UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended September 30, ~~2016~~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 number001-36895

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)


Tennessee		20-8839445
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

722 Columbia Avenue Franklin, Tennessee		37064
(Address of principal executive offices)		(Zip Code)

615-236-2265

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 RegulationS-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, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company” and “emerging growth company” in Rule12b-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 Rule12b-2 of the Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, no par value per share, as of ~~October 31, 2016,~~November 7, 2017, was ~~10,758,458.~~13,215,564.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements			1
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets			2
Consolidated Statements of Income			3
Consolidated Statements of Comprehensive Income ~~(Loss)~~			4
Consolidated ~~Statements~~Statement of Changes in Shareholders’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			5047
Item 4. Controls and Procedures			5148

PART II OTHER INFORMATION

Item 1. Legal Proceedings			5148
Item 1A. Risk Factors			5148
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5249
Item 3. Defaults Upon Senior Securities			5349
Item 4. Mine Safety Disclosures			5349
Item 5. Other Information			5349
Item 6. Exhibits			5450

SIGNATURES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-Q contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this Quarterly Report on Form10-Q, and we undertake no obligation to update such statements after this date.

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Item 1A of our Annual Report on Form10-K for the year ended December 31, ~~2015 and those described in Item 1A of Part II of this Quarterly Report on Form 10-Q.~~2016.

PART I FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

~~ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS~~

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)


	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
	*(Unaudited)*						(Unaudited)
ASSETS
Cash and due from financial institutions	$	55,749		$	52,394		$	155,842		$	90,927
Certificates of deposit at other financial institutions		1,055			250			2,365			1,055
Securities available for sale		670,756			575,838			980,737			754,755
Securities held to maturity (fair value 2016—$243,946 and 2015—$161,969)		235,050			158,200
Securities held to maturity (fair value 2017—$220,089 and 2016—$227,892)								217,312			228,894
Loans held for sale, at fair value		26,819			14,079			11,823			23,699
Loans		1,654,058			1,303,826			2,115,930			1,773,592
Allowance for loan losses		(15,590	)		(11,587	)		(19,944	)		(16,553	)

Net loans		1,638,468			1,292,239			2,095,986			1,757,039

Restricted equity securities, at cost		11,829			7,998			18,472			11,843
Premises and equipment, net		8,796			7,640			11,217			9,551
Accrued interest receivable		7,871			7,299			11,156			9,931
Bank owned life insurance		23,105			22,619			23,732			23,267
Deferred tax asset		5,590			9,430			13,592			15,013
Assets held for sale		—			1,640
Foreclosed assets		—			200			1,503			—
Servicing rights, net		3,566			3,455			3,639			3,621
Goodwill		9,124			9,124			9,124			9,124
Core deposit intangible, net		1,612			2,043			1,117			1,480
Other assets		3,805			3,344			7,663			2,990

Total assets	$	2,703,195		$	2,167,792		$	3,565,278		$	2,943,189

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND EQUITY
Deposits
Non-interest bearing	$	232,118		$	176,742		$	257,177		$	233,781
Interest bearing		1,985,836			1,637,297			2,567,648			2,158,037

Total deposits		2,217,954			1,814,039			2,824,825			2,391,818
Federal Home Loan Bank advances								337,000			132,000
Federal funds purchased and repurchase agreements		45,843			101,086			32,862			83,301
Federal Home Loan Bank advances		162,000			57,000
Subordinated notes, net of issuance costs		58,292			—
Subordinated notes, net								58,470			58,337
Accrued interest payable		1,399			644			2,597			1,924
Other liabilities		8,063			6,207			5,827			5,448

