2019 at 2.5 percent.

Actual and required capital amounts and ratios are presented below at period-end:

	Actual					For capital adequacy purposes					Minimum Capital adequacy with capital buffer					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2017
Total Capital (to risk-weighted assets)
FB Financial Corporation	$	516,889		19.14	%	$	216,046		8.0	%	$	249,803		9.25	%	N/A		N/A
FirstBank		330,106		12.26	%		215,404		8.0	%		249,060		9.25	%	$	269,254		10.0	%
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	493,642		18.28	%	$	162,027		6.0	%	$	195,783		7.25	%	N/A		N/A
FirstBank		306,859		11.40	%		161,505		6.0	%		195,152		7.25	%	$	161,505		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	493,642		15.54	%	$	127,064		4.0	%	N/A		N/A			N/A		N/A
FirstBank		306,859		9.67	%		126,932		4.0	%	N/A		N/A			$	158,665		5.0	%
Common Equity Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	463,642		17.16	%	$	121,584		4.5	%	$	155,358		5.75	%	N/A		N/A
FirstBank		306,859		11.40	%		121,129		4.5	%		154,775		5.75	%	$	174,963		6.5	%

	Actual					For capital adequacy purposes					Minimum Capital adequacy with capital buffer					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2016
Total Capital (to risk-weighted assets)
FB Financial Corporation	$	338,893		13.03	%	$	208,069		8.0	%	$	224,325		8.63	%	N/A		N/A
FirstBank		304,018		11.72	%		207,521		8.0	%		223,733		8.63	%	$	259,401		10.0	%
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	317,146		12.19	%	$	156,101		6.0	%	$	172,362		6.63	%	N/A		N/A
FirstBank		282,271		10.88	%		155,664		6.0	%		171,879		6.63	%	$	155,664		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	317,146		10.05	%	$	126,227		4.0	%	N/A		N/A			N/A		N/A
FirstBank		282,271		8.95	%		126,155		4.0	%	N/A		N/A			$	157,693		5.0	%
Common Equity Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	287,146		11.04	%	$	117,043		4.5	%	$	133,299		5.13	%	N/A		N/A
FirstBank		282,271		10.88	%		116,748		4.5	%		132,963		5.13	%	$	168,636		6.5	%

Note (13)—Stock-Based Compensation:

The Company granted shares of common stock and restricted stock units as a part of its initial public offering and compensation arrangements for the benefit of employees, executive officers, and directors. Restricted stock unit grants are subject to time-based vesting. The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the service conditions set forth in the grant agreements.

Following the initial public offering, participants in the EBI Plans were given the option to elect conversion of their outstanding cash-settled EBI Units to stock-settled EBI Units.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

The following table summarizes information about vested and unvested restricted stock units outstanding at June 30, 2017:

	Six Months Ended
	June 30, 2017
	Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value
Balance at beginning of period		1,200,848		$	19.00
Grants		97,893			33.88
Released and distributed (vested)		(70,819	)		19.00
Forfeited/expired		(1,021	)		19.00
Balance at end of period		1,226,901		$	19.67

The total fair value of restricted stock units vested and released was $3 and $1,346 for the three and six months ended June 30, 2017.

The compensation cost related to stock grants and vesting of restricted stock units was $1,802 and $3,154 for the three and six months ended June 30, 2017, respectively. This included $277 paid to Company independent directors during the three months ended June 30, 2017 related to one time IPO grants and director compensation elected to be settled in stock.

As of June 30, 2017 and December 31, 2016, there were $15,579 and $15,721, respectively, of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 3.46 years and 3.66 years, respectively.

At June 30, 2017 and December 31, 2016, there were 67,470 and 180,447 units valued at $2,442 and $4,683, respectively, remaining in the equity based incentive plans for employees who elected cash settlement of EBI units. Expense related to the cash settled EBI for the three and six months ended June 30, 3017 was $184 and $482, respectively.

Employee Stock Purchase Plan:

In 2016, the Company adopted an employee stock purchase plan (“ESPP”) under which employees, through payroll deductions, are able to purchase shares of Company common stock. The purchase price was 85% with respect to the first offering period, and is 95% with respect to the current offering period, of the lower of the market price on the first or last day of the offering period. The maximum number of shares issuable during any offering period is 200,000 shares, and a participant may not purchase more than 725 shares during any offering period (and, in any event, no more than $25,000 worth of common stock in any calendar year). There were not any shares issued under the ESPP during the three or six months ended June 30, 2017. As of June 30, 2017 and December 31, 2016, there were 2,479,623 shares available for issuance under the ESPP.

Note (14)—Related party transactions:

(A) Loans:

The Bank has made and expects to continue to make loans to the directors, certain management and executive officers of the Company and their affiliates in the ordinary course of business. In management’s opinion, these transactions with directors and executive officers complied with federal banking Regulation O and were made on substantially the same terms as those prevailing at the time for comparable transactions with other unaffiliated persons and did not involve more than the normal risk.

FB Financial Corporation and subsidiaries

Notes to consolidated financial statements

(Unaudited)

(Amounts are in thousands except share and per share amounts)

An analysis of loans to executive officers, certain management, and directors of the Bank and their affiliates follows:

Loans outstanding at January 1, 2017	$	27,370
New loans and advances		2,264
Repayments		(2,416	)
Loans outstanding at June 30, 2017	$	27,218

Unfunded commitments to certain executive officers and directors and their associates totaled $5,720 and $6,838 at June 30, 2017 and December 31, 2016, respectively.

(B) Deposits:

The Bank held deposits from related parties totaling $139,448 and $150,373 as of June 30, 2017 and December 31, 2016, respectively.

The Bank leases various office spaces from entities related to the majority shareholder and his son, who is also a Director of the Company, under varying terms. The Company had $148 and $158 in unamortized leasehold improvements related to these leases at June 30, 2017 and December 31, 2016, respectively. These improvements are being amortized over a term not to exceed the length of the lease. Lease expense for these properties totaled $124 and $130 and $250 and $264 for the three and six months ended June 30, 2017 and 2016, respectively.

(D) Subordinated debt:

On February 12, 1996, the Company borrowed $775 from the shareholder through a term subordinated note. On August 26, 1999, the Company borrowed $3,300 from the shareholder through a term subordinated note. On June 30, 2006, the Company borrowed $6,000 from the shareholder through a term subordinated note. The total of $10,075 was repaid with cash proceeds from the sale of common stock in the initial public offering, as discussed in Note 1. The Company paid interest payments related to these subordinated debentures to the shareholder amounting to approximately $56 and $124 for the three and six months ended June 30, 2016, respectively.

(E) Investment securities transactions:

The Company holds an investment in a fund that was issued by an entity owned by one of its directors. The balance in the investment was $1,145 and $1,145 as of June 30, 2017 and December 31, 2016, respectively.

(F) Aviation time sharing agreement:

Effective May 24, 2016, the Company entered an aviation time sharing agreement with an entity owned by the majority shareholder and his son, who is also a Director of the Company. This replaces the previous agreement dated December 21, 2012. During the three and six months ended June 30, 2017 and 2016, the Company made payments of $2 and $14 and $27 and $32, respectively, under these agreements.

ITEM 2—Management’s discussion and analysis of financial condition and results of operations

The following is a discussion of our financial condition at June 30, 2017 and December 31, 2016 and our results of operations for the three and six months ended June 30, 2017 and 2016, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 that was filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017 (our “Annual Report”) and with the accompanying unaudited notes to consolidated financial statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 (this “Report”).

Cautionary note regarding forward-looking statements

Certain statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements relating to our projected growth, our anticipated future financial performance, our financial condition, our credit quality, management’s long-term performance goals, the anticipated benefits, costs and financial impact of our acquisition of Clayton Bank and Trust and American City Bank, the performance of the banking and mortgage industry and the condition of the economy in general, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected developments or events, our business, growth and strategies. These statements, which are based on certain assumptions and estimates and describe our future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions.

These forward-looking statements are not historical facts and are based upon our current expectations, estimates, assumptions and projections about our business, our industry and the economy in general. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates, assumptions and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance or outcomes and are subject to various risks, assumptions and uncertainties. Although we believe that the expectations, estimates, assumptions and projections reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or will be important risks and other factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, those risks and other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 under the captions “Cautionary note regarding forward-looking statements” and “Risk Factors.” Many of these factors are beyond our ability to control or predict.

Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this Report. Our past results of operations are not necessarily indicative of our future results. You should not unduly rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

We qualify all of our forward-looking statements by these cautionary statements.

Critical accounting policies

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. Within our financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated balance sheet dates and our results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgments necessary to prepare our financial statements. Our critical accounting policies are described in our Annual Report under the captions “Item 7 – Management’s discussion and analysis of financial condition and results of operations – Critical accounting policies” and “Item 8 – Financial Statement and Supplementary Data – Notes to consolidated financial statements.” In the first quarter of 2017, we adopted a new accounting policy electing fair value on mortgage servicing rights (“MSRs”), which is further described in the “Part I. Financial Information – Notes to Consolidated Financial Statements” on this Report.

Overview

We are a bank holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly-owned bank subsidiary, FirstBank, the third largest bank headquartered in Tennessee, based on total assets. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, North Alabama, and North Georgia. At June 30, 2017, our footprint included 45 full-service bank branches serving the following Metropolitan Statistical areas (“MSAs”): Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, Jackson, and Huntsville (AL) and 12 community markets throughout Tennessee. See “Mergers and acquisitions” for discussion on additional branches added as a result of our merger with the Clayton Banks. FirstBank also provides mortgage banking services utilizing its bank branch network and mortgage banking offices strategically located throughout the southeastern United States and a national internet delivery channel.

We operate through two segments, Banking and Mortgage. We generate most of our revenue in our Banking segment from interest on loans and investments, loan-related fees, mortgage originations in our banking footprint, investment services and deposit-related fees. We generate most of our revenue in our Mortgage segment, from origination fees and gains on sales in the secondary market of mortgage loans that we originate outside our Banking footprint or through our internet delivery channels and from servicing these mortgage loans. Our primary source of funding for our loans is customer deposits, and, to a lesser extent, Federal Home Loan Bank advances and other borrowings.

Selected historical consolidated financial data

The following table presents certain selected historical consolidated financial data as of the dates or for the period indicated:

	As of or for the three months ended						As of or for the six months ended						As of or for the year ended
	June 30,						June 30,						December 31,
	2017			2016			2017			2016			2016
Statement of Income Data
Total interest income	$	33,278		$	30,680		$	66,167		$	58,922		$	120,494
Total interest expense		2,851			2,322			5,489			4,621			9,544
Net interest income		30,427			28,358			60,678			54,301			110,950
Provision for loan losses		(865	)		(789	)		(1,122	)		(798	)		(1,479	)
Total noninterest income		35,657			38,356			66,744			69,391			144,685
Total noninterest expense		49,136			50,595			95,553			91,942			194,790
Net income before income taxes		17,813			16,908			32,991			32,548			62,324
Income tax expense		6,574			1,133			11,999			2,174			21,733
Net income		11,239			15,775			20,992			30,374			40,591
Net interest income (tax—equivalent basis)		31,158			28,967			62,121			55,412			113,311
Per Common Share
Basic net income		0.44			0.92			0.84			1.77			2.12
Diluted net income		0.43			0.92			0.82			1.77			2.10
Book value(1)		17.59			15.47			17.59			15.47			13.71
Tangible book value(5)		15.83			12.41			15.83			12.41			11.58
Pro Forma Statement of Income and Per Common Share Data(4)
Pro forma provision for income tax		6,574			6,332			11,999			12,169			22,902
Pro forma net income		11,239			10,576			20,992			20,379			39,422
Pro forma net income per common share—basic		0.44			0.62			0.84			1.19			2.06
Pro forma net income per common share—diluted		0.43			0.62			0.82			1.19			2.04
Selected Balance Sheet Data
Cash and due from banks		59,112			52,122			59,112			52,122			50,157
Loans held for investment		1,970,974			1,750,304			1,970,974			1,750,304			1,848,784
Allowance for loan losses		(23,247	)		(23,734	)		(23,247	)		(23,734	)		(21,747	)
Loans held for sale		427,416			322,249			427,416			322,249			507,442
Available-for-sale securities, fair value		553,357			550,307			553,357			550,307			582,183
Foreclosed real estate, net		6,370			9,902			6,370			9,902			7,403
Total assets		3,346,570			2,917,958			3,346,570			2,917,958			3,276,881
Total deposits		2,727,593			2,514,297			2,727,593			2,514,297			2,671,562
Borrowings		43,790			55,785			43,790			55,785			194,892
Total shareholders' equity		509,517			265,768			509,517			265,768			330,498
Selected Ratios
Return on average:
Assets(2)		1.40	%		2.19	%		1.32	%		2.11	%		1.35	%
Shareholders' equity(2)		11.30	%		24.42	%		11.56	%		23.94	%		14.68	%
Average shareholders' equity to average assets		12.37	%		8.96	%		11.45	%		8.82	%		9.22	%
Net interest margin (tax-equivalent basis)		4.19	%		4.40	%		4.24	%		4.20	%		4.10	%
Efficiency ratio		74.35	%		75.84	%		74.99	%		74.33	%		76.20	%
Adjusted efficiency ratio (tax-equivalent basis)(5)		70.18	%		67.92	%		71.66	%		69.55	%		70.59	%
Loans held for investment to deposit ratio		72.26	%		69.61	%		72.26	%		69.61	%		69.20	%
Yield on interest-earning assets		4.57	%		4.73	%		4.61	%		4.55	%		4.45	%
Cost of interest-bearing liabilities		0.55	%		0.48	%		0.53	%		0.47	%		0.48	%
Cost of total deposits		0.34	%		0.28	%		0.33	%		0.28	%		0.29	%
Pro Forma Selected Ratios
Pro forma return on average assets(2)(4)		1.40	%		1.47	%		1.32	%		1.42	%		1.31	%
Pro forma return on average equity(2)(4)		11.30	%		16.37	%		11.56	%		16.06	%		14.25	%
Credit Quality Ratios
Allowance for loan losses to loans, net of unearned income		1.18	%		1.36	%		1.18	%		1.36	%		1.18	%
Allowance for loan losses to nonperforming loans		233.73	%		213.70	%		233.73	%		213.70	%		216.22	%
Nonperforming loans to loans, net of unearned income		0.50	%		0.63	%		0.50	%		0.63	%		0.54	%
Capital Ratios (Company)
Shareholders' equity to assets		15.23	%		9.11	%		15.23	%		9.11	%		10.09	%
Tier 1 capital (to average assets)		15.54	%		7.98	%		15.54	%		7.98	%		10.05	%
Tier 1 capital (to risk-weighted assets)(3)		18.28	%		9.57	%		18.28	%		9.57	%		12.19	%
Total capital (to risk-weighted assets)(3)		19.14	%		11.00	%		19.14	%		11.00	%		13.03	%
Tangible common equity to tangible assets(5)		13.92	%		7.44	%		13.92	%		7.44	%		8.65	%
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)		17.16	%		8.30	%		17.16	%		8.30	%		11.04	%
Capital Ratios (Bank)
Shareholders' equity to assets		10.55	%		10.12	%		10.55	%		10.12	%		9.94	%
Tier 1 capital (to average assets)		9.67	%		8.02	%		9.67	%		8.02	%		8.95	%
Tier 1 capital (to risk-weighted assets)(3)		11.40	%		9.65	%		11.40	%		9.65	%		10.88	%
Total capital to (risk-weighted assets)(3)		12.26	%		10.92	%		12.26	%		10.92	%		11.72	%
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)		11.40	%		9.65	%		11.40	%		9.65	%		10.88	%

(1)

Book value per share equals our total shareholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding as of June 30, 2017 and 2016 and December 31, 2016 was 28,968,160 and 17,180,000 and 24,107,660, respectively.

(2)

We have calculated our return on average assets and return on average equity for a period by dividing net income for that period by our average assets and average equity, as the case may be, for that period. We have calculated our pro forma return on average assets and pro forma return on average equity for a period by calculating our pro forma net income for that period as described in footnote 5 below and dividing that by our average assets and average equity, as the case be, for that period. We calculate our average assets and average equity for a period by dividing the sum of our total asset balance or total stockholder’s equity balance, as the case may be, as of the close of business on each day in the relevant period and dividing by the number of days in the period.

(3)	We calculate our risk-weighted assets using the standardized method of the Basel III Framework as of June 30, 2017 and December 31, 2016 and the Basel II Framework for June 30, 2016, as implemented by the Federal Reserve and the FDIC.

(4)

We have calculated our pro forma net income, pro forma net income per share, pro forma returns on average assets and pro forma return on average equity for each period shown by calculating a pro forma provision for federal income tax using a combined effective income tax rate of 37.45%, 37.39% and 36.75% for the three and six months ended June 30, 2016 and for the year ended December 31, 2016, respectively, and adjusting our historical net income for each period to give effect to the pro forma provision for U.S. federal income tax for such period.

(5)

These measures are not measures prepared in accordance with United States generally accepted accounting principles (“GAAP”), and are therefore considered to be non-GAAP financial measures. See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a reconciliation of these measures to their most comparable GAAP measures.