Total liabilities		2,493,551			1,978,976			3,261,581			2,672,828
Shareholders’ equity
Preferred stock, no par value: 1,000,000 shares authorized; Senior non-cumulative preferred stock, Series A, no par value, $1,000 liquidation value per share, 10,000 shares authorized; no shares outstanding at September 30, 2016 and 10,000 shares issued and outstanding at December 31, 2015		—			10,000
Common stock, no par value; 20,000,000 shares authorized; 10,757,483 and 10,571,377 shares issued and outstanding at September 30, 2016 and December 31 2015, respectively		150,852			147,784
Equity
Preferred stock, no par value: 1,000,000 shares authorized; no shares outstanding at September 30, 2017 and December 31, 2016								—			—
Common stock, no par value: 30,000,000 and 20,000,000 shares authorized at September 30, 2017 and December 31, 2016, respectively; 13,209,055 and 13,036,954 issued at September 30, 2017 and December 31, 2016, respectively								221,642			218,354
Retained earnings		51,591			31,352			85,075			59,386
Accumulated other comprehensive income (loss)		7,201			(320	)
Accumulated other comprehensive loss								(3,123	)		(7,482	)

Total shareholders’ equity		209,644			188,816			303,594			270,258
Noncontrolling interest in consolidated subsidiary								103			103

Total liabilities and shareholders’ equity	$	2,703,195		$	2,167,792
Total equity							$	303,697		$	270,361

Total liabilities and equity							$	3,565,278		$	2,943,189

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Interest income and dividends
Loans, including fees	$	20,192		$	14,744		$	56,864		$	38,071		$	25,973		$	20,192		$	73,195		$	56,864
Securities:
Taxable		3,889			3,462			11,402			9,084			5,041			3,889			16,358			11,402
Tax-exempt		1,457			966			3,776			1,155
Tax-Exempt														2,217			1,457			6,449			3,776
Dividends on restricted equity securities		133			100			354			250			269			133			663			354
Federal funds sold and other		53			29			175			80			280			53			667			175

Total interest income		25,724			19,301			72,571			48,640			33,780			25,724			97,332			72,571

Interest expense
Deposits		3,683			2,417			10,118			5,963			7,311			3,683			19,118			10,118
Federal funds purchased and repurchase agreements		69			69			237			232			92			69			309			237
Federal Home Loan Bank advances		215			79			511			225			968			215			2,228			511
Subordinated notes and other borrowings		1,082			—			1,820			—			1,083			1,082			3,239			1,820

Total interest expense		5,049			2,565			12,686			6,420			9,454			5,049			24,894			12,686

Net interest income		20,675			16,736			59,885			42,220			24,326			20,675			72,438			59,885
Provision for loan losses		1,392			1,724			4,095			3,154			590			1,392			3,018			4,095

Net interest income after provision for loan losses		19,283			15,012			55,790			39,066			23,736			19,283			69,420			55,790

Noninterest income
Service charges on deposit accounts		44			44			139			78			39			44			114			139
Other service charges and fees		845			679			2,245			1,987			787			845			2,297			2,245
Net gains on sale of loans		2,942			2,463			6,859			5,573			1,517			2,942			5,918			6,859
Wealth management		446			327			1,343			914			643			446			1,884			1,343
Loan servicing fees, net		(40	)		84			(2	)		187			70			(40	)		230			(2	)
Gain on sale or call of securities		430			5			1,535			529			350			430			470			1,535
Net gain on sale of foreclosed assets		30			3			36			30
Net (loss) gain on sale of foreclosed assets														(16	)		30			(10	)		36
Other		179			193			432			566			179			179			554			432

Total noninterest income		4,876			3,798			12,587			9,864			3,569			4,876			11,457			12,587

Noninterest expense
Salaries and employee benefits		7,979			6,208			22,099			17,960			9,011			7,979			26,172			22,099
Occupancy and equipment		2,001			1,683			5,563			4,961			2,399			2,001			6,689			5,563
FDIC assessment expense		570			362			1,388			792			900			570			2,675			1,388
Marketing		206			277			611			695			192			206			744			611
Professional fees		935			516			3,006			1,382			821			935			2,558			3,006
Amortization of core deposit intangible		138			160			431			499			115			138			363			431
Indirect expenses related to public offering		—			—			—			314
Other		1,879			1,647			5,354			4,443			1,840			1,879			5,636			5,354

Total noninterest expense		13,708			10,853			38,452			31,046			15,278			13,708			44,837			38,542