GAAP reconciliation and management explanation of non-GAAP financial measures

We identify certain of the financial measures discussed in this Report as being “non-GAAP financial measures.” The non-GAAP financial measures presented in this Report are adjusted efficiency ratio (tax equivalent basis), tangible book value per common share and tangible common equity to tangible assets.

In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our summary historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have presented in our summary historical consolidated financial data when comparing such non-GAAP financial measures. The following discussion and reconciliations provide a more detailed analysis of these non-GAAP financial measures.

Adjusted efficiency ratio (tax equivalent basis)

The adjusted efficiency ratio (tax equivalent basis) is a non-GAAP measure that excludes securities gains (losses), merger-related and conversion expenses, one time IPO equity grants and other selected items. Our management uses this measure in its analysis of our performance. Our management believes this measure provides a greater understanding of ongoing operations and enhances comparability of results with prior periods, as well as demonstrates the effects of significant gains and charges. The most directly comparable financial measure calculated in accordance with GAAP is the efficiency ratio.

The following table presents, as of the dates set forth below, a reconciliation of our adjusted efficiency ratio (tax equivalent basis) to our efficiency ratio:

	Three Months Ended June 30,						Six Months Ended June 30,						Year ended December 31,
(dollars in thousands, except per share data)	2017			2016			2017			2016			2016
Adjusted efficiency ratio (tax-equivalent basis)
Total noninterest expense	$	49,136		$	50,595		$	95,553		$	91,942		$	194,790
Less vesting of one time equity grants		—			—			—			—			2,960
Less variable compensation charge related to cash settled equity awards previously issued		—			—			635			—			1,254
Less merger and conversion expenses		767			1,540			1,254			2,146			3,268
Less impairment of MSRs		—			4,914			—			5,687			4,678
Less loss on sale of MSRs		249			—			249			—			4,447
Adjusted noninterest expense	$	48,120		$	44,141		$	93,415		$	84,109		$	178,183
Net interest income (tax-equivalent basis)	$	31,158		$	28,967		$	62,121		$	55,412		$	113,311
Total noninterest income		35,657			38,356			66,744			69,391			144,685
Less change in fair value on MSRs		(1,840	)		—			(2,341	)		—			—
Less gain on sales or (write-downs) of other real estate		23			(131	)		771			(142	)		1,282
Less gain (loss) on sale of other assets		39			(123	)		39			17			(103	)
Less gain on sales of securities		29			2,591			30			3,991			4,407
Adjusted noninterest income	$	37,406		$	36,019		$	68,245		$	65,525		$	139,099
Adjusted operating revenue	$	68,564		$	64,986		$	130,366		$	120,937		$	252,410
Efficiency ratio (GAAP)		74.35	%		75.84	%		74.99	%		74.33	%		76.20	%
Adjusted efficiency ratio (tax-equivalent basis)		70.18	%		67.92	%		71.66	%		69.55	%		70.59	%

Tangible book value per common share and tangible common equity to tangible assets

Tangible book value per common share and tangible common equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other companies. The most directly comparable financial measures calculated in accordance with GAAP are book value per common share and our total shareholders’ equity to total assets.

The following table presents, as of the dates set forth below, reconciliations of our tangible common equity to our total shareholders’ equity, our tangible book value per common share to our book value per common share and our tangible common equity to tangible assets to our total shareholders’ equity to total assets:

	As of June 30,						As of December 31,
(dollars in thousands, except per share data)	2017			2016			2016
Tangible Assets
Total assets	$	3,346,570		$	2,917,958		$	3,276,881
Adjustments:
Goodwill		(46,867	)		(46,867	)		(46,867	)
Core deposit intangibles		(4,048	)		(5,616	)		(4,563	)
Tangible assets	$	3,295,655		$	2,865,475		$	3,225,451
Tangible Common Equity
Total shareholders' equity	$	509,517		$	265,768		$	330,498
Adjustments:
Goodwill		(46,867	)		(46,867	)		(46,867	)
Core deposit intangibles		(4,048	)		(5,616	)		(4,563	)
Tangible common equity	$	458,602		$	213,285		$	279,068
Common shares outstanding		28,968,160			17,180,000			24,107,660
Book value per common share	$	17.59		$	15.47		$	13.71
Tangible book value per common share		15.83			12.41			11.58
Total shareholders' equity to total assets		15.23	%		9.11	%		10.09	%
Tangible common equity to tangible assets		13.92	%		7.44	%		8.65	%

Mergers and acquisitions

Clayton Bank and Trust and American City Bank

On July 31, 2017, the Company and FirstBank completed its previously-announced merger with Clayton Bank and Trust (“CBT”) and American City Bank (“ACB” and together with CBT, the “Clayton Banks”), pursuant to the Stock Purchase Agreement dated February 8, 2017 with Clayton HC, Inc., a Tennessee Corporation (“Seller”) and James L. Clayton, the majority shareholder of Seller, in the transaction was valued at approximately $236.4 million. The Company issued 1,521,200 shares of common stock and paid approximately $184.2 million to purchase all of the outstanding shares of the Clayton Banks. At closing, the Clayton Banks merged with and into FirstBank, with FirstBank continuing as the surviving banking corporation. Prior to the determination of purchase accounting adjustments, at June 30, 2017, the Clayton Banks had approximately $1.20 billion in assets, $1.10 billion in loans, $900.0 million in deposits, and 18 banking locations across Tennessee. Substantially, all of the operations of the Clayton Banks will be included in Banking segment in future periods. The Clayton Banks will continue to be operated under their existing names as divisions of FirstBank until conversion of their core systems which is currently planned during the fourth quarter of 2017. We have incurred merger and conversion expenses connected with this transaction amounting to $0.8 million and $1.3 million during the three and six months ended June 30, 2017, respectively.

Northwest Georgia Bank

On September 18, 2015, we completed our acquisition of Northwest Georgia Bank, which we refer to as NWGB, pursuant to the Agreement and Plan of Merger dated April 27, 2015. We acquired the stock of NWGB for $1.5 million in cash. NWGB was a 110-year old institution with six branches, serving clients in Chattanooga, Tennessee MSA, including northern Georgia. We acquired net assets with a fair value of approximately $272 million, which includes a bargain purchase gain of $2.8 million, loans with a fair value of approximately $79 million, and assumed liabilities of approximately $268 million, including deposits with a fair value of approximately $246 million. At the acquisition date, $4.9 million of core deposit intangible assets were recorded. Additionally, we recorded merger and conversion related charges totaling $1.5 million and $2.1 million for the three and six months ended June 30, 2016, respectively.

Factors affecting comparability of financial results

S Corporation status

From our formation in 2001 through September 16, 2016, we elected to be taxed for federal income tax purposes as a “Subchapter S corporation” under the provisions of Section 1361 through 1379 of the Internal Revenue Code. As a result, our net income was not subject to, and we have not paid, U.S. federal income taxes, and we have not been required to make any provision or recognize any liability for federal income tax in our financial statements for the periods ending on or prior to September 16, 2016. We terminated our status as a “Subchapter S” corporation in connection with our initial public offering as of September 16, 2016. We commenced paying federal income taxes on our pre-tax net income and our net income for each fiscal year and each interim period commencing on or after September 16, 2016 will reflect a provision for federal income taxes. As a result of that change in our status under the federal income tax laws, the net income and earnings per share data presented in our historical financial statements set forth elsewhere in this Report, which do not include any provision for federal income taxes, will not be comparable with our future net income and earnings per share in periods in which we are taxed as a C corporation, which will be calculated by including a provision for federal income taxes. Pro forma amounts for income tax expense and basic and diluted earnings per share are presented in the consolidated statements of income assuming the Company’s pro forma tax rates of 37.45% and 37.39% for the three and six months ended June 30, 2016, respectively, as if it had been a C corporation during those periods.

Although we did not historically pay federal income tax until our conversion to C corporation status, in the past, we made periodic cash distributions to our majority (and formerly sole) shareholder in amounts estimated to be necessary for him to pay his estimated individual U.S. federal income tax liabilities related to our taxable income that was “passed through” to him. Our historical cash flows and financial condition were affected by such cash distributions in prior periods.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized in income in the third quarter of 2016 in which such change took place. On September 16, 2016, the Company recorded an additional net deferred tax liability of $13.2 million to recognize the difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases as of the date that the Company became a taxable corporate entity. In recording the impact of the conversion to a C Corporation, the Company recorded a deferred income tax expense of $3.0 million related to the unrealized gain on available for sale securities through the income statement; therefore, the amount shown in other comprehensive income has not been reduced by the above expense. This difference will remain in OCI until the underlying securities are sold or mature.

Public company costs

On August 19, 2016, we publicly filed a Registration Statement on Form S-1 (File No. 333-213210) with the SEC. That Registration Statement was declared effective by the SEC on September 15, 2016. We sold and issued 6,764,704 shares of common stock at $19 per share pursuant to that Registration Statement. Total proceeds received, net of offering costs, were approximately $115.5 million. A portion of the proceeds were used to fund a $55.0 million distribution to the majority shareholder representing undistributed earnings previously taxed to him under subchapter S, and a portion of the proceeds were used to repay all $10.1 million aggregate principal amount of subordinated notes held by the majority shareholder, plus any accrued and unpaid interest thereon. We qualify as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (JOBS Act).

There are additional costs associated with operating as a public company, hiring additional personnel, enhancing technology and expanding our capabilities. We expect that these costs will include legal, regulatory, accounting, investor relations and other expenses that we did not incur as a private company. Sarbanes-Oxley, as well as rules adopted by the SEC, the FDIC and the New York Stock Exchange also require public companies to implement specified corporate governance practices. In addition, due to regulatory changes in the banking industry and the implementation of new laws, rules and regulations, we are now subject to higher regulatory compliance costs. These additional rules and regulations also increase our legal, regulatory, accounting and financial compliance costs and make some activities more time-consuming.

Overview of recent financial performance

Results of operation

For the three months ended June 30, 2017, net income was $11.2 million compared to $15.8 million in the three months ended June 30, 2016. Pre-tax income was $17.8 million in the three months ended June 30, 2017 compared with $16.9 million in the same period in 2016. Diluted earnings per share were $0.43 and $0.92 for the three months ended June 30, 2017 and 2016, respectively. Pro forma net income on a C Corporation basis was $10.6 million and pro forma earnings per share was $0.62 for the three months ended June 30, 2016. Our net income represented a ROAA of 1.40% and 2.19% for the three months ended June 30, 2017 and 2016, respectively, and a ROAE of 11.30% and 24.42% for the same periods. Our ratio of average shareholders’ equity to average assets in the three months ended June 30, 2017 and 2016 was 12.37% and 8.96%, respectively.

For the six months ended June 30, 2017, net income was $21.0 million compared to $30.4 million in the six months ended June 30, 2016. Pre-tax income was $33.0 million in the six months ended June 30, 2017 compared with $32.5 million in the same period in 2016. Diluted earnings per share were $0.82 and $1.77 for the six months ended June 30, 2017 and 2016, respectively. Pro forma net income was $20.4 million and pro forma earnings per share were $1.19 for the six months ended June 30, 2016. Our net income represented a ROAA of 1.32% and 2.11% for the six months ended June 30, 2017 and 2016, respectively, and a ROAE of 11.56% and 23.94% for the same periods. Our ratio of average shareholders’ equity to average assets in the six months ended June 30, 2017 and 2016 was 11.45% and 8.82%, respectively.

During the three months ended June 30, 2017, net interest income increased to $30.4 million compared to $28.4 million in the three months ended June 30, 2016, which was attributable to an increase in interest income, primarily driven by loan growth. Our net interest margin, on a tax-equivalent basis, decreased to 4.19% for the three months ended June 30, 2017 as compared to 4.40% for the three months ended June 30, 2016, due primarily to decreased loan fees, and accretion associated with the acquisition of the NWGB loan portfolio. Noninterest income for the three months ended June 30, 2017 compared to the same period in 2016 decreased by $2.7 million, or 7.0%, due primarily to $2.6 million in securities gain included in the three months ended June 30, 2016.

Noninterest expense also decreased to $49.1 million for the three months ended June 30, 2017 compared to $50.6 million for the three months ended June 30, 2016, reflecting the change to fair value election on MSRs as of January 1, 2017 offset by continued increases in personnel costs associated with our growth.

During the six months ended June 30, 2017, net interest income increased to $60.7 million compared to $54.3 million in the six months ended June 30, 2016, which was attributable to an increase in interest income, primarily driven by loan growth. Our net interest margin, on a tax-equivalent basis, increased to 4.24% as compared to 4.20% for the six months ended June 30, 2017 and 2016, respectively, due to our continued efforts to maintain our cost of funds, loan growth and increased volume in loans held for sale. Noninterest income for the six months ended June 30, 2017 compared to the same period in 2016 decreased by $2.6 million, or 3.8%, primarily due to decreased gains on sale of securities.

Noninterest expense also increased to $95.6 million for the six months ended June 30, 2017 compared to $91.9 million for the six months ended June 30, 2016, reflecting continued increases in personnel costs associated with our growth in addition to increased data processing and advertising costs.

Financial condition

Our total assets increased by 2.1% to $3.35 billion at June 30, 2017 as compared to $3.28 billion at December 31, 2016, due to a $122.2 million increase in loans held for investment to $1.97 billion offset by a decline in loans held for sale of $80.0 million to $427.4 million at June 30, 2017.

We grew total deposits by 2.1% to $2.73 billion as compared to December 31, 2016. Noninterest bearing deposits as a percentage of total deposits was 26.2% at June 30, 2017 compared to 26.1% at December 31, 2016.

Business segment highlights

We operate our business in two business segments: Banking and Mortgage. See “Part I. Financial Information – Notes to Consolidated Financial Statements – Note (11) – Segment reporting” in this Report.

During the first quarter of 2016, management evaluated the current composition of its operating segments –Banking and Mortgage. The primary focus of the evaluation was on capturing all of the revenue and expenses from all customer activities within the Banking segment’s geographic footprint. Specifically, the primary product and service that was not previously captured by the Banking segment related to our retail mortgage origination activities occurring within our banking geographic footprint and typically within our existing branch network. Therefore, we have reclassified the revenue

and associated expenses from the retail mortgage origination activities within the Banking geographic footprint into the Banking segment from the Mortgage segment for all periods presented. Based on the review and evaluation of the revised information, our chief executive officer believes that this presentation better presents the results of each segment to enhance overall resource allocation and evaluation of the Company’s performance. Additionally, we believe that the revised results of the Banking segment become more comparable to other banking organizations for analysis and understanding of the Banking segment operating results.

As discussed above, the mortgage retail origination activities within the Banking segment contributed the following to Banking segment results:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2017		2016		2017		2016
Mortgage banking income	$	7,118	$	7,215	$	12,784	$	13,359
Noninterest expense		5,368		4,072		10,204		7,930

Banking

Income before taxes decreased by $3.2 million, or 18.7%, in the three months ended June 30, 2017 to $14.1 million as compared to $17.3 million in the three months ended June 30, 2016 due primarily to $2.6 million in securities gains included in the three months ended June 30, 2016. Noninterest expense increased $1.2 million, primarily due to our overall growth and volume.

Income before taxes decreased by $3.3 million, or 10.8%, in the six months ended June 30, 2017 to $27.1 million as compared to $30.4 million in the six months ended June 30, 2016. The decrease reflects a decline of $2.8 million, or 52.5%, in mortgage banking contribution from retail origination activities. Noninterest expense increased $4.3 million, primarily due to our overall growth and volume coupled with an increase in expenses associated with our retail mortgage closing activities.

Mortgage

Income before taxes from the mortgage segment increased $4.1 million in the three months ended June 30, 2017 to $3.7 million as compared to a loss of $0.4 million in the three months ended June 30, 2016 primarily due to increased commitments. Interest rate lock commitment volume increased $693.5 million, or 47.4%, during the three months ended June 30, 2017 due to increased activity in our correspondent channel, which was established during the second quarter of 2016. Noninterest income increased $0.2 million to $23.1 million for the three months ended June 30, 2017 as compared to $22.9 for the three months ended June 30, 2016, driven by the increase in interest rate lock commitment volume in the during the period. On January 1, 2017, fair value accounting was elected on the MSRs; the change in fair value is now included in mortgage banking income and amounted to a $1.8 million charge during the three months ended June 30, 2017. Previous to this change, amortization and impairment of MSRs was included in noninterest expense and amounted to $6.9 million for the three months ended June 30, 2016. This decline in amortization and impairment was partially offset by an increase in other mortgage noninterest expense related to the correspondent channel and increased production overall. Interest rate lock commitments in the pipeline at June 30, 2017 were $546.5 million compared with $727.9 million at June 30, 2016 and $532.9 million at December 31, 2016.

Income before taxes from the mortgage segment increased $3.7 million in the six months ended June 30, 2017 to $5.9 million as compared to $2.2 million in the six months ended June 30, 2016. This increase is primarily attributable to increases in overall interest rate lock commitment volume driven by growth in our correspondent channel. Interest rate lock commitment volume increased $1,072.2 million for the six months ended June 30, 2017 to $3,755.8 million as compared to $2,683.7 million for the six months ended June 30, 2016. Noninterest income increased $1.3 million to $42.5 million for the six months ended June 30, 2017 as compared to $41.3 million for the six months ended June 30, 2016, driven by an increase in mortgage banking income of $1.3 million reflecting the significant increase in volume. This increase was partially offset by a $2.3 million charge related to the change in fair value of the MSRs during the six months ended June 30, 2017. Noninterest expense decreased by a $0.7 million, which included amortization and impairment of MSRs of $9.1 million in the six months ended June 30, 2016. This was partially offset by increased expenses of $8.4 million during the six month ended June 30, 2017 related to increased sales volume amounting to $3,026.5 million in the six months ended June 30, 2017, an increase of 76.2% over the same period in the previous year.

Results of operation

Throughout the following discussion of our operating results, we present our net interest income, net interest margin and efficiency ratio on a fully tax-equivalent basis. The fully tax-equivalent basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, which enhances comparability of net interest income arising from taxable and tax-exempt sources. The adjustment to convert certain income to a tax-equivalent basis consists of dividing tax exempt income by one minus the combined federal and state statutory income tax rate of 39.225%.

Net interest income

Our net interest income is primarily affected by the interest rate environment, and by the volume and the composition of our interest-earning assets and interest-bearing liabilities. We utilize net interest margin, or NIM, which represents net interest income, on a tax-equivalent basis, divided by average interest-earning assets, to track the performance of our investing and lending activities. We earn interest income from interest, dividends and fees earned on interest-earning assets, as well as from amortization and accretion of discounts on acquired loans. Our interest-earning assets include loans, time deposits in other financial institutions and securities available for sale. We incur interest expense on interest-bearing liabilities, including interest-bearing deposits, borrowings and other forms of indebtedness as well as from amortization of premiums on purchased deposits. Our interest-bearing liabilities include deposits, advances from the FHLB, other borrowings and other liabilities.

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Net interest income increased 7.3% to $30.4 million in the three months ended June 30, 2017 compared to $28.4 million in the three months ended June 30, 2016. On a tax-equivalent basis, net interest income increased $2.2 million to $31.2 million in the three months ended June 30, 2017 as compared to $29.0 million in the three months ended June 30, 2016. The increase in tax-equivalent net interest income in the three months ended June 30, 2017 was primarily driven by increased volume and rates on mortgage loans held for sale resulting in a $2.3 million increase in interest income.

Interest income, on a tax-equivalent basis, was $34.0 million for the three months ended June 30, 2017, compared to $31.3 million for the three months ended June 30, 2016, an increase of $2.7 million. The two largest components of interest income are loan income and investment income. Loan income consists primarily of interest earned on our loan held for investment portfolio in addition to loans held for sale. Investment income consists primarily of interest earned on our investment portfolio. Loan income on loans held for investment, on a tax-equivalent basis, increased $0.2 million to $25.0 million from $24.8 million for the three months ended June 30, 2016 primarily due to increased loan balances of $206.2 million. The tax-equivalent yield on loans was 5.17%, down 59 basis points from the three months ended June 30, 2016. The decrease in yield was primarily due to decreased accretion associated with specific pay-offs on loans purchased from NWGB, which yielded 0.17% for the three months ended June 30, 2017 compared with 0.36% for the three months ended June 30, 2016, in addition to decreased loan fees and syndicated loan fees, which decreased 27 basis points and 17 basis points, respectively.

The components of our loan yield, a key driver to our NIM for the three months ended June 30, 2017 and 2016, were as follows:

	Three Months Ended June 30, 2017					Three Months Ended June 30, 2016
(dollars in thousands)	Interest income/ expense		Average yield/ rate			Interest income/ expense		Average yield/ rate
Loan yield components:
Contractual interest rate on loans held for investment (1)	$	22,553		4.66	%	$	19,927		4.61	%
Origination and other loan fee income		1,534		0.32	%		2,536		0.59	%
Accretion on purchased loans		848		0.17	%		1,555		0.36	%
Syndicated fee income		87		0.02	%		825		0.19	%
Total loan yield	$	25,022		5.17	%	$	24,843		5.75	%

(1)	Includes tax equivalent adjustment using combined rate of 39.225%

Accretion on purchased loans contributed 11 and 24 basis points to the NIM for the three months ended June 30, 2017 and 2016, respectively. Additionally, syndicated loan fees contributed 1 and 12 basis points to the NIM for the three months ended June 30, 2017 and 2016, respectively.

For the three months ended June 30, 2017, interest income on loans held for sale increased by $2.3 million compared to the three months ended June 30, 2016. The increase resulted from an increase in volume of $1.3 million and an increase in rates of $1.0 million. For the three months ended June 30, 2017, investment income, on a tax-equivalent basis, remained level at $4.3 million for the three months ended June 30, 2017 compared to $4.2 million for the three months ended June 30, 2016. The average balance in the investment portfolio for the three months ended June 30, 2017 was $564.9 million compared to $582.0 million in the three months ended June 30, 2016. The decline in the balance is driven by the use of investment cash flow to fund loan growth and overall asset liability management.

Interest expense was $2.9 million for the three months ended June 30, 2017, an increase of $0.5 million, or 22.8%, as compared to the three months ended June 30, 2016. The increase in interest expense was due primarily to an increase in deposit interest expense driven by overall increased interest rates and growth in deposit volume. Interest expense on deposits was $2.3 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively. The cost of total deposits was 0.34% and 0.28% for the three months ended June 30, 2017 and 2016, respectively. The cost of interest-bearing deposits was 0.47% and 0.38% for the same periods. The primary driver for the increase in total interest expense is the increase in money market and time deposit interest expense to $0.9 and $0.6 million from $0.4 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, driven by an increase in rate and balances. The rate on money markets was 0.49%, up 18 basis points from the three months ended June 30, 2016. Time deposit interest expense also increased $0.2 million from the three months ended June 30, 2016. The rate on time deposits was 0.62%, up 5 basis points from the three months ended June 30, 2016. This increase is due to a restructuring of our IRA savings products to a time deposit product during the second quarter of 2016. Time deposit balances increased $80.2 million to $390.9 million from $310.7 million during the three months ended June 30, 2017. Interest expense on borrowings was $0.5 and $0.6 million for the three months ended June 30, 2017 and 2016, respectively, while the cost of total borrowings was 2.16% and 2.13% for the three months ended June 30, 2017 and 2016, respectively. For more information about our subordinated debentures which were partially paid off during the third quarter of 2016, refer to the discussion in this section under the heading “Financial condition: Borrowed funds.”

Our net interest margin, on a tax-equivalent basis, decreased to 4.19% during the three months ended June 30, 2017 from 4.40% in the three months ended June 30, 2016, primarily as a result of decrease in loan yield driven by decreased accretion on loans purchased from NWGB and syndication fees.

Average balance sheet amounts, interest earned and yield analysis

The table below shows the average balances, income and expense and yield rates of each of our interesting-earning assets and interest-bearing liabilities on a tax-equivalent basis, if applicable, for the periods indicated.

	Three Months Ended June 30,
	2017								2016
(dollars in thousands on tax-equivalent basis)	Average balances(1)			Interest income/ expense		Average yield/ rate			Average balances			Interest income/ expense		Average yield/ rate
Interest-earning assets:
Loans(2)(4)	$	1,942,667		$	25,022		5.17	%	$	1,736,493		$	24,843		5.75	%
Loans held for sale		390,596			4,369		4.49	%		276,943			2,099		3.05	%
Securities:
Taxable		442,309			2,589		2.35	%		499,617			2,849		2.29	%
Tax-exempt(4)		122,553			1,758		5.75	%		82,368			1,390		6.79	%
Total Securities(4)		564,862			4,347		3.09	%		581,985			4,239		2.93	%
Federal funds sold		8,456			23		1.09	%		10,745			16		0.60	%
Interest-bearing deposits with other financial institutions		68,460			158		0.93	%		46,594			26		0.22	%
FHLB stock		7,743			90		4.66	%		6,528			66		4.07	%
Total interest earning assets(4)		2,982,784			34,009		4.57	%		2,659,288			31,289		4.73	%
Noninterest Earning Assets:
Cash and due from banks		50,004								46,646
Allowance for loan losses		(22,813	)							(24,625	)
Other assets(3)		214,808								218,766
Total noninterest earning assets		241,999								240,787
Total assets	$	3,224,783							$	2,900,075
Interest-bearing liabilities:
Interest bearing deposits:
Time deposits	$	390,912		$	604		0.62	%	$	310,744		$	441		0.57	%
Money market		723,020			889		0.49	%		585,947			446		0.31	%
Negotiable order of withdrawals		711,099			759		0.43	%		717,590			687		0.39	%
Savings deposits		143,357			55		0.15	%		220,639			156		0.28	%
Total interest bearing deposits		1,968,388			2,307		0.47	%		1,834,920			1,730		0.38	%
Other interest-bearing liabilities:
FHLB advances		52,569			192		1.46	%		36,773			135		1.48	%
Other borrowings		17,315			12		0.28	%		34,041			23		0.27	%
Long-term debt		30,930			340		4.41	%		41,005			434		4.26	%
Total other interest-bearing liabilities		100,814			544		2.16	%		111,819			592		2.13	%
Total Interest-bearing liabilities		2,069,202			2,851		0.55	%		1,946,739			2,322		0.48	%
Noninterest bearing liabilities:
Demand deposits		724,419								668,295
Other liabilities		32,357								25,251
Total noninterest-bearing liabilities		756,776								693,546
Total liabilities		2,825,978								2,640,285
Shareholders' equity		398,805								259,790
Total liabilities and shareholders' equity	$	3,224,783							$	2,900,075
Net interest income (tax-equivalent basis)				$	31,158							$	28,967
Interest rate spread (tax-equivalent basis)							4.10	%							4.36	%
Net interest margin (tax-equivalent basis)(5)							4.19	%							4.40	%
Average interest-earning assets to average interesting-bearing liabilities							144.2	%							136.6	%

(1)	Calculated using daily averages.

(2)

Average balances of nonaccrual loans are included in average loan balances. Loan fees of $1.5 million and $2.5 million, accretion of $0.8 million and $1.6 million, and syndication fee income of $0.1 million and $0.8 million are included in interest income in the three months ended June 30, 2017 and 2016, respectively.

(3)	Includes investments in premises and equipment, foreclosed assets, interest receivable, MSRs, deposit base intangible, goodwill and other miscellaneous assets.

(4)

Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included in the above table were $0.7 million and $0.6 million for the three months ended June 30, 2017 and 2016, respectively.

(5)	The net interest margin is calculated by dividing net interest income, on a tax-equivalent basis, by average total earning assets.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Net interest income increased 11.7% to $60.7 million in the six months ended June 30, 2017 compared to $54.3 million in the six months ended June 30, 2016. On a tax-equivalent basis, net interest income increased $6.7 million to $62.1 million in the six months ended June 30, 2017 as compared to $55.4 million in the six months ended June 30, 2016. The

increase in tax-equivalent net interest income in the six months ended June 30, 2017 was primarily driven by higher balances in loans held for investment and increased volume and rates on loans held for sale.

Interest income, on a tax-equivalent basis, was $67.6 million for the six months ended June 30, 2017, compared to $60.0 million for the six months ended June 30, 2016, an increase of $7.6 million. The two largest components of interest income are loan income and investment income. Loan income consists primarily of interest earned on our loan portfolio and loans held for sale. Investment income consists primarily of interest earned on our investment portfolio. Loan income, on a tax-equivalent basis, increased $2.9 million to $50.0 million from $47.1 million for the six months ended June 30, 2016 primarily due to increased average loan balances of $186.0 million in addition to increased average loans held for sale balances of $122.1 million. The tax-equivalent yield on loans was 5.29%, down 22 basis points from the six months ended June 30, 2016. The decrease in yield was primarily due to decreased accretion on loans purchased from NWGB, which yielded 0.21% in the six months ended June 30, 2017 compared with 0.28% in the six months ended June 30, 2016, in addition to decreased loan fees which yielded 0.36% for the six months ended June 30, 2017 compared with 0.46% for the six months ended June 30, 2016.

The components of our loan yield, a key driver to our NIM for the six months ended June 30, 2017 and 2016, were as follows:

	Six Months Ended June 30, 2017					Six Months Ended June 30, 2016
(dollars in thousands)	Interest income/ expense		Average yield/ rate			Interest income/ expense		Average yield/ rate
Loan yield components:
Contractual interest rate on loans held for investment (1)	$	44,191		4.67	%	$	40,043		4.68	%
Origination and other loan fee income		3,384		0.36	%		3,899		0.46	%
Accretion on purchased loans		2,008		0.21	%		2,381		0.28	%
Syndicated loan fee income		440		0.05	%		825		0.10	%
Total loan yield	$	50,023		5.29	%	$	47,148		5.51	%

(1)	Includes tax equivalent adjustment

Accretion on purchased loans contributed 14 and 18 basis points to the NIM for the six months ended June 30, 2017 and 2016, respectively. Additionally, syndicated loan fees contributed 3 and 6 basis points to the NIM for the six months ended June 30, 2017 and 2016, respectively.

For the six months ended June 30, 2017, interest income on loans held for sale increased $4.3 million to $8.4 million compared to the six months ended June 30, 2016. This resulted from an increase in rates of $1.6 million and growth in volume of $2.7 million. For the six months ended June 30, 2017, investment income, on a tax-equivalent basis, increased slightly to $8.6 million compared to $8.4 million for the six months ended June 30, 2016. The average balance in the investment portfolio in the six months ended June 30, 2017 was $569.5 million compared to $592.5 million in the six months ended June 30, 2016. The decline in the balance is driven by the use of investment cash flow to fund loan growth.

Interest expense was $5.5 million for the six months ended June 30, 2017, an increase of $0.9 million, or 18.8%, as compared to the six months ended June 30, 2016. The increase in interest expense was due primarily to an increase in deposit interest expense due to growth in deposits. Interest expense on deposits was $4.4 million and $3.5 million for the six months ended June 30, 2017 and 2016, respectively. The cost of total deposits was 0.33% and 0.28% for the six months ended June 30, 2017 and 2016, respectively. The cost of interest-bearing deposits was 0.45% and 0.38% for the same periods, respectively. The primary driver for the increase in total interest expense is the increase in money market interest expense to $1.7 million from $1.0 million for the six months ended June 30, 2017 and 2016, respectively, driven by an increase in rates and balances. The rate on money markets was 0.46%, up 11 basis points from six months ended June 30, 2016. Time deposit interest expense also increased $0.4 million to $1.2 million from the six months ended June 30, 2016, also as a result of an increase in rates and balances. The rate on time deposits was 0.61%, up 12 basis points from the six months ended June 30, 2016. Average time deposit balances increased $60.1 million to $390.6 million from $330.5 million during the six months ended June 30, 2017. The increase in time deposits from June 30, 2016 is a result of restructuring an IRA savings product to a time deposit product at the end of the second quarter of 2016, the average balance of which was $75.7 million. Interest expense on borrowings was $1.1 and $1.1 million for the six months ended June 30, 2017 and 2016, respectively, while the cost of total borrowings was 2.04% and 1.57% for the six months ended June 30, 2017 and 2016, respectively.

Our net interest margin, on a tax-equivalent basis, increased to 4.24% during the six months ended June 30, 2017 from 4.20% in the six months ended June 30, 2016, primarily as a result of our increase in yield on loans held for sale while relatively maintaining our low cost of funds.

Average balance sheet amounts, interest earned and yield analysis

	Six Months Ended June 30,
	2017								2016
(dollars in thousands on tax-equivalent basis)	Average balances(1)			Interest income/ expense		Average yield/ rate			Average balances(1)			Interest income/ expense		Average yield/ rate
Interest-earning assets:
Loans(2)(4)	$	1,906,510		$	50,023		5.29	%	$	1,720,545		$	47,148		5.51	%
Loans held for sale		386,288			8,415		4.39	%		264,166			4,153		3.16	%
Securities:
Taxable		449,432			5,156		2.31	%		513,516			5,870		2.30	%
Tax-exempt(4)		120,098			3,469		5.82	%		78,998			2,550		6.49	%
Total Securities(4)		569,530			8,625		3.05	%		592,514			8,420		2.86	%
Federal funds sold		11,375			50		0.89	%		12,905			31		0.48	%
Interest-bearing deposits with other financial institutions		75,680			329		0.88	%		57,432			149		0.52	%
FHLB stock		7,743			168		4.38	%		6,528			132		4.07	%
Total interest earning assets(4)		2,957,126			67,610		4.61	%		2,654,090			60,033		4.55	%
Noninterest Earning Assets:
Cash and due from banks		50,805								47,900
Allowance for loan losses		(22,387	)							(24,590	)
Other assets(3)		213,067								215,472
Total noninterest earning assets		241,485								238,782
Total assets	$	3,198,611							$	2,892,872
Interest-bearing liabilities:
Interest bearing deposits:
Time deposits	$	390,564		$	1,187		0.61	%	$	330,455		$	803		0.49	%
Money market		726,458			1,674		0.46	%		571,022			980		0.35	%
Negotiable order of withdrawals		715,006			1,454		0.41	%		718,705			1,330		0.37	%
Savings deposits		140,011			106		0.15	%		202,779			376		0.37	%
Total interest bearing deposits		1,972,039			4,421		0.45	%		1,822,961			3,489		0.38	%
Other interest-bearing liabilities:
FHLB advances		56,547			383		1.37	%		15,183			259		3.43	%
Other borrowings		18,096			22		0.25	%		88,403			46		0.10	%
Long-term debt		30,930			663		4.32	%		41,005			827		4.06	%
Total other interest-bearing liabilities		105,573			1,068		2.04	%		144,591			1,132		1.57	%
Total Interest-bearing liabilities		2,077,612			5,489		0.53	%		1,967,552			4,621		0.47	%
Noninterest bearing liabilities:
Demand deposits		716,560								641,538
Other liabilities		38,265								28,637
Total noninterest-bearing liabilities		754,825								670,175
Total liabilities		2,832,437								2,637,727
Shareholders' equity		366,174								255,145
Total liabilities and shareholders' equity	$	3,198,611							$	2,892,872
Net interest income (tax-equivalent basis)				$	62,121							$	55,412
Interest rate spread (tax-equivalent basis)							4.16	%							4.16	%
Net interest margin (tax-equivalent basis)(5)							4.24	%							4.20	%
Average interest-earning assets to average interesting-bearing liabilities							142.33	%							134.89	%

(1)	Calculated using daily averages.