Income before income tax expense		10,451			7,957			29,925			17,884			12,027			10,451			36,040			29,925
Income tax expense		3,421			2,807			9,663			6,468			3,138			3,314			10,343			9,047

Net income		7,030			5,150			20,262			11,416			8,889			7,137			25,697			20,878
Earnings attributable to noncontrolling interest														—			—			(8	)		—
Dividends paid on Series A preferred stock		—			(25	)		(23	)		(75	)		—			—			—			(23	)

Net income available to common shareholders	$	7,030		$	5,125		$	20,239		$	11,341		$	8,889		$	7,137		$	25,689		$	20,855

Earnings per share:
Basic	$	0.66		$	0.49		$	1.90		$	1.17		$	0.67		$	0.67		$	1.96		$	1.96
Diluted		0.62			0.46			1.80			1.12			0.65			0.63			1.86			1.84

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

~~Three and Nine Months Ended September 30, 2016 and 2015~~

(Dollar amounts in thousands, except share and per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Net income	$	7,030		$	5,150		$	20,262		$	11,416		$	8,889		$	7,137		$	25,697		$	20,878
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains on securities:
Unrealized holding gain (loss) arising during the period		(3,664	)		7,871			13,910			4,006			1,610			(3,664	)		7,641			13,910
Reclassification adjustment for gains included in net income		(430	)		(5	)		(1,535	)		(529	)		(350	)		(430	)		(470	)		(1,535	)

Net unrealized gains (losses)		(4,094	)		7,866			12,375			3,477			1,260			(4,094	)		7,171			12,375
Tax effect		1,606			(3,090	)		(4,854	)		(1,401	)		(494	)		1,606			(2,812	)		(4,854	)

Total other comprehensive income (loss)		(2,488	)		4,776			7,521			2,076			766			(2,488	)		4,359			7,521

Comprehensive income	$	4,542		$	9,926		$	27,783		$	13,492		$	9,655		$	4,649		$	30,056		$	28,399

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN ~~SHAREHOLDERS’~~ EQUITY

Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

(Dollar amounts in thousands, except share and per share data)

(Unaudited)


	Preferred Stock			Common Stock						Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders Equity																Accumulated Other
	Preferred Stock			Shares			Amount							Accumulated Other Comprehensive Income (Loss)			Preferred						Common Stock						Retained			Comprehensive			Noncontrolling			Total
Balance at December 31, 2014	$	10,000			7,756,411		$	94,251		Retained Earnings		$	15,372			$	2,176	Total Shareholders Equity			$	121,799
Exercise of common stock options		—			80,331			780			—				—				780
Exercise of common stock warrants		—			4,970			60			—				—				60
Dividends paid on Series A preferred stock		—			—			—			(75	)			—				(75	)
Issuance of restricted stock, net of forfeitures		—			28,229			—			—				—				—
Stock based compensation expense, net of restricted share forfeitures		—			—			619			—				—				619
Stock issued related to initial public offering, net of stock issuance costs		—			2,640,000			50,423			—				—				50,423
Stock issued (divestment) in conjunction with 401(k) employer match, net of distributions		—			14,689			365			—				—				365
Excess tax benefit from exercise of stock options		—			—			147			—				—				147
Net income		—			—			—			11,416				—				11,416
Other comprehensive income		—			—			—			—			$	2,076				2,076

Balance at September 30, 2015	$	10,000			10,524,630		$	146,645		$	26,713			$	4,252			$	187,610
																						Stock			Shares			Amount			Earnings			Income (Loss)			Interest		Equity
Balance at December 31, 2015	$	10,000			10,571,377		$	147,784		$	31,352			$	(320	)		$	188,816			$	10,000			10,571,377		$	147,784		$	31,352		$	(320	)	$	—	$	188,816
Exercise of common stock options, net		—			152,003			1,357											1,357				—			152,003			1,357									—		1,357
Exercise of common stock warrants		—			6,575			79											79				—			6,575			79									—		79
Redemption of Series A preferred stock		(10,000	)		—			—			—				—				(10,000	)			(10,000	)		—			—			—			—			—		(10,000	)
Dividends paid on Series A preferred stock		—			—			—			(23	)			—				(23	)			—			—			—			(23	)		—			—		(23	)
Stock based compensation expense, net of restricted share forfeitures		—			34,480			1,201			—				—				1,201				—			34,480			1,201			—			—			—		1,201
Stock issued (divestment) in conjunction with 401(k) employer match, net of distributions		—			(6,952	)		(185	)		—				—				(185	)			—			(6,952	)		(185	)		—			—			—		(185	)
Excess tax benefit from restricted stock vesting		—			—			94			—				—				94
Excess tax benefit from exercise of stock options		—			—			522			—				—				522
Net income		—			—			—			20,262				—				20,262				—			—			—			20,878			—			—		20,878
Other comprehensive income		—			—			—			—				7,521				7,521				—			—			—			—			7,521			—		7,521