(2)

Average balances of nonaccrual loans are included in average loan balances. Loan fees of $3.4 million and $3.9 million and accretion of $2.0 million and $2.4 million, and syndication fee income of $0.4 million and $0.8 million are included in interest income in the six months ended June 30, 2017 and 2016 respectively.

(3)	Includes investments in premises and equipment, foreclosed assets, interest receivable, MSRs, deposit base intangible, goodwill and other miscellaneous assets.

(4)

Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included in the above table were $1.4 million and $1.1 million for the six months ended June 30, 2017 and 2016, respectively.

(5)	The net interest margin is calculated by dividing net interest income, on a tax-equivalent basis, by average total earning assets.

Rate/volume analysis

The tables below present the components of the changes in net interest income for the three and six months ended June 30, 2017 and 2016. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

Three months ended June 30, 2017 compared to three months ended June 30, 2016

	Three months ended June 30, 2017 compared to three months ended June 30, 2016 due to changes in
(in thousands on a tax-equivalent basis)	volume			rate			Net increase (decrease)
Interest-earning assets:
Loans(1)(2)	$	2,656		$	(2,477	)	$	179
Loans held for sale		1,271			999			2,270
Securities available for sale and other securities:
Taxable		(335	)		75			(260	)
Tax Exempt(2)		576			(208	)		368
Federal funds sold and balances at Federal Reserve Bank		(6	)		13			7
Time deposits in other financial institutions		50			82			132
FHLB stock		14			10			24
Total interest income(2)		4,226			(1,506	)		2,720
Interest-bearing liabilities:
Time deposits		124			39			163
Money market		169			274			443
Negotiable order of withdrawal accounts		(7	)		79			72
Savings deposits		(30	)		(71	)		(101	)
FHLB advances		58			(1	)		57
Other borrowings		(12	)		1			(11	)
Long-term debt		(111	)		17			(94	)
Total interest expense		191			338			529
Change in net interest income(2)	$	4,035		$	(1,844	)	$	2,191

(1)

Average loans are gross, including non-accrual loans and overdrafts (before deduction of net fees and allowance for loan losses). Loan fees of $1.5 million and $2.5 million, accretion of $0.8 million and $1.6 million, and syndication fee income of $ 0.1 million and $ 0.8 million are included in interest income in the three months ended June 30, 2017 and 2016, respectively.

(2)	Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.

As discussed above, the $2.4 million increase in loans and loans held for sale interest income during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was the primary driver of the $2.2 million increase in net interest income. The increase in loan interest income was driven by an increase in average loans held for investment of $206.2 million, or 11.9%, to $1.9 billion as of June 30, 2017, as compared to $1.7 billion as of June 30, 2016, which was in turn driven by loan growth in our metropolitan markets. The increase in interest income on loans held for sale of $2.3 million was driven by an increase in average balances of $113.7 million, which was the result of an increase in rates and volume, including the addition of a correspondent delivery channel in 2016.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

	Six months ended June 30, 2017 compared to six months ended June 30, 2016 due to changes in
(dollars in thousands on a tax-equivalent basis)	volume			rate			Net increase (decrease)
Interest-earning assets:
Loans(1)(2)	$	4,879		$	(2,004	)	$	2,875
Loans held for sale		2,660			1,602			4,262
Securities available for sale and other securities:
Taxable		(735	)		21			(714	)
Tax Exempt(2)		1,187			(268	)		919
Federal funds sold and balances at Federal Reserve Bank		(7	)		26			19
Time deposits in other financial institutions		79			101			180
FHLB stock		26			10			36
Total interest income(2)		8,089			(512	)		7,577
Interest-bearing liabilities:
Time deposits		183			201			384
Money market		358			336			694
Negotiable order of withdrawal accounts		(8	)		132			124
Savings deposits		(48	)		(222	)		(270	)
FHLB advances		280			(156	)		124
Other borrowings		(85	)		61			(24	)
Long-term debt		(216	)		52			(164	)
Total interest expense		464			404			868
Change in net interest income(2)	$	7,625		$	(916	)	$	6,709

(1)

Average loans are gross, including non-accrual loans and overdrafts (before deduction of net fees and allowance for loan losses). Loan fees of $3.4 million and $3.9 million and accretion of $2.0 million and $2.4 million and syndication fee income of $0.4 million and $0.8 million are included in interest income in the six months ended June 30, 2017 and 2016, respectively.

(2)	Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.

As discussed above, the $7.1 million increase in loan and loans held for sale interest income during the six months ended June 30, 2017 compared to June 30, 2016 was the primary driver of the $6.7 million increase in net interest income. The increase in loan interest income was driven by an increase in average loans of $186.0 million, or 10.8%, to $1.9 billion as of June 30, 2017, as compared to $1.7 billion as of June 30, 2016, which was in turn driven by loan growth in our metropolitan markets. The increase in average loans held for sale of $122.1 million was the result of increased volume primarily attributable to expansion in our correspondent delivery channel.

Provision for loan losses

The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of losses in our loan portfolio. Factors considered by management in determining the amount of the provision for loan losses include the internal risk rating of individual credits, historical and current trends in net charge-offs, trends in nonperforming loans, trends in past due loans, trends in the market values of underlying collateral securing loans and the current economic conditions in the markets in which we operate. The determination of the amount is complex and involves a high degree of judgment and subjectivity.

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Our provision for loan losses for the three months ended June 30, 2017 was a reversal of $0.9 million as compared to a reversal of $0.8 million for the three months ended June 30, 2016, reflecting continued improving asset quality.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Our provision for loan losses for the six months ended June 30, 2017 was a reversal of $1.1 million as compared to a reversal of $0.8 million for the six months ended June 30, 2016, reflecting a large single recovery during the six months

ended June 30, 2017 combined with a stable operating environment and consistent credit quality throughout the six months ended June 30, 2017.

Noninterest income

Our noninterest income includes gains on sales of mortgage loans, fees on mortgage loan originations, loan servicing fees, hedging results, fees generated from deposit services, securities gains and all other noninterest income.

The following table sets forth the components of noninterest income for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
(dollars in thousands)	2017		2016			2017		2016
Mortgage banking income	$	30,239	$	30,133		$	55,319	$	54,636
Service charges on deposit accounts		1,796		2,276			3,562		4,259
ATM and interchange		2,085		1,907			4,132		3,942
Investment services income		903		958			1,717		1,651
Gain on sale of securities		29		2,591			30		3,991
Net gain (loss) on sales or write-downs of foreclosed assets		23		(131	)		771		(142	)
Other		582		622			1,213		1,054
Total noninterest income	$	35,657	$	38,356		$	66,744	$	69,391

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Noninterest income was $35.7 million for the three months ended June 30, 2017, a decrease of $2.7 million, or 7.0%, as compared to $38.4 million for the three months ended June 30, 2016. Noninterest income to average assets (excluding any gains or losses from sale of securities) was 4.4% in the three months ended June 30, 2017 as compared to 5.0% in the three months ended June 30, 2016.

Mortgage banking income primarily includes origination fees on mortgage loans, gains and losses on the sale of mortgage loans, change in fair value on derivatives, fees from wholesale and third party origination services provided to community banks and mortgage companies, changes in fair value of MSRs and mortgage servicing fees. Mortgage banking income was $30.2 million and $30.1 million for the three months ended June 30, 2017 and 2016, respectively.

During the second quarter of 2017, the Bank’s mortgage operations had closings of $1,598.0 million which generated $30.2 million in gains and related fair value charges included in mortgage banking revenue. This compares to $1,012.4 million and $30.1 million for the three months ended June 30, 2016, respectively. During the fourth quarter of 2016, mortgage rates began to increase above prevailing rates during the first three quarters of 2016. This increase in rates has caused the level of interest lock commitments in the pipeline to decline to approximately $546.5 million at June 30, 2017 from $727.9 million at June 30, 2016 while increasing slightly from $532.9 million at December 31, 2016. Increased gains on sale were driven by an increase in interest rate lock volume of $693.5 million, or 47.4%, to $2,157.6 million for the three months ended June 30, 2017 from the three months ended June 30, 2016, due in large part to the growth in correspondent delivery channel, which was established late in the second quarter of 2016. With the increasing rates and a change in the mix of sales volume, including a lower contribution from the newly established correspondent origination channel, the Company is currently seeing a decline in mortgage sales margins from the same period in the previous year. Income from mortgage servicing was $2.7 million and $2.7 for the three months ended June 30, 2017 and 2016 offset by a decline in fair value on MSRs by $1.8 million. The fair value adjustment in the three months ended June 30, 2017 was the result of our change in accounting policy to elect fair value on MSRs as of January 1, 2017. As such, there is no such fair value adjustment reflected in mortgage banking income for the three months ended June 30, 2016.

The components of mortgage banking income for the three months ended June 30, 2017 and 2016 were as follows:

	Three Months Ended June 30,
(in thousands)	2017			2016
Mortgage banking income:
Origination and sales of mortgage loans	$	23,920		$	22,867
Net change in fair value of loans held for sale and derivatives		5,412			4,611
Change in fair value on MSRs		(1,840	)		—
Mortgage servicing income		2,747			2,655
Total mortgage banking income	$	30,239		$	30,133

Closing volume	$	1,597,946		$	1,012,368
Interest rate lock commitment volume	$	2,157,589		$	1,464,086
Outstanding principal balance of mortgage loans serviced	$	4,245,457		$	4,023,151

Mortgage banking income attributable to our Banking segment was $7.1 million and $7.2 million for the three months ended June 30, 2017 and 2016, respectively, and mortgage banking income attributable to our Mortgage segment was $23.1 million and $22.9 million for the three months ended June 30, 2017 and 2016, respectively.

Service charges on deposit accounts include analysis and maintenance fees on accounts, per item charges, non-sufficient funds and overdraft fees. Service charges on deposit accounts were $1.8 million and $2.3 million for the three months ended June 30, 2017 and 2016, respectively.

ATM and interchange fees include debit card interchange, ATM and other consumer fees. These fees increased by $0.2 million to $2.1 million during the three months ended June 30, 2017 from $1.9 million for the three months ended June 30, 2016.

Gains on sales of securities for the three months ended June 30, 2017 was $29 thousand compared to gains on sales of securities for the three months ended June 30, 2016 of $2.6 million. The gains are attributable to management taking advantage of portfolio structuring opportunities to lock in current gains while maintaining comparable interest rates and maturities and to fund current loan growth in addition to overall asset liability management.

Net gain on sales or write-downs of foreclosed assets for the three months ended June 30, 2017 was $23 thousand compared to a net loss of $131 thousand for the three months ended June 30, 2016. This change was the result of specific sales and valuation transactions of other real estate.

Other noninterest income for the three months ended June 30, 2017 remained flat at $0.6 million as compared to $0.6 million for the three months ended June 30, 2016.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Noninterest income was $66.7 million for the six months ended June 30, 2017, a decrease of $2.6 million, or 3.8%, as compared to $69.4 million for the six months ended June 30, 2016. Noninterest income to average assets (excluding any gains or losses from sale of securities) was 4.2% in the six months ended June 30, 2017 as compared to 4.5% in the six months ended June 30, 2016.

Mortgage banking income was $55.3 million and $54.6 million for the six months ended June 30, 2017 and 2016, respectively. Closings of mortgage loans totaled $2,944.5 million for the six months ended June 30, 2017 as compared to $1,762.1 million for the six months ended June 30, 2016. Increased gains on sale were driven by an increase in interest rate lock commitment volume of $1,072.2 million, or 40.0%, to $3,755.8 million for the six months ended June 30, 2017 from the six months ended June 30, 2016 due in large part to growth in the correspondent delivery channel. The increase in closings of mortgage loans to be sold is due to increased overall volume as well as the expansion of the correspondent delivery channel established late in the second quarter of 2016. Income from mortgage servicing was $5.5 million for the six months ended June 30, 2017 compared with $4.7 million for the same period in 2016. Income for 2017 was partially offset by a $2.3 million charge related to changes in fair value of MSRs.

The components of mortgage banking income for the six months ended June 30, 2017 and 2016 were as follows:

	Six Months Ended June 30,
(in thousands)	2017			2016
Mortgage banking income:
Origination and sales of mortgage loans	$	51,497		$	39,477
Net change in fair value of loans held for sale and derivatives	$	668		$	10,508
Change in fair value on MSRs		(2,341	)		—
Mortgage servicing income		5,495			4,651
Total mortgage banking income	$	55,319		$	54,636

Closing volume	$	2,944,481		$	1,762,143
Interest rate lock commitment volume	$	3,755,819		$	2,683,659
Outstanding principal balance of mortgage loans serviced	$	4,245,457		$	4,023,151

Mortgage banking income attributable to our Banking segment was $12.8 million and $13.4 million for the six months ended June 30, 2017 and 2016, respectively, and mortgage banking income attributable to our Mortgage segment was $42.5 million and $41.3 million for the six months ended June 30, 2017 and 2016, respectively.

Service charges on deposit accounts were $3.6 million, a decrease of $0.7 million, or 16.4%, for the six months ended June 30, 2017, compared to $4.3 million for the six months ended June 30, 2016. The decrease in service charges on deposit accounts in the six months ended June 30, 2017 was primarily the result of policy changes related to nonsufficient fund fees and overdraft charges.

ATM and interchange fees include debit card interchange, ATM and other consumer fees. These fees increased 4.8% to $4.1 million during the six months ended June 30, 2017 as compared to $3.9 million for the six months ended June 30, 2016 as a result of increased debit card fees from continued growth in client usage of debit cards experienced by most financial institutions.

Gains on sales of securities for the six months ended June 30, 2017 were $30 thousand, resulting from the sale of approximately $12.2 million in securities, compared to gains on sales of securities for the six months ended June 30, 2016 of $4.0 million, resulting from the sale of approximately $269.0 million in securities. The gains are attributable to management taking advantage of portfolio structuring opportunities to lock in current gains while maintaining comparable interest rates and maturities and to fund current loan growth.

Net gain on sales or write-downs of foreclosed assets for the six months ended June 30, 2017 was $0.8 million compared to a net loss of $142 thousand for the six months ended June 30, 2016. This change was the result of specific sales and valuation transactions of other real estate.

Other noninterest income for the six months ended June 30, 2017 was $1.2 million as compared to other noninterest income of $1.1 million for the six months ended June 30, 2016. This $0.2 million increase in other noninterest income was due to increased miscellaneous income items associated with our overall growth.

Noninterest expense

Our noninterest expense includes salaries and employee benefits expense, occupancy expense, legal and professional fees, data processing expense, regulatory fees and deposit insurance assessments, advertising and promotion and foreclosed asset expense, among others. We monitor the ratio of noninterest expense to the sum of net interest income plus noninterest income, which is commonly known as the efficiency ratio.

The following table sets forth the components of noninterest expense for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2017		2016		2017		2016
Salaries and employee benefits	$	30,783	$	26,688	$	59,789	$	50,476
Occupancy and fixed asset expense		3,307		3,226		6,416		6,396
Legal and professional fees		1,033		856		2,461		1,888
Data processing expense		1,460		669		2,961		1,397
Merger and conversion expenses		767		1,540		1,254		2,146
Amortization of core deposit intangible		123		527		515		1,079
Amortization of mortgage servicing rights		—		1,968		—		3,425
Impairment of mortgage servicing rights		—		4,914		—		5,687
Loss on sale of mortgage servicing rights		249		—		249		—
Regulatory fees and deposit insurance assessments		494		529		929		1,016
Foreclosed assets expense		190		177		434		422
Software license and maintenance fees		364		1,349		821		1,858
Advertising		3,343		3,601		6,275		5,851
Other		7,023		4,551		13,449		10,301
Total noninterest expense	$	49,136	$	50,595		95,553	$	91,942

Three months ended June 30, 2017 compared to three months ended June 30, 2016

Noninterest expense decreased by $1.5 million during the three months ended June 30, 2017 to $49.1 million as compared to $50.6 million in the three months ended June 30, 2016. This decrease resulted primarily from the change to fair value accounting on MSRs at January 1, 2017 partially offset by higher salaries and employee benefits expenses and increased costs associated with our growth.