Balance at September 30, 2016	$	—			10,757,483		$	150,852		$	51,591			$	7,201			$	209,644			$	—			10,757,483		$	150,236		$	52,207		$	7,201			—	$	209,644

Balance at December 31, 2016																						$	—			13,036,954		$	218,354		$	59,386		$	(7,482	)		103	$	270,361
Exercise of common stock options, net																							—			138,007			1,361			—			—			—		1,361
Exercise of common stock warrants																							—			12,461			150			—			—			—		150
Stock based compensation expense, net of restricted share forfeitures																							—			26,718			1,970			—			—			—		1,970
Stock issued (divestment) in conjunction with 401(k) employer match, net of distributions																							—			(5,085	)		(193	)		—			—			—		(193	)
Earnings attributable to noncontrolling interest																							—			—			—			(8	)		—			—		(8	)
Net income																							—			—			—			25,697			—			—		25,697
Other comprehensive income																							—			—			—			—			4,359			—		4,359

Balance at September 30, 2017																						$	—			13,209,055		$	221,642		$	85,075		$	(3,123	)	$	103	$	303,697

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except share and per share data)

(Unaudited)


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2016				2015			2017			2016
Cash flows from operating activities
Net income	$	20,262			$	11,416		$	25,697		$	20,878
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		986				996			1,118			986
Accretion of purchase accounting adjustments		(488	)			(1,551	)		(873	)		(488	)
Net amortization of securities		5,428				3,426			7,654			5,428
Amortization of loan servicing right asset		905				644			721			905
Amortization of core deposit intangible		431				499			363			431
Amortization of debt issuance costs		79				—			133			79
Provision for loan losses		4,095				3,154			3,018			4,095
Deferred income tax benefit		(1,015	)	��		(567	)		(1,394	)		(1,015	)
Origination of loans held for sale		(260,598	)			(236,831	)		(270,876	)		(260,598	)
Proceeds from sale of loans held for sale		253,701				245,194			290,669			253,701
Net gain on sale of loans		(6,859	)			(5,573	)		(5,918	)		(6,859	)
Gain on sale of available for sale securities		(1,535	)			(380	)		(470	)		(1,535	)
Gain on call of held to maturity securities		—				(149	)
Income from bank owned life insurance		(486	)			(444	)		(465	)		(486	)
Net gain on foreclosed assets		(36	)			(30	)
Net loss/(gain) on foreclosed assets									10			(36	)
Loss on sale of assets held for sale		98				—			—			98
Stock-based compensation		1,201				619			1,970			1,201
Compensation expense related to common stock issued to 401(k) plan		404				356			—			404
Deferred gain on sale of loans		(46	)			(27	)		(58	)		(46	)
Net change in:
Accrued interest receivable and other assets		(1,033	)			(3,986	)		(5,949	)		(1,033	)
Accrued interest payable and other liabilities		2,261				2,190			1,120			2,261