Salaries and employee benefits expense is the largest component of noninterest expenses representing 62.6% and 52.7% of total noninterest expense in the three months ended June 30, 2017 and 2016, respectively. During the three months ended June 30, 2017, salaries and employee benefits expense increased $4.1 million, or 15.3%, to $30.8 million as compared to $26.7 million for the three months ended June 30, 2016. The increase in the three months ended June 30, 2017 was primarily due to a $3.0 million increase in mortgage banking salaries and benefits resulted from the 57.8% increase in mortgage loan interest rate lock commitment volume compared with the three months ended June 30, 2016 and expansion in our correspondent channel.

The overall increase also reflects $0.7 million accrued for equity compensation grants during the three months ended June 30, 2017 that were made in conjunction with the initial public offering to all full-time associates. Salaries and employee benefits expense also includes amounts earned under our management incentive plans that (prior to the IPO) were based on our total assets, tangible book value of consolidated equity and contractually-defined after-tax earnings. As of September 16, 2016, the date of the initial public offering, participants in these plans were given the option to convert their equity based incentive plan units to shares of restricted stock units at the IPO price of $19 per share. Aggregate expenses recognized under these plans totaled $0.6 million and $0.7 million for the three months ended June 30, 2017 and 2016, respectively.

Occupancy and fixed asset expense in the three months ended June 30, 2017 was $3.3 million, relatively flat compared to $3.2 million for the three months ended June 30, 2016.

Legal and professional fees increased slightly to $1.0 million for the three months ended June 30, 2017 as compared to $0.9 million for the three months ended June 30, 2016. The increase in legal and professional fees is attributable to increased costs associated with being a publicly traded company.

Merger and conversion expenses related to the merger with the Clayton Banks that closed on July 31, 2017 were $0.8 million for the three months ended June 30, 2017 as compared to $1.5 million related to the acquisition of NWGB for the three months ended June 30, 2016. We expect to incur approximately $10.0 million in merger and conversion costs through 2017 associated with our merger with the Clayton Banks in addition to $10.0 million in community investments across the related markets.

Data processing costs increased $0.8 million to $1.5 million for the three months ended June 30, 2017 from $0.7 million for the three months ended June 30, 2016. The increase for the three months ended June 30, 2017 was attributable to our

growth and volume of transaction processing in addition to the change of our core processor from Cardinal to Jack Henry Silverlake in the second quarter of 2016.

Amortization of intangible assets totaled $0.1 million for the three months ended June 30, 2017 compared to $0.5 million for the three months ended June 30, 2016. The decrease is due to one core deposit intangible becoming fully amortized in the first quarter of 2017. The remaining amortization relates to the core deposit intangible asset from NWGB, which is being amortized over its useful life. As of June 30, 2017, this intangible asset has a remaining estimated useful life of approximately 9 years.

MSRs are recognized as a separate asset on the date the corresponding mortgage loan is sold. Prior to January 1, 2017, MSRs were amortized in proportion to and over the period of estimated net servicing income. The amortization of MSRs was determined using the level yield method based on the expected life of the loan and these servicing rights were carried at the lower of amortized cost or fair value. As of January 1, 2017, we elected to transition our accounting policy to carry MSRs at fair value as permitted under ASC-860-50-35, Transfers and Servicing, which positions us to hedge our MSR portfolio. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs and other factors. MSRs were carried at fair value at June 30, 2017 and amortized cost less impairment at June 30, 2016. Therefore, there was no amortization expense or impairment losses for the three months ended June 30, 2017 as fair value changes under fair value accounting are included in noninterest income as mortgage banking income. Amortization expense amounted to $2.0 million for the three months ended June 30, 2016. Impairment losses on MSRs are recognized to the extent by which the unamortized cost exceeds fair value. Impairment losses on MSRs of $4.9 million were recognized in earnings in the three months ended June 30, 2016.

Regulatory fees and deposit insurance assessments were $0.5 million for three months ended June 30, 2017, flat compared with the three months ended June 30, 2016.

Expenses related to foreclosed assets for the three months ended June 30, 2017 were $190 thousand, which was relatively flat compared to $177 thousand for the three months ended June 30, 2016. Sales of real estate amounting to $0.7 million and $2.1 million was the primary driver for the expense during the three months ended June 30, 2017 and 2016, respectively.

Software license and maintenance fees for the three months ended June 30, 2017 were $0.4 million, a decrease of 73.0% from $1.3 million for the three months ended June 30, 2016. This decrease is related to our core system conversion to Jack Henry Silverlake completed during the three months ended June 30, 2016.

Advertising costs for the three months ended June 30, 2017 were $3.3 million, a decrease of $0.3 million compared to $3.6 million for the three months ended June 30, 2016. This decrease was largely attributable to communications surrounding our second quarter 2016 conversion to Jack Henry Silverlake.

Other noninterest expense for three months ended June 30, 2017 was $7.0 million, an increase of $2.5 million from the three months ended June 30, 2016, reflecting an increase of various expenses in mortgage servicing and other mortgage banking activities and expenses associated with our overall growth.

Six months ended June 30, 2017 compared to six months ended June 30, 2016

Noninterest expense increased by $3.6 million during the six months ended June 30, 2017 to $95.6 million as compared to $91.9 million in the six months ended June 30, 2016. This increase resulted primarily from higher salaries and employee benefits expenses offset by impairment and amortization of MSRs in addition to increased costs associated with our growth.

Salaries and employee benefits expense is the largest component of noninterest expenses representing 62.6% and 54.9% of total noninterest expense in the six months ended June 30, 2017 and 2016, respectively. During the six months ended June 30, 2017, salaries and employee benefits expense increased $9.3 million, or 18.5%, to $59.8 million as compared to $50.5 million for the six months ended June 30, 2016. The increase in the six months ended June 30, 2017 was primarily due to the $6.9 million increase in mortgage banking salaries and benefits resulting from the increase in mortgage loan interest rate lock commitment volume and expansion in our correspondent delivery channel.

The overall increase also reflects $1.4 million accrued for equity compensation grants during the six months ended June 30, 2017 that were made in conjunction with our initial public offering to all full-time associates. Salaries and employee benefits expense includes amounts earned under our three management incentive plans (prior to the IPO) that were based on our total assets, tangible book value of consolidated equity and contractually-defined after-tax earnings. As of September 16, 2016, the date of the initial public offering, participants in these plans were given the option to convert their equity based incentive plan units to shares of restricted stock units at the IPO price of $19 per share. Aggregate salaries

and employee benefits expense recognized under these incentive plans totaled $1.4 million and $1.5 million for the six months ended June 30, 2017 and 2016, respectively.

Occupancy and fixed asset expense in the six months ended June 30, 2017 was $6.4 million, flat compared with the six months ended June 30, 2016.

Legal and professional fees were $2.5 million for the six months ended June 30, 2017 as compared to $1.9 million for the six months ended June 30, 2016. The increase in legal and professional fees is attributable to additional professional services related to our growth and volume of business.

Merger and conversion expenses related to the acquisition of Clayton Banks that closed on July 31, 2017 were $1.3 million for the six months ended June 30, 2017 as compared to $2.1 million related to the acquisition and core system conversion of NWGB for the six months ended June 30, 2016.

Data processing costs increased $1.6 million to $3.0 million for the six months ended June 30, 2017 from $1.4 million for the six months ended June 30, 2016. The increase for the six months ended June 30, 2017 was attributable to our growth and volume of transaction processing in addition to the change of our core processor from Cardinal to Jack Henry Silverlake in the second quarter of 2016.

Amortization of intangible assets totaled $0.5 million for the six months ended June 30, 2017 compared to $1.1 million for the six months ended June 30, 2016. The decrease is due to one of the intangibles becoming fully amortized during the first quarter of 2017. The remaining amortization relates to the core deposit intangible asset, which is being amortized over its remaining useful life.

MSRs were carried at fair value at June 30, 2017 and at amortized cost less impairment at June 30, 2016. Therefore, there was no amortization expense or impairment losses for the six months ended June 30, 2017 and amortization and impairment expense amounted to $3.4 million and $5.7 million, respectively, for the six months ended June 30, 2016.

Regulatory fees and deposit insurance assessments were relatively flat, amounting to $0.9 million for the six months ended June 30, 2017 compared with $1.0 million for the same period in 2016.

Expenses related to foreclosed assets for the six months ended June 30, 2017 were $0.4 million for the six months ended June 30, 2017 and 2016. Legal fees related to foreclosed real estate sold is the primary driver for the expense.

Software license and maintenance fees for the six months ended June 30, 2017 were $0.8 million, a decrease of $1.0 million compared to $1.9 million for the six months ended June 30, 2016. This decrease is due to costs associated with the conversion of our core system to Jack Henry Silverlake during the second quarter of 2016.

Advertising costs for the six months ended June 30, 2017 were $6.3 million, an increase of $0.4 million compared to $5.9 million for the six months ended June 30, 2016. This increase was largely driven by the mortgage segment.

Other noninterest expense for six months ended June 30, 2017 was $13.4 million, an increase of $3.1 million from the six months ended June 30, 2016, reflecting an increase of various expenses in mortgage banking activities and our overall growth.

Efficiency ratio

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. For an adjusted efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.

Our efficiency ratio was 74.35% and 75.84% and 74.99% and 74.33% for the three months ended June 30, 2017 and 2016 and six months ended June 30, 2017 and 2016, respectively. Our adjusted efficiently ratio, on a tax-equivalent basis, was 70.18% and 67.92% and 71.66% and 69.55% for the three months ended June 30, 2017 and 2016 and six months ended June 30, 2017 and 2016, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a discussion of the adjusted efficiency ratio.

Return on equity and assets

The following table sets forth our ROAA, ROAE, dividend payout ratio and average shareholders’ equity to average assets ratio for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,						Year Ended December 31,
	2017			2016			2017			2016			2016
Return on average total assets		1.40	%		2.19	%		1.32	%		2.11	%		1.35	%
Return on average shareholders' equity		11.30	%		24.42	%		11.56	%		23.94	%		14.68	%
Dividend payout ratio		—			27.26	%		—			30.62	%		170.73	%
Average shareholders’ equity to average assets		12.37	%		8.96	%		11.45	%		8.82	%		9.22	%

Income tax

Income tax expense was $6.6 million and $1.1 million for the three months ended June 30, 2017 and 2016, respectively, and $12.0 million and $2.2 million for the six months ended June 30, 2017 and 2016, respectively. The increase over the prior year is due to our conversion to a C Corporation. From our formation in 2001 through September 16, 2016, we elected to be taxed for federal income tax purposes as a “Subchapter S corporation” under the provisions of Section 1361 through 1379 of the Internal Revenue Code. As a result, our net income was not subject to, and we have not paid, U.S. federal income taxes and we have not been required to make any provision or recognize any liability for federal income tax in our financial statements for the periods ending on or prior to September 30, 2016. We terminated our status as an S corporation in connection with our initial public offering as of September 16, 2016. We commenced paying federal income taxes on our pre-tax net income in the third quarter of 2016 and fiscal year and each interim period commencing on or after September 16, 2016 and each such period will reflect a provision for federal income taxes. See “Pro forma income tax expense and net income” below for a discussion on what our income tax expense and net income would have been had we been taxed as a C Corporation for the full periods.

Pro forma income tax expense and net income

We have determined that had we been taxed as a C Corporation and paid U.S. federal income tax for the three and six months ended June 30, 2016, our combined effective income tax rate would have been 37.45% and 37.39%, respectively. This pro forma effective rate reflects a U.S. federal income tax rate of 35.00% on corporate income and the fact that a portion of our net income in each of these periods was derived from nontaxable investment income and other nondeductible expenses. Our net income for the three months ended June 30, 2017 and 2016 was $11.2 million and $15.8 million, respectively, and our tax-equivalent net interest income for the same periods was $31.2 million and $29.0 million, respectively. For the six months ended June 30, 2016 our net income was $21.0 million and $30.4 million, respectively, and our tax-equivalent net interest income for the same periods was $62.1 million and $55.4 million, respectively. Had we been subject to U.S. federal income tax during the three months ended June 30, 2016, on a pro forma basis, our provision for combined federal and state income tax would have been $6.3 million and our pro forma net income (after U.S. federal income tax) would have been $10.6 million, respectively. Had we been subject to the U.S. federal income tax during the six months ended June 30, 2016, on a pro forma basis, our provision for combined federal and state income tax would have been $12.2 million and our pro form net income would have been $20.4 million, respectively.

Financial condition

The following discussion of our financial condition compares the six months ended June 30, 2017 with the year ended December 31, 2016.

Total assets

Our total assets were $3.35 billion at June 30, 2017. This compares to total assets of $3.28 billion as of December 31, 2016. The increase in total assets is primarily attributable to an increase of $122.2 million in loans held for investment balances, driven by strong demand for our loan products in our markets and the success of our growth initiatives.

Loan portfolio

Our loan portfolio is our most significant earning asset, comprising 58.9% and 56.4% of our total assets as of June 30, 2017 and December 31, 2016, respectively. Our strategy is to grow our loan portfolio by originating quality commercial

and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly rather than purchasing loan syndications and loan participations from other banks (collectively, “Purchased loans”). At June 30, 2017 and December 31, 2016, loans held for investment included approximately $32.1 million and $29.7 million, respectively, related to Purchased loans. Currently, our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories. At June 30, 2017 and December 31, 2016, our outstanding loans to the broader healthcare industry made up less than 5% of our total outstanding loans and are spread across nursing homes, assisted living facilities, outpatient mental health and substance abuse centers, home health care services, and medical practices within our geographic markets. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans

Loans increased $122.2 million, or 6.6%, to $1.97 billion as of June 30, 2017 as compared to $1.85 billion as of December 31, 2016. Our loan growth during the six months ended June 30, 2017 has been comprised of increases of $37.5 million, or 9.7%, in commercial and industrial, $36.8 million, or 15.0%, in construction loans, $14.1 million, or 4.0%, in owner occupied commercial real estate, $5.4 million, or 2.0%, in non-owner occupied commercial real estate, $20.7 million, or 4.0%, in residential real estate and $7.7 million, or 10.4%, in consumer and other, respectively. The increase in loans during the six months ended June 30, 2017 is attributable to continued strong demand in our metropolitan markets, building customer relationships and continued favorable economic conditions throughout much of our geographic footprint.

Loans by type

The following table sets forth the balance and associated percentage of each major category in our loan portfolio of loans as of the dates indicated:

	June 30, 2017					December 31, 2016
(dollars in thousands)	Amount		% of total			Amount		% of total
Loan Type:
Commercial and industrial	$	423,704		21	%	$	386,233		21	%
Construction		282,727		14	%		245,905		13	%
Residential real estate:
1-to-4 family		307,152		16	%		294,924		16	%
Line of credit		177,783		9	%		177,190		10	%
Multi-family		52,810		3	%		44,977		2	%
Commercial real estate:
Owner-Occupied		371,462		19	%		357,346		19	%
Non-Owner Occupied		273,285		14	%		267,902		15	%
Consumer and other		82,051		4	%		74,307		4	%
Total loans	$	1,970,974		100	%	$	1,848,784		100	%

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At June 30, 2017 and December 31, 2016, there were no concentrations of loans exceeding 10% of loans other than the categories of loans disclosed in the table above.

Loan categories

The principal categories of our loan held for investment portfolio are discussed below:

Commercial and industrial loans. We provide a mix of variable and fixed rate commercial and industrial loans. Our commercial and industrial loans are typically made to small and medium-sized manufacturing, wholesale, retail and service businesses for working capital and operating needs and business expansions, including the purchase of capital equipment and loans made to farmers relating to their operations. Commercial and industrial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with operating cash flows as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, equipment and personal guarantees. We plan to continue to make commercial and industrial loans an area of emphasis in our lending

operations in the future. As of June 30, 2017, our commercial and industrial loans comprised of $423.7 million, or 21% of loans, compared to $386.2 million, or 21%, of loans as of December 31, 2016.

Commercial real estate owner-occupied loans. Our commercial real estate owner-occupied loans include loans to finance commercial real estate owner occupied properties for various purposes including use as offices, warehouses, production facilities, health care facilities, retail centers, restaurants, churches and agricultural based facilities. Commercial real estate owner-occupied loans are typically repaid through the ongoing business operations of the borrower, and hence are dependent on the success of the underlying business for repayment and are more exposed to general economic conditions. As of June 30, 2017, our owner occupied commercial real estate loans comprised $371.5 million, or 19% of loans, compared to $357.3 million, or 19%, of loans as of December 31, 2016.

Commercial real estate non-owner occupied loans. Our commercial real estate non-owner occupied loans include loans to finance commercial real estate non-owner occupied investment properties for various purposes including use as offices, warehouses, health care facilities, hotels, mixed-use residential/commercial, retail centers, assisted living facilities and agricultural based facilities. Commercial real estate non-owner occupied loans are typically repaid with the funds received from the sale of the completed property or rental proceeds from such property, and are therefore more sensitive to adverse conditions in the real estate market, which can also be affected by general economic conditions. As of June 30, 2017, our non-owner occupied commercial real estate loans comprised $273.3 million, or 14% of loans, compared to $267.9 million, or 15%, of loans as of December 31, 2016.

Residential real estate 1-4 family mortgage loans. Our residential real estate 1-4 family mortgage loans are primarily made with respect to and secured by single family homes, which are both owner-occupied and investor owned. We intend to continue to make residential 1-4 family housing loans at a similar pace, so long as housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. First lien residential 1-4 family mortgages may be affected by unemployment or underemployment and deteriorating market values of real estate. As of June 30, 2017, our residential real estate mortgage loans comprised $307.2 million, or 16% of loans, compared to $294.9 million, or 16%, of loans as of December 31, 2016.

Residential line of credit loans. Our residential line of credit loans are primarily revolving, open-end lines of credit secured by 1-4 family residential properties. We intend to continue to make residential line of credit loans if housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. Residential line of credit loans may be affected by unemployment or underemployment and deteriorating market values of real estate. Our home equity loans as of June 30, 2017 comprised $177.8 million, or 9% of loans, compared to $177.2 million, or 10%, of loans as of December 31, 2016. Of these, approximately $84.7 million and $81.3 million were secured by first liens as of June 30, 2017 and December 31, 2017, respectively.

Multi-family residential loans. Our multi-family residential loans are primarily secured by multi-family properties, such as apartments and condominium buildings. These loans may be affected by unemployment or underemployment and deteriorating market values of real estate. Our multifamily loans as of June 30, 2017, comprised $52.8 million, or 3% of loans, compared to $45.0 million, or 2%, of loans as of December 31, 2016.

Construction loans. Our construction loans include commercial construction, land acquisition and land development loans and single-family interim construction loans to small- and medium-sized businesses and individuals. These loans are generally secured by the land or the real property being built and are made based on our assessment of the value of the property on an as-completed basis. We expect to continue to make construction loans at a similar pace so long as demand continues and the market for and values of such properties remain stable or continue to improve in our markets. These loans can carry risk of repayment when projects incur cost overruns, have an increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate. As of June 30, 2017, our construction loans comprised $282.7 million, or 14% of loans, compared to $245.9 million, or 13%, of loans as of December 31, 2016.

Consumer and other loans. Consumer and other loans include consumer loans made to individuals for personal, family and household purposes, including car, boat and other recreational vehicle loans and personal lines of credit. Consumer loans are generally secured by vehicles and other household goods. The collateral securing consumer loans may depreciate over time. The company seeks to minimize these risks through its underwriting standards. Other loans also include loans to states and political subdivisions in the U.S. These loans are generally subject to the risk that the borrowing municipality or political subdivision may lose a significant portion of its tax base or that the project for which the loan was made may produce inadequate revenue. None of these categories of loans represents a significant portion of our loan portfolio. As June 30, 2017, our consumer and other loans comprised $82.1 million, or 4% of loans, compared to $74.3 million, or 4%, of loans as of December 31, 2016.

Loan maturity and sensitivities

The following tables present the contractual maturities of our loan portfolio as of June 30, 2017 and December 31, 2016. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment or scheduled repayments.

Loan type (dollars in thousands)	Maturing in one year or less		Maturing in one to five years		Maturing after five years		Total
As of June 30, 2017
Commercial	$	194,997	$	179,188	$	49,519	$	423,704
Commercial real estate:
Owner occupied		72,943		241,013		57,506		371,462
Non-owner occupied		61,607		151,100		60,578		273,285
Residential real estate:
1-to-4 family		35,203		130,745		141,204		307,152
Line of credit		17,105		35,049		125,629		177,783
Multi-family		1,675		42,104		9,031		52,810
Construction		167,701		87,917		27,109		282,727
Consumer and other		36,979		32,567		12,505		82,051
Total	$	588,210	$	899,683	$	483,081	$	1,970,974

Loan type (dollars in thousands)	Maturing in one year or less		Maturing in one to five years		Maturing after five years		Total
As of December 31, 2016
Commercial	$	158,621	$	172,112	$	55,500	$	386,233
Commercial real estate:
Owner occupied		69,642		230,289		57,415		357,346
Non-owner occupied		55,611		161,341		50,950		267,902
Residential real estate:
1-to-4 family		44,631		115,783		134,510		294,924
Line of credit		15,614		39,232		122,344		177,190
Multi-family		4,089		39,938		950		44,977
Construction		146,447		79,108		20,350		245,905
Consumer and other		30,174		31,436		12,697		74,307
Total	$	524,829	$	869,239	$	454,716	$	1,848,784

For loans due after one year or more, the following tables present the sensitivities to changes in interest rates as of June 30, 2017 and December 31, 2016:

Loan type (dollars in thousands)	Fixed interest rate			Floating interest rate			Total
As of June 30, 2017
Commercial	$	120,017		$	108,690		$	228,707
Commercial real estate:
Owner occupied		211,087			87,432			298,519
Non-owner occupied		118,386			93,292			211,678
Residential real estate:
1-to-4 family		234,918			37,031			271,949
Line of credit		640			160,038			160,678
Multi-family		46,571			4,564			51,135
Construction		21,337			93,689			115,026
Consumer and other		43,057			2,015			45,072
Total	$	796,013		$	586,751		$	1,382,764
		57.57	%		42.43	%		100.00	%

Loan type (dollars in thousands)	Fixed interest rate			Floating interest rate			Total
As of December 31, 2016
Commercial	$	117,960		$	109,652		$	227,612
Commercial real estate:
Owner occupied		195,188			92,516			287,704
Non-owner occupied		125,784			86,507			212,291
Residential real estate:
1-to-4 family		210,820			39,473			250,293
Line of credit		686			160,890			161,576
Multi-family		39,504			1,384			40,888
Construction		32,585			66,873			99,458
Consumer and other		41,921			2,212			44,133
Total	$	764,448		$	559,507		$	1,323,955
		57.74	%		42.26	%		100.00	%

The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of June 30, 2017 and December 31, 2016:

(dollars in thousands)	Fixed interest rate			Floating interest rate			Total
As of June 30, 2017
One year or less	$	243,461		$	344,749		$	588,210
One to five years		590,113			309,570			899,683
More than five years		205,900			277,181			483,081
Total	$	1,039,474		$	931,500		$	1,970,974
		52.74	%		47.26	%		100.00	%

(dollars in thousands)	Fixed interest rate			Floating interest rate			Total
As of December 31, 2016
One year or less	$	244,419		$	280,410		$	524,829
One to five years		571,492			297,747			869,239
More than five years		192,956			261,760			454,716
Total	$	1,008,867		$	839,917		$	1,848,784
		54.57	%		45.43	%		100.00	%

Of the loans shown above with floating interest rates totaling $931.5 million as of June 30, 2017, many of such have interest rate floors as follows:

Loans with interest rate floors (dollars in thousands)	Maturing in one year or less		Weighted average level of support (bps)		Maturing in one to five years		Weighted average level of support (bps)		Maturing after five years		Weighted average level of support (bps)
As of June 30, 2017
Loans with current rates above floors	$	146,748		—	$	93,523		—	$	159,174		—
Loans with current rates below floors:
1-25 bps		24,477		15.08		4,185		22.48		2,682		12.24
26-50 bps		3,565		30.66		1,275		49.86		822		39.88
51-75 bps		16,644		63.51		5,745		67.06		573		74.49
76-100 bps		24		100.00		447		96.44		55		81.00
101-125 bps		295		125.00		5,098		124.70		4,299		122.45
126-150 bps		76		150.00		1,331		127.39		99		128.43
151-200 bps		1,524		174.86		3,647		175.08		257		179.98
200-250 bps		6,890		202.39		98		225.00		172		215.64
251 bps and above		2,829		283.88		176		300.79		88		301.00
Total loans with current rates below floors	$	56,324		20.02	$	22,002		19.30	$	9,047		4.65

Asset quality

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans which can result in us carrying higher nonperforming assets. We believe this practice leads to higher recoveries in the long term.

Nonperforming assets

Our nonperforming assets consist of nonperforming loans and foreclosed real estate. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. In our loan review process, we seek to identify and proactively address nonperforming loans. As of June 30, 2017 and December 31, 2016, we had $19.5 million and $19.1 million, respectively, in nonperforming assets. During the second quarter of 2017, we received $1.5 million in restricted marketable equity securities in satisfaction of a previously charged-off loan. This is included in other assets and is considered nonperforming at June 30, 2017. Without these marketable equity securities acquired during the second quarter of 2017, our total nonperforming assets and nonperforming assets as a percentage of total assets would have been $18.0 million and 0.54%, respectively. If our nonperforming assets would have been current during the three and six months ended June 30, 2017 and 2016, we would have recorded an additional $140 thousand and $170 thousand and $0.3 million and $0.3 million of interest income, respectively. No significant amount of interest income was recognized from loans classified as nonperforming during the three and six months ended June 30, 2017 and 2016. We had net interest recoveries of $0.2 million and $0.5 million for the three and six months ended June 30, 2017, respectively, recognized on loans that had previously been charged off or classified as nonperforming in previous periods. This compares to net interest charged off of $43 thousand and $18 thousand for the three and six months ended June 30, 2016, respectively. Our nonperforming assets remaining low is the result of the consistent improvement in our overall credit quality as economic conditions in our markets have remained strong throughout 2016 and the first half of 2017.

The following table provides details of our nonperforming assets, the ratio of such loans and foreclosed assets to total assets as of the dates presented, and certain other related information:

	As of June 30,						As of December 31,
(dollars in thousands)	2017			2016			2016
Loan Type
Commercial and industrial	$	1,118		$	1,674		$	1,424
Construction		438			265			271
Residential real estate:
1-to-4 family mortgage		2,981			2,194			2,986
Residential line of credit		1,056			1,039			1,034
Multi-family mortgage		—			—			—
Commercial real estate:
Owner occupied		1,884			2,324			2,007
Non-owner occupied		2,293			3,448			2,251
Consumer and other		176			162			85
Total nonperforming loans		9,946			11,106			10,058
Other real estate owned		6,370			9,902			7,403
Other		3,154			1,654			1,654
Total nonperforming assets	$	19,470		$	22,662		$	19,115
Total nonperforming loans as a percentage of loans		0.50	%		0.63	%		0.54	%
Total nonperforming assets as a percentage of total assets		0.58	%		0.78	%		0.58	%
Total accruing loans over 90 days delinquent as a percentage of total assets		0.05	%		0.05	%		0.04	%
Loans restructured as troubled debt restructurings	$	8,488		$	14,970		$	8,802
Troubled debt restructurings as a percentage of loans		0.43	%		0.86	%		0.48	%

Total nonperforming loans as a percentage of total loans were 0.5% as of June 30, 2017 as compared to 0.5% as of December 31, 2016. Our coverage ratio, or our allowance for loan losses as a percentage of our nonperforming loans, was 233.73% as of June 30, 2017 as compared to 216.22% as of December 31, 2016.

Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at June 30, 2017. Management also continually monitors past due loans for potential credit quality deterioration. Loans 30-89 days past due were $4.8 million at June 30, 2017, as compared to $5.7 million for the year ended December 31, 2016.

Under acquisition accounting rules, loans acquired from NWGB were recorded at their estimated fair value. We recorded the loan portfolio acquired from NWGB at fair value as of the acquisition date, which resulted in a discount to the loan portfolio’s previous carrying value. Neither the credit portion nor any other portion of the fair value mark is reflected in the reported allowance for loan and lease losses. The purchased non-credit impaired loans had remaining discount that will accrete into interest income over the life of the loans of $0.8 million and $1.2 million, as of June 30, 2017 and December 31, 2016, respectively. The purchased credit impaired loans had remaining discount of $1.8 million and $2.4 million, as of June 30, 2017 and December 31, 2016, respectively, which is the result of pay downs, credit improvements and changes in expected cash flows of individual credits.

Foreclosed assets consist of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Gain/(loss) on sales or write- downs of foreclosed assets” in the accompanying consolidated statements of income. Foreclosed assets with a cost basis of $0.7 million and $2.9 million were sold during the three months and six months ended June 30, 2017, respectively, resulting in a net gain of $23 thousand and $0.8 million, respectively. Foreclosed assets with a cost basis of $2.0 million and $3.5 million were sold during the three months and six months ended June 30, 2016, respectively, resulting in a net loss of $131 thousand and $142 thousand, respectively.

Classified loans

Accounting standards require us to identify loans, where full repayment of principal and interest is doubtful, as impaired loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, or using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our quarterly review of the adequacy of the allowance for loan losses, and identify and value impaired loans in accordance with guidance on these standards. As part of the review process, we also identify loans classified as watch, which have a potential weakness that deserves management’s close attention.

Loans totaling $37.9 million and $38.6 million were classified substandard under our policy at June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017 and December 31, 2016, $15.7 million and $16.1 million of substandard loans were acquired with deteriorated credit quality in connection with our acquisition of NWGB. The following table sets forth information related to the credit quality of our loan portfolio at June 30, 2017 and December 31, 2016.

Loan type (dollars in thousands)	Pass		Watch		Substandard		Total
As of June 30, 2017
Commercial and industrial	$	382,189	$	39,404	$	2,111	$	423,704
Construction		275,094		2,701		4,932		282,727
Residential real estate:
1-to-4 family mortgage		291,280		5,135		10,737		307,152
Residential line of credit		174,178		1,424		2,181		177,783
Multi-family mortgage		51,642		143		1,025		52,810
Commercial real estate:
Owner occupied		353,275		9,293		8,894		371,462
Non-owner occupied		259,588		6,216		7,481		273,285
Consumer and other		81,107		447		497		82,051
Total loans	$	1,868,353	$	64,763	$	37,858	$	1,970,974

Loan type (dollars in thousands)	Pass		Watch		Substandard		Total
As of December 31, 2016
Commercial and industrial	$	351,046	$	31,074	$	4,113	$	386,233
Construction		236,588		4,612		4,705		245,905
Residential real estate:
1-to-4 family mortgage		277,948		6,945		10,031		294,924
Residential line of credit		173,011		1,875		2,304		177,190
Multi-family mortgage		43,770		152		1,055		44,977
Commercial real estate:
Owner occupied		338,698		10,459		8,189		357,346
Non-owner occupied		249,877		10,273		7,752		267,902
Consumer and other		73,454		417		436		74,307
Total loans	$	1,744,392	$	65,807	$	38,585	$	1,848,784

Allowance for loan losses

The allowance for loan losses is the amount that, based on our judgment, is required to absorb probable credit losses inherent in our loan portfolio and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Among the material estimates required to establish the allowance are loss exposure at default, the amount and timing of future cash flows on impacted loans, value of collateral and determination of the loss factors to be applied to the various elements of the portfolio.

Our methodology for assessing the adequacy of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and an allocated allowance for individual impaired loans. Actual credit losses or recoveries are charged or credited directly to the allowance.

The appropriate level of the allowance is established on a quarterly basis after input from management and our loan review staff and is based on an ongoing analysis of the credit risk of our loan portfolio. In making our evaluation of the credit risk of the loan portfolio, we consider factors such as the volume, growth and composition of our loan portfolio, the

diversification by industry of our commercial loan portfolio, the effect of changes in the local real estate market on collateral values, trends in past dues, our experience as a lender, changes in lending policies, the effects on our loan portfolio of current economic indicators and their probable impact on borrowers, historical loan loss experience, industry loan loss experience, the amount of nonperforming loans and related collateral and the evaluation of our loan portfolio by our loan review function.

In addition, on a regular basis, management and the Bank’s Board of Directors review loan ratios. These ratios include the allowance for loan losses as a percentage of loans, net charge-offs as a percentage of average loans, the provision for loan losses as a percentage of average loans, nonperforming loans as a percentage of loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by relationship manager, individual markets and the Bank as a whole. The allowance for loan losses was $23.2 million and $21.7 million at June 30, 2017 and December 31, 2016, respectively.