Net cash from operating activities		17,755				18,956			46,470			18,371
Cash flows from investing activities
Securities available for sale :
Sales		74,203				52,064			122,837			74,203
Purchases		(223,432	)			(467,067	)		(455,700	)		(223,432	)
Maturities, prepayments and calls		64,502				187,222			108,339			64,502
Securities held to maturity :
Purchases		(92,646	)			(88,550	)		(1,996	)		(92,646	)
Maturities, prepayments and calls		14,088				9,394			12,110			14,088
Net change in loans		(349,944	)			(335,238	)		(346,595	)		(349,944	)
Purchase of bank owned life insurance		—				(10,344	)
Proceeds from sale of assets held for sale		1,542				4,080			—			1,542
Purchase of restricted equity securities		(3,831	)			(2,342	)		(6,629	)		(3,831	)
Proceeds from sale of foreclosed assets		336				531			1,330			336
Purchases of premises and equipment, net		(2,142	)			(692	)		(2,784	)		(2,142	)
Capitalization of foreclosed assets									(35	)		—
Increase in certificates of deposits at other financial institutions		(805	)			—			(1,310	)		(805	)

Net cash from investing activities		(518,129	)			(650,942	)		(570,433	)		(518,129	)
Cash flows from financing activities
Increase in deposits		403,915				542,422			433,007			403,915
Decrease in federal funds purchased and repurchase agreements		(55,243	)			(1,460	)		(50,439	)		(55,243	)
Proceeds from Federal Home Loan Bank advances		305,000				157,000			370,000			305,000
Repayment of Federal Home Loan Bank advances		(200,000	)			(119,000	)		(165,000	)		(200,000	)
Proceeds from other borrowings		10,000				—			—			10,000
Repayment of other borrowings		(10,000	)			—			—			(10,000	)
Proceeds from issuance of subordinated notes, net of issuance costs		58,213				—			—			58,213
Proceeds from exercise of common stock warrants		79				60			150			79
Proceeds from exercise of common stock options, including excess tax benefit		1,879				927
Excess tax benefit from restricted stock vesting		94				—
Proceeds from issuance of common stock, net of offering costs		—				50,423
Proceeds from exercise of common stock options									1,361			1,357
Divestment of common stock issued to 401(k) plan		(185	)			—			(193	)		(185	)
Redemption of Series A preferred stock		(10,000	)			—			—			(10,000	)
Dividends paid on preferred stock		(23	)			(75	)		—			(23	)
Earnings attributable to noncontrolling interest									(8	)		—

Net cash from financing activities		503,729				630,297			588,878			503,113

Net change in cash and cash equivalents		3,355				(1,689	)		64,915			3,355
Cash and cash equivalents at beginning of period		52,394				49,347			90,927			52,394

Cash and cash equivalents at end of period	$	55,749			$	47,658		$	155,842		$	55,749

Supplemental information:
Interest paid	$	11,931			$	6,254		$	24,221		$	11,931
Income taxes paid		9,650				6,339			12,380			9,650
Non-cash supplemental information:
Transfers from loans to foreclosed assets								$	2,818		$	—
Transfers from loans to loans held for sale									2,685			—

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form10-Q and therefore do not include all information and footnotes necessary for a ~~fair~~complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by RegulationS-X, Rule10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report onForm 10-K filed with the SEC on March ~~15, 2016.~~16, 2017.

These consolidated financial statements include the accounts of Franklin Financial Network, Inc. (“FFN”), and its wholly-owned subsidiaries, Franklin Synergy Bank (“Franklin Synergy” or the “Bank”) and Franklin Synergy Risk Management, Inc. (collectively, the “Company”). Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of the Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2016
September 30, 2017
U.S. government sponsored entities and agencies	$	3,000	$	138	$	—		$	3,138	$	20,147	$	—	$	(65	)	$	20,082
Mortgage-backed securities: residential		546,805		10,346		(354	)		556,797		729,014		1,113		(5,460	)		724,667
Mortgage-backed securities: commercial		19,526		233		—			19,759		15,675		—		(65	)		15,610
State and political subdivisions		89,576		1,820		(334	)		91,062		161,223		2,197		(2,855	)		160,565
U.S Treasury bills											59,816		1		(4	)		59,813

Total	$	658,907	$	12,537	$	(688	)	$	670,756	$	985,875	$	3,311	$	(8,449	)	$	980,737