The following table presents the allocation of the allowance for loan losses by loan category as of the periods indicated:

	June 30, 2017					December 31, 2016
(dollars in thousands)	Amount		% of Loans			Amount		% of Loans
Loan Type:
Commercial and industrial	$	5,440		23	%	$	5,309		24	%
Construction		5,579		24	%		4,940		23	%
Residential real estate:
1-to-4 family mortgage		2,974		13	%		3,197		15	%
Residential line of credit		1,445		6	%		1,613		8	%
Multi-family mortgage		513		2	%		504		2	%
Commercial real estate:
Owner occupied		3,983		17	%		3,302		15	%
Non-owner occupied		2,452		11	%		2,019		9	%
Consumer and other		861		4	%		863		4	%
Total allowance	$	23,247		100	%	$	21,747		100	%

The following table summarizes activity in our allowance for loan losses during the periods indicated:

	Three Months Ended June 30,			Six Months Ended June 30,			Year ended December 31,
(dollars in thousands)	2017			2017			2016
Allowance for loan loss at beginning of period	$	22,898		$	21,747		$	24,460
Charge-offs:
Commercial and industrial		(131	)		(300	)		(562	)
Construction		—			(6	)		(2	)
Residential real estate:
1-to-4 family mortgage		(35	)		(123	)		(224	)
Residential line of credit		(195	)		(195	)		(132	)
Multi-family mortgage		—			—			—
Commercial real estate:
Owner occupied		—			—			(249	)
Non-owner occupied		—			—			(527	)
Consumer and other		(430	)		(609	)		(1,154	)
Total charge-offs		(791	)		(1,233	)		(2,850	)
Recoveries:
Commercial and industrial		1,511			1,594			524
Construction		29			58			216
Residential real estate:
1-to-4 family mortgage		14			40			127
Residential line of credit		155			211			174
Multi-family mortgage		—			—			—
Commercial real estate:
Owner occupied		11			15			140
Non-owner occupied		2			1,641			195
Consumer and other		283			296			240
Total recoveries		2,005			3,855			1,616
Net charge offs		1,214			2,622			(1,234	)
Provision (reversal of provision) for loan loss charged to operations		(865	)		(1,122	)		(1,479	)
Allowance for loan loss at the end of period	$	23,247		$	23,247		$	21,747
Ratio of net recoveries (charge-offs) during the period to average loans outstanding during the period		0.25	%		0.28	%		-0.07	%
Allowance for loan loss as a percentage of loans at end of period		1.18	%		1.18	%		1.18	%
Allowance of loan loss as a percentage of nonperforming loans		233.73	%		233.73	%		216.22	%

Mortgage loans held for sale

Mortgage loans held for sale were $427.4 million at June 30, 2017 compared to $507.4 million at December 31, 2016. Closings of mortgage loans held for sale totaled $1,598.0 million and $1,012.4 million and $2,944.5 million and $1,762.1 million for the three and six months ended June 30, 2017 and 2016, respectively, while interest rate lock volume totaled $2,157.6 million and $1,464.1 million and $3,755.8 million and $2,683.7 million for the same periods. Generally, mortgage closing activity and interest rate lock volume increases in lower interest rate environments and robust housing markets and decreases in rising interest rate environments and slower housing markets. Increased closings during 2017 reflect the ongoing expansion of our mortgage business, including our expansion of our internet delivery channel and the establishment of our correspondent delivery channel late in the second quarter of 2016.

Mortgage loans to be sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party

private investors or directly with government sponsored agencies, and we are obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within thirty days after the loan is funded. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.

Deposits

Deposits represent the Bank’s primary source of funds. We continue to focus on growing core deposits through our relationship driven banking philosophy, community-focused marketing programs, and initiatives such as the development of our treasury management services.

Total deposits were $2.73 billion and $2.67 billion as of June 30, 2017 and December 31, 2016, respectively. Noninterest-bearing deposits at June 30, 2017 and December 31, 2016 were $715.4 million and $697.1 million, respectively, while interest-bearing deposits were $2,012.2 million and $1,974.5 million at June 30, 2017 and December 31, 2016, respectively. During the second quarter of 2016, our third party servicing provider, Cenlar, began transferring certain servicing escrow deposit accounts to the Bank which totaled $50.0 million and $46.8 million at June 30, 2017 and December 31, 2016, respectively. The mix between noninterest bearing and interest bearing demand has remained relatively stagnant; however, management continues to focus on strategic pricing to grow noninterest bearing deposits while allowing more costly funding sources, including certain time deposits, to mature.

Average deposit balances by type, together with the average rates per periods are reflected in the average balance sheet amounts, interest earned and yield analysis tables included above under the discussion of net interest income.

The following table sets forth the distribution by type of our deposit accounts for the dates indicated:

	June 30, 2017								December 31, 2016
(dollars in thousands)	Amount		% of total deposits			Average rate			Amount		% of total deposits			Average rate
Deposit Type
Noninterest bearing demand	$	715,391		26	%		—	%	$	697,072		26	%		—	%
Interest bearing demand		1,471,650		54	%		0.23	%		1,449,382		54	%		0.38	%
Savings deposits		143,951		5	%		0.15	%		134,077		5	%		0.37	%
Certificates of deposit		396,601		15	%		0.62	%		391,031		15	%		0.48	%
Total deposits	$	2,727,593		100	%		0.34	%	$	2,671,562		100	%		0.29	%
Time Deposits
0.00-0.50%	$	194,984		49	%				$	207,081		53	%
0.51-1.00%		172,764		43	%					158,257		41	%
1.01-1.50%		18,257		5	%					16,209		4	%
1.51-2.00%		8,068		2	%					7,855		2	%
2.01-2.50%		2,501		1	%					1,603		0	%
Above 2.50%		27		0	%					26		0	%
Total time deposits	$	396,601		100	%				$	391,031		100	%

The following table sets forth our time deposits segmented by months to maturity and deposit amount as of June 30, 2017 and December 31, 2016:

	As of June 30, 2017
(dollars in thousands)	Time deposits of $100 and greater		Time deposits of less than $100		Total
Months to maturity:
Three or less	$	26,994	$	38,578	$	65,572
Over Three to Six		33,860		36,187		70,047
Over Six to Twelve		64,851		65,364		130,215
Over Twelve		69,738		61,029		130,767
Total	$	195,443	$	201,158	$	396,601

	As of December 31, 2016
(dollars in thousands)	Time deposits of $100 and greater		Time deposits of less than $100		Total
Months to maturity:
Three or less	$	27,749	$	41,699	$	69,448
Over Three to Six		33,638		37,745		71,383
Over Six to Twelve		55,494		63,058		118,552
Over Twelve		66,135		65,513		131,648
Total	$	183,016	$	208,015	$	391,031

Investment portfolio

Our investment portfolio provides liquidity and certain of our investment securities serve as collateral for certain deposits and other types of borrowings. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.

The following table shows the carrying value of our total securities available for sale by investment type and the relative percentage of each investment type for the dates indicated:

	June 30, 2017					December 31, 2016
(dollars in thousands)	Carrying value		% of total			Carrying value		% of total
U.S. Government agency securities	$	990		0	%	$	985		0	%
Mortgage-backed securities		410,708		74	%		443,908		76	%
Municipals, tax exempt		122,698		22	%		116,923		20	%
Treasury securities		10,310		2	%		11,757		2	%
Equity Securities		8,651		2	%		8,610		2	%
Total securities available for sale	$	553,357		100	%	$	582,183		100	%

The balance of our investment portfolio at June 30, 2017 was $553.4 million compared to $582.2 million at December 31, 2016. During the three and six months ended June 30, 2017, we purchased $17.9 million and 22.9 million investment securities, respectively. This compares to purchases of $150.7 million and $202.8 million during the three and six months ended June 30, 2016, respectively. For the three and six months ended June 30, 2017, mortgage-backed securities and collateralized mortgage obligations, or CMOs, in the aggregate, comprised 68.7% and 53.7% of these purchases, respectively. This compares to purchases of mortgage-backed securities and CMOs, in the aggregate, comprising 90.0% and 91.0% during the three and six months ended June 30, 2016. CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government agency securities and municipal securities accounted for 31.3% and 46.3%, respectively of total securities purchased in the three and six months ended June 30, 2017 and made up 10.0% and 9.0% of total securities purchased during the same periods in 2016. The carrying value of securities sold during the three and six months ended June 30, 2017, totaled $12.2 million and $12.2 million, respectively. This compares to the carrying value of total securities sold during the three and six months ended June 30, 2016 totaling $166.7 million and $269.0 million, respectively. Maturities and calls of securities during the three and six months ended June 30, 2017

totaled $22.4 million and $41.9 million, respectively, while totaling $24.3 million and $44.2 million during the same periods in 2016. As of June 30, 2017 and December 31, 2016, net unrealized losses of $2.7 million and $6.3 million, respectively, were recorded on investment securities.

The following table sets forth the fair value, scheduled maturities and weighted average yields for our investment portfolio as of June 30, 2017 and December 31, 2016:

	As of June 30, 2017								As of December 31, 2016
(dollars in thousands)	Fair value		% of total investment securities			Weighted average yield(1)			Fair value		% of total investment securities			Weighted average yield(1)
Treasury securities
Maturing within one year	$	2,998		0.5	%		0.72	%	$	4,502		0.8	%		0.69	%
Maturing in one to five years		7,312		1.3	%		1.76	%		7,255		1.2	%		1.76	%
Maturing in five to ten years		—		—			—			—		—			—
Maturing after ten years		—		—			—			—		—			—
Total Treasury securities		10,310		1.8	%		1.46	%		11,757		2.0	%		1.35	%
Government agency securities:
Maturing within one year		—		—			—			—		—			—
Maturing in one to five years		990		0.2	%		1.43	%		985		0.2	%		1.43	%
Maturing in five to ten years		—		—			—			—		—			—
Maturing after ten years		—		—			—			—		—			—
Total government agency securities		990		0.2	%		1.43	%		985		0.2	%		1.43	%
Obligations of state and municipal subdivisions:
Maturing within one year		4,872		0.9	%		4.77	%		4,850		0.8	%		5.87	%
Maturing in one to five years		25,168		4.5	%		4.67	%		18,100		3.1	%		6.22	%
Maturing in five to ten years		24,748		4.5	%		4.00	%		32,248		5.5	%		6.17	%
Maturing after ten years		67,910		12.3	%		3.28	%		61,725		10.6	%		4.81	%
Total obligations of state and municipal subdivisions		122,698		22.2	%		3.76	%		116,923		20.0	%		5.45	%
Residential mortgage backed securities guaranteed by FNMA, GNMA and FHLMC:
Maturing within one year		—		—			—			1		0.0	%		2.53	%
Maturing in one to five years		—		—			—			137		0.0	%		5.32	%
Maturing in five to ten years		25		0.0	%		3.47	%		360		0.1	%		5.33	%
Maturing after ten years		410,683		74.2	%		2.37	%		443,410		76.2	%		2.17	%
Total residential mortgage backed securities guaranteed by FNMA, GNMA and FHLMC		410,708		74.2	%		2.37	%		443,908		76.3	%		2.17	%
Total marketable equity securities		8,651		1.6	%		1.17	%		8,610		1.5	%		1.11	%
Total investment securities	$	553,357		100.0	%		3.05	%	$	582,183		100.0	%		2.81	%

(1)	Yields on a tax-equivalent basis.

The following table summarizes the amortized cost of securities classified as available for sale and their approximate fair values as of the dates shown:

(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Securities available for sale
As of June 30, 2017
US Government agency securities	$	999	$	—	$	(9	)	$	990
Mortgage-backed securities		416,011		679		(5,982	)		410,708
Municipals, tax exempt		119,960		3,617		(879	)		122,698
Treasury securities		10,325		—		(15	)		10,310
Equity securities		8,780		1		(130	)		8,651
	$	556,075	$	4,297	$	(7,015	)	$	553,357
As of December 31, 2016
US Government agency securities	$	998	$	—	$	(13	)	$	985
Mortgage-backed securities		450,874		939		(7,905	)		443,908
Municipals, tax exempt		116,034		3,003		(2,114	)		116,923
Treasury securities		11,809		—		(52	)		11,757
Equity securities		8,744		1		(135	)		8,610
	$	588,459	$	3,943	$	(10,219	)	$	582,183

Borrowed funds

Deposits and investment securities for sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into client purchase agreements. We also use these sources of funds as part of our asset liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds. This may include match funding of fixed-rate loans. Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy the needs.

Total borrowings include securities sold under agreements to repurchase, lines of credit, advances from the FHLB, federal funds, junior subordinated debentures and related party subordinated debt.

	As of June 30, 2017
(dollars in thousands)	Amount		% of total			Weighted average interest rate (%)
Maturing Within:
June 30, 2018	$	19,949		33	%		0.60	%
June 30, 2019		6,520		11	%		1.67	%
June 30, 2020		139		0	%		5.76	%
June 30, 2021		211		0	%		5.81	%
June 30, 2022		784		1	%		5.95	%
Thereafter		32,530		55	%		4.49	%
Total	$	60,133		100	%		2.04	%

Short-term borrowings

The following table summarizes short-term borrowings (borrowings with maturities of one year or less), which consist of federal funds purchased from our correspondent banks on an overnight basis at the prevailing overnight market rates, securities sold under agreements to repurchase and FHLB Cash Management variable rate advances, or CMAs, and the weighted average interest rates paid:

	Three months ended			Six months ended			Year ended
	June 30,			June 30,			December 31,
(dollars in thousands)	2017			2017			2016
Average daily amount of short-term borrowings outstanding during the period	$	56,601		$	61,134		$	108,335
Weighted average interest rate on average daily short-term borrowings		0.94	%		0.96	%		0.09	%
Maximum outstanding short-term borrowings outstanding at any month-end	$	85,326		$	104,432		$	173,808
Short-term borrowings outstanding at period end	$	16,343		$	16,343		$	171,561
Weighted average interest rate on short-term borrowings at period end		0.16	%		0.16	%		0.66	%

Lines of credit and other borrowings.

As a member of the FHLB Cincinnati, the Bank receives advances from the FHLB pursuant to the terms of various agreements that assist in funding its mortgage and loan portfolios. Under the agreements, we pledge certain qualifying multi-family and 1 to 4 family loans as well as certain investment securities as collateral. As of June 30, 2017 and December 31, 2016, the Company had outstanding advances from the FHLB totaling $12.9 million and $14.0 million, respectively.

As of June 30, 2017 and December 31, 2016, $390.1 million and $565.7 million, respectively, of 1 to 4 family mortgage loans, loans held for sale and multi-family loans were pledged to the FHLB Cincinnati, securing advances against the Bank’s line of credit.

The Bank has a secured line of credit with the FHLB for $300.0 million and $300.0 million as of June 30, 2017 and December 31, 2016, respectively, and the line is secured by qualifying 1 to 4 family and multi-family mortgages in the Bank’s loan portfolio as well as U.S. Government agency securities. Borrowings against this line were $0 and $150.0 million as of June 30, 2017 and December 31, 2016, respectively. Subsequent to June 30, 2017, we borrowed $100.0 million from the FHLB under short-term borrowings with fixed rate arrangements and entered into certain derivative instruments as part of the funding strategy of the Clayton Banks acquisition.

In addition to the FHLB line, the Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal fund purchases in the aggregate amount of $125.0 million as of June 30, 2017 and December 31, 2016. As of June 30, 2017 and December 31, 2016, there were not any borrowings under these lines.

We have two wholly-owned subsidiaries that are statutory business trusts (“Trusts”). The Trusts were created for the sole purpose of issuing 30-year capital trust preferred securities to fund the purchase of junior subordinated debentures issued by the Company. As of June 30, 2017 and December 31, 2016, our $0.9 million investment in the Trusts, was included in other assets in the accompanying consolidated balance sheets and our $30.9 million obligation is reflected as junior subordinated debt. The junior subordinated debt bears interest at floating interest rates based on a spread over 3-month LIBOR of 3.25% (4.54% and 4.25% at June 30, 2017 and December 31, 2016, respectively) for the $21.7 million debenture and 3.15% (4.44% and 4.15% at June 30, 2017 and December 31, 2016, respectively) for the remaining $9.3 million. The $9.3 million debenture may be redeemed prior to the 2034 maturity date upon the occurrence of a special event and the $21.7 million debenture may be redeemed prior to 2034 at our option.

Liquidity and capital resources

Bank liquidity management

We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of clients who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our asset and liability management policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations. We accomplish this through management of the

maturities of our interest-earning assets and interest-bearing liabilities. We believe that our present position is adequate to meet our current and future liquidity needs.

We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.

As part of our liquidity management strategy, we are also focused on minimizing our costs of liquidity and attempt to decrease these costs by growing our noninterest bearing and other low-cost deposits and replacing higher cost funding including time deposits and borrowed funds. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer. As a result of these strategies, we have been able to maintain a relatively low cost of funds in an increasing rate environment.

Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At June 30, 2017 and December 31, 2016, securities with a carrying value of $380.8 million and $390.8 million, respectively, were pledged to secure government, public, trust and other deposits and as collateral for short- term borrowings, letters of credit and derivative instruments.

Additional sources of liquidity include federal funds purchased and advances from the FHLB. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. Funds and advances obtained from the FHLB are used primarily to match-fund fixed rate loans in order to minimize interest rate risk and also be used to meet day to day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. The balance of outstanding federal funds purchased at December 31, 2016 was $150.0 million. There were $0 outstanding federal funds purchased at June 30, 2017. At June 30, 2017 and December 31, 2016, the balance of our outstanding advances from the FHLB was $12.9 million and $14.0 million, respectively. The total amount of the remaining credit available to us from the FHLB at June 30, 2017 and December 31, 2016 was $300.0 million and $150.0 million, respectively. We also maintain lines of credit with other commercial banks totaling $125.0 million. These are unsecured, uncommitted lines of credit maturing at various times within the next twelve months. There were no amounts outstanding under these lines of credit at June 30, 2017 or December 31, 2016, respectively.

Holding company liquidity management

The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short-term cash obligations. For additional information regarding dividend restrictions, see “Item 1. Business — Supervision and regulation,” “Item 1A. Risk Factors — Risks related to our business,” and “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy,” each of which is set forth in our Annual Report.

Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount that would exceed an amount equal to the total of its net income for that year combined with its retained net income of the preceding two years, without the prior approval of the TDFI. Based upon this regulation, as of June 30, 2017 and December 31, 2016, $72.6 million and $66.2 million of the Bank’s retained earnings were available for the payment of dividends without such prior approval. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

The Bank also paid dividends of approximately $14.9 million to the Company in the year ended December 31, 2016 for dividends to our majority (and formerly sole) shareholder and operational expenses that did not require approval from the TDFI.

Additionally, the Company had cash balances on deposit with the Bank totaling $182.9 million and $31.0 million at June 30, 2017 and December 31, 2016, respectively, for ongoing corporate needs.

Capital management and regulatory capital requirements

Our capital management consists of providing adequate equity to support our current and future operations. We are subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDFI, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under

capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

As a result of recent developments such as the Dodd-Frank Act and Basel III, we have become subject to increasingly stringent regulatory capital requirements beginning in 2015. For further discussion of the changing regulatory framework in which we operate, see “Item 1. Business — Supervision and regulation” in our Annual Report.

The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the classifications set forth in the following table. As of June 30, 2017 and December 31, 2016, we exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as detailed in the table below:

	Actual						Required for capital adequacy purposes							To be well capitalized under prompt corrective action provision
(dollars in thousands)	Amount		Ratio (%)				Amount			Ratio (%)				Amount			Ratio (%)
June 30, 2017
Common Equity Tier 1 (CET1)
FB Financial Corporation	$	463,642		17.16	%	>	$	121,584	>		4.5	%		N/A			N/A
FirstBank	$	306,859		11.40	%	>	$	121,129	>		4.5	%	>	$	174,963	>		6.5	%
Total capital (to risk weighted assets)
FB Financial Corporation	$	516,889		19.14	%	>	$	216,046	>		8.0	%		N/A			N/A
FirstBank	$	330,106		12.26	%	>	$	215,404	>		8.0	%	>	$	269,254	>		10.0	%
Tier 1 capital (to risk weighted assets)
FB Financial Corporation	$	493,642		18.28	%	>	$	162,027	>		6.0	%		N/A			N/A
FirstBank	$	306,859		11.40	%	>	$	161,505	>		6.0	%	>	$	161,505	>		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	493,642		15.54	%	>	$	127,064	>		4.0	%		N/A			N/A
FirstBank	$	306,859		9.67	%	>	$	126,932	>		4.0	%	>	$	158,665	>		5.0	%
December 31, 2016
Common Equity Tier 1 (CET1)
FB Financial Corporation	$	287,146		11.04	%	>	$	117,043	>		4.5	%		N/A			N/A
FirstBank	$	282,271		10.88	%	>	$	116,748	>		4.5	%	>	$	168,636	>		6.5	%
Total capital (to risk weighted assets)
FB Financial Corporation	$	338,893		13.03	%	>	$	208,069	>		8.0	%		N/A			N/A
FirstBank	$	304,018		11.72	%	>	$	207,521	>		8.0	%	>	$	259,401	>		10.0	%
Tier 1 capital (to risk weighted assets)
FB Financial Corporation	$	317,146		12.19	%	>	$	156,101	>		6.0	%		N/A			N/A
FirstBank	$	282,271		10.88	%	>	$	155,664	>		6.0	%	>	$	155,664	>		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	317,146		10.05	%	>	$	126,227	>		4.0	%		N/A			N/A
FirstBank	$	282,271		8.95	%	>	$	126,155	>		4.0	%	>	$	157,693	>		5.0	%

We also have outstanding junior subordinated debentures with a carrying value of $30.9 million at June 30, 2017 and December 31, 2016, of which $30.0 million are included in our Tier 1 capital. The Federal Reserve Board issued rules in March 2005 providing more strict quantitative limits on the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital. This guidance, which became fully phased-in in March 2009, did not impact the amount of debentures we include in Tier 1 capital. In addition, although our existing junior subordinated debentures are unaffected and are included in our Tier 1 capital, on account of changes enacted as part of the Dodd-Frank Act, any trust preferred securities issued after May 19, 2010 may not be included in Tier 1 capital.

In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency approved the implementation of the Basel III regulatory capital reforms and issued rules affecting certain changes required by the Dodd-Frank Act, which we refer to as the Basel III Rules, that call for broad and comprehensive revision of regulatory capital standards for U.S. banking organizations. The Basel III Rules implement a new common equity Tier 1 minimum capital

requirement, a higher minimum Tier 1 capital requirement and other items that will affect the calculation of the numerator of a banking organization’s risk-based capital ratios. Additionally, the Basel III Rules apply limits to a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.

The new common equity Tier 1 capital ratio includes common equity as defined under GAAP and does not include any other type of non-common equity under GAAP. When the Basel III Rules are fully phased in 2019, banks will be required to have common equity Tier 1 capital of 4.5% of average assets, Tier 1 capital of 6% of average assets, as compared to the current 4%, and total capital of 8% of risk-weighted assets to be categorized as adequately capitalized. The Basel III Rules do not require the phase-out of trust preferred securities as Tier 1 capital of bank holding companies of the Company’s size.

Further, the Basel III Rules changed the agencies’ general risk-based capital requirements for determining risk-weighted assets, which will affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The Basel III Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”.

The calculation of risk-weighted assets in the denominator of the Basel III capital ratios are adjusted to reflect the higher risk nature of certain types of loans. Specifically, as applicable to the Company and the Bank:

•	Commercial mortgages: Replaces the current 100% risk weight with a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

•	Nonperforming loans: Replaces the current 100% risk weight with a 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.

•	Securities pledged to overnight repurchase agreements.

•	Unfunded lines of credit one year or less.

Generally, the new Basel III Rules became effective on January 1, 2015, although parts of the Basel III Rules will be phased in through 2019. As of June 30, 2017 and December 31, 2016, the Bank and Company met all capital adequacy requirements to which it is subject. Also, as of June 30, 2016, the most recent notification from the FDIC, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Capital Expenditures

Currently, we have not entered into any contractual obligations that would result in material capital expenditures over the next twelve months. However, as a result of our subsequent merger with Clayton Banks, we expect to incur expenses of approximately $4.0 million related to various projects over the next twelve to eighteen months.

Shareholders’ equity

Our total shareholders’ equity was $509.5 million at June 30, 2017 and $330.5 million, at December 31, 2016. Book value per share was $17.59 at June 30, 2017 and $13.71 at December 31, 2016. The growth in shareholders’ equity was attributable to additional capital of $152.7 raised in the private placement of 4,806,710 shares of common stock in addition to earnings retention offset by changes in accumulated other comprehensive income.

Off-balance sheet transactions

We enter into loan commitments and standby letters of credit in the normal course of our business. Loan commitments are made to accommodate the financial needs of our clients. Standby letters of credit commit us to make payments on behalf of clients when certain specified future events occur. Both arrangements have credit risk essentially the same as that involved in extending loans to clients and are subject to our normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment, etc.) is obtained based on management’s credit assessment of the client.

Loan commitments and standby letters of credit do not necessarily represent our future cash requirements because while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn upon. Our unfunded loan commitments and standby letters of credit outstanding at the dates indicated were as follows:

	June 30,		December 31,
	2017		2016
Loan commitments	$	666,372	$	579,879
Standby letters of credit		19,007		22,547

We closely monitor the amount of our remaining future commitments to borrowers in light of prevailing economic conditions and adjust these commitments as necessary. We will continue this process as new commitments are entered into or existing commitments are renewed.

For more information about our off-balance sheet transactions, see “Part I. Financial Information — Notes to Consolidated Financial Statements — Note (8)-Commitments and contingencies” in this Report.

Risk management

There have been no significant changes in our Risk Management practices as described in “Item 1. Business — Risk Management” in our Annual Report.

Credit risk

There have been no significant changes in our Credit Risk Management practices as described in our “Item 1. Business — Risk Management — Credit risk management” in our Annual Report.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate sensitivity

Our market risk arises primarily from interest rate risk inherent in the normal course of lending and deposit-taking activities. Management believes that our ability to successfully respond to changes in interest rates will have a significant impact on our financial results. To that end, management actively monitors and manages our interest rate risk exposure.

The Asset Liability Management Committee (ALMC), which is authorized by the Company’s Board of Directors, monitors our interest rate sensitivity and makes decisions relating to that process. The ALMC’s goal is to structure our asset/ liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.

We monitor the impact of changes in interest rates on our net interest income and economic value of equity, or EVE, using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in affect over the life of the current balance sheet.

The following analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates at the specified levels for the periods presented:

	Percentage change in:
Change in interest rates	Net interest income(1)
	Year 1						Year 2
	June 30,			December 31,			June 30,			December 31,
(in basis points)	2017			2016			2017			2016
+400		11.5	%		3.6	%		17.8	%		10.7	%
+300		8.5	%		2.8	%		13.4	%		8.4	%
+200		5.8	%		1.8	%		9.2	%		5.8	%
+100		3.1	%		1.0	%		4.8	%		3.1	%
-100		(10.8	)%		(7.4	)%		(13.5	)%		(9.3	)%

	Percentage change in:
Change in interest rates	Economic value of equity(2)
	June 30,			December 31,
(in basis points)	2017			2016
+400		3.4	%		(4.3	)%
+300		3.2	%		(2.3	)%
+200		2.8	%		(0.8	)%
+100		1.9	%		0.2	%
-100		(10.7	)%		(10.6	)%

(1)	The percentage change represents the projected net interest income for 12 months and 24 months on a flat balance sheet in a stable interest rate environment versus the projected net income in the various rate scenarios.

(2)	The percentage change in this column represents our EVE in a stable interest rate environment versus EVE in the various rate scenarios.

The results for the net interest income simulations for June 30, 2017 and December 31, 2016 resulted in an asset sensitive position. These asset sensitive positions are primarily due to the increase in mortgage loans held for sale and trending growth of noninterest bearing deposits. As our mortgage loans held for sale increase, we become more asset sensitive, which has been our current trend. However, as mortgage rates rise, we expect our mortgage originations and mortgage loans held for sale to decline, which will make us less asset sensitive. Beta assumptions on loans and deposits were consistent for both time periods. The ALMC also reviewed beta assumptions for time deposits and loans with industry standards and revised them accordingly. For the June 30, 2017 and December 31, 2016 simulations the loan and time deposit betas were 100% for all rate scenarios as is industry standard.

The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the measures do not reflect the actions the ALMC may undertake in response to such changes in interest rates. The scenarios assume instantaneous movements in interest rates in increments of 100, 200, 300 and 400 basis points. With the present position of the target federal funds rate, the declining rate scenarios seem improbable. Furthermore, it has been the Federal Reserve’s policy to adjust the target federal funds rate incrementally over time. As interest rates are adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business assumptions are based upon our experience, business plans and published industry experience. Key assumptions employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual results may differ from simulated results.

We utilize derivative financial instruments, including rate lock commitments and forward loan sales contracts as part of our ongoing efforts to mitigate our interest rate risk exposure inherent in our mortgage pipeline and held for sale portfolio. Under the interest rate lock commitments, interest rates for a mortgage loan are locked in with the client for a period of time, typically thirty days. Once an interest rate lock commitment is entered into with a client, we also enter into a forward commitment to sell the residential mortgage loan to secondary market investors. Forward loan sale contracts are contracts for delayed sale and delivery of mortgage loans to a counter party. We agree to deliver on a specified future date, a specified instrument, at a specified price or yield. The credit risk inherent to us arises from the potential inability of counterparties to meet the terms of their contracts. In the event of non-acceptance by the counterparty, we would be subject to the credit and inherent (or market) risk of the loans retained.

For more information about our derivative financial instruments, see Note 9, “Derivative Instruments,” in the notes to our consolidated financial statements.

ITEM 4—CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This conclusion was based on the material weakness in our internal control over financial reporting disclosed in our Annual Report and as further described below.

The material weakness identified by our management results from deficiencies around the recording of mortgage banking transactions and reconciliations of mortgage loans held for sale and related clearing accounts on a timely and periodic basis in order to properly record identified reconciling items. The material weakness was identified during the fourth quarter of 2016 following the implementation of a new comprehensive mortgage lending accounting system. Our management believes that the conversion to the system, which was completed during 2016, and the revised policies and procedures for reconciling applicable accounts put in place during 2016 have been sufficient to remediate this material weakness. However, the material weakness will only be considered remediated when these controls have been performing as designed for a sufficient period of time.

Following additional testing and notwithstanding the existence of the material weakness described above, our management has concluded that the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates and for the periods presented in conformity with accounting principles generally accepted in the United States and Article 10 of Regulation S-X of the Exchange Act.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Various legal proceedings to which we or our subsidiaries are party arise from time to time in the normal course of business. As of the date of this Report, there are no material pending legal proceedings to which we or any of our subsidiaries is a party or of which any of our or our subsidiaries’ properties are subject.

Item 1A. Risk Factors.

There have been no material changes to the risk factors set forth in the “Risk Factors” section of our Annual Report.

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

Initial Public Offering

On September 15, 2016, our registration statement on Form S-1 (Registration No. 333-213210) was declared effective by the SEC for our underwritten initial public offering in which we sold a total of 6,764,704 shares of our common stock at a price to the public of $19.00 per share. J.P. Morgan Securities LLC, UBS Securities LLC, and Keefe, Bruyette & Woods, Inc., acted as the joint book-running managers for the offering, and Raymond James & Associates, Inc., Sandler O’Neill & Partners, L.P., and Stephens Inc. acted as co-managers.

The offering commenced on September 15, 2016 and closed on September 21, 2016. All of the shares registered pursuant to the registration statement were sold at an aggregate offering price of $128.5 million. We received net proceeds of approximately $115.5 million after deducting underwriting discounts and commissions of $9.0 million and other offering expenses of $4.0 million. No payments with respect to expenses were made by us to directors, officers or persons owning ten percent or more of either class of our common stock or to their associates, or to our affiliates. However, $55 million of the net proceeds from the offering were used to fund a cash distribution to James W. Ayers, our majority shareholder and executive chairman, which cash distribution was intended to be non-taxable to Mr. Ayers, and $10.1 million of the net proceeds from the offering were used to fund the repayment of all amounts outstanding under our subordinated notes held by Mr. Ayers. Remaining proceeds of approximately $34.9 million from the offering remain in interest bearing deposits in other financial institutions and may be used for general business purposes or to fund future acquisitions.

Private Placement

As previously reported in our Current Report on Form 8-K that was filed with the SEC on May 26, 2017, we sold 4,806,710 shares of our common stock (the “Private Placement Shares”) to accredited investors in a private placement that closed on June 1, 2017. We received net proceeds of approximately $152.7 million from the sale of the Private Placement Shares after deducting placement agent fees of approximately $5.5 million and other offering expenses of approximately $0.4 million. The net proceeds were used to fund a portion of the payment of approximately $184.2 million cash consideration to Clayton HC, Inc. in connection with our acquisition of Clayton Bank and Trust and American City Bank, which closed on July 31, 2017. The Private Placement Shares were not registered under the Securities Act in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act and Regulation D promulgated under the Securities Act. The disclosure under Item 1.01 and Item 3.02 of the previously referenced Form 8-K are incorporated by reference herein.

Item 6. Exhibits.

The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Report.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FB Financial Corporation

	/s/ James R. Gordon
August 10, 2017	James R. Gordon Chief Financial Officer (duly authorized officer and principal financial officer)

Exhibit Index

Exhibit Number		Description

2.1		Stock Purchase Agreement by and among FB Financial Corporation, FirstBank, Clayton HC, Inc., Clayton Bank and Trust, American City Bank, and James L. Clayton, dated as of February 8, 2017 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 9, 2017)
2.2		First Amendment to Stock Purchase Agreement, dated May 26, 2017, by and among FB Financial Corporation, FirstBank, Clayton HC, Inc., Clayton Bank and Trust, American City Bank, and James L. Clayton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 26, 2017)
3.1		Amended and Restated Charter of FB Financial Corporation (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 333-213210), filed on September 6, 2016)
3.2		Amended and Restated Bylaws of FB Financial Corporation (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-Q for the quarter ended September 30, 2016)
4.1		Registration Rights Agreement (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2016)
10.1		Securities Purchase Agreement, dated May 26, 2017, by and among FB Financial Corporation and the purchases named therein and their permitted transferees (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 26, 2017)
10.2		FB Financial Corporation Independent Director Compensation Policy*^†
11.1		Earnings Per Share Computation (included in Note 1 to the Consolidated Financial Statement in this Report)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer*
31.2		Rules 13a-14(a) Certification of Chief Financial Officer*
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

**	Furnished herewith.

^†	Represents a management contract or compensatory plan or arrangement.