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2015
U.S. government sponsored entities and agencies	$	6,792	$	72	$	(47	)	$	6,817
December 31, 2016
Mortgage-backed securities: residential		502,916		2,386		(4,347	)		500,955	$	614,344	$	949	$	(8,208	)	$	607,085
Mortgage-backed securities: commercial		19,993		22		(180	)		19,835		19,439		27		(132	)		19,334
State and political subdivisions		46,664		1,570		(3	)		48,231		133,280		238		(5,182	)		128,336

Total	$	576,365	$	4,050	$	(4,577	)	$	575,838	$	767,063	$	1,214	$	(13,522	)	$	754,755

The amortized cost and fair value of the securities held to maturity portfolio at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 and the corresponding amounts of gross unrecognized gains and losses were as follows:


	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
September 30, 2016
U.S. government sponsored entities and agencies	$	203	$	7	$	—		$	210
September 30, 2017
Mortgage backed securities: residential		112,071		1,014		(124	)		112,961	$	95,560	$	354	$	(1,502	)	$	94,412
State and political subdivisions		122,776		7,999		—			130,775		121,752		3,957		(32	)		125,677

Total	$	235,050	$	9,020	$	(124	)	$	243,946	$	217,312	$	4,311	$	(1,534	)	$	220,089


	Gross Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value		Gross Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
December 31, 2015
December 31, 2016
U.S. government sponsored entities and agencies	$	3,300	$	11	$	(72	)	$	3,239	$	203	$	6	$	—		$	209
Mortgage backed securities: residential		30,398		410		(408	)		30,400		106,169		328		(2,343	)		104,154
State and political subdivisions		124,502		3,841		(13	)		128,330		122,522		1,214		(207	)		123,529

Total	$	158,200	$	4,262	$	(493	)	$	161,969	$	228,894	$	1,548	$	(2,550	)	$	227,892

The proceeds from sales and calls of securities available for sale and the associated gains and losses were as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

   2016    2015    2016    2015
Proceeds
   $ 11,939       $ 19,776       $ 74,203       $ 54,064
Gross gains
   430       $ 95       1,920       485
Gross losses
   —      (90 )    (385 )    (105 )
~~The proceeds from calls of securities held to maturity that were called at a price in excess of par value and the associated gains were as follows:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended
September 30,

Nine Months Ended
September 30,

   2016    2015    2016    2015    2017    2016    2017    2016
Proceeds
   $ —      —      $ —      $ 2,300       $ 61,647    $ 11,939    $ 122,837    $ 74,203
Gross gains
   —      —      —      149       414    430    659    1,920
Gross losses
   —      —      —      —      (64 )    —      (189 )    (385 )
The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

   September 30, 2016    September 30, 2017
   Amortized
Cost    Fair
Value    Amortized
Cost    Fair
Value
Available for sale

One year or less
   $ 74,815    $ 74,800
Over one year through five years
   $ 3,000       $ 3,138       20,147    20,082
Over five years through ten years
   4,681    4,811
Over ten years
   89,576       91,062       141,543    140,767
Mortgage-backed securities: residential
   546,805       556,797       729,014    724,667
Mortgage-backed securities: commercial
   19,526       19,759       15,675    15,610








Total
   $ 658,907       $ 670,756       $ 985,875    $ 980,737








Held to maturity

Over one year through five years
   $ 706       $ 750       $ 1,607    $ 1,665
Over five years through ten years
   5,073       5,351       6,322    6,496
Over ten years
   117,200       124,884       113,823    117,516
Mortgage-backed securities: residential
   112,071       112,961       95,560    94,412








Total
   $ 235,050       $ 243,946       $ 217,312    $ 220,089








Securities pledged at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 had a carrying amount of ~~$742,828~~$944,463 and ~~$595,524,~~$808,224, respectively, and were pledged to secure public deposits and repurchase agreements.
At September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.
The following table summarizes the securities with unrealized and unrecognized losses at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, aggregated by major security type and length of time in a continuous unrealized loss position:

   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
September 30, 2016

Available for sale

Mortgage-backed securities: residential
   $ 36,585       $ (269 ) $ 13,659       $ (85 ) $ 50,244       $ (354 )
State and political subdivisions
   43,314       (334 ) —      —   43,314       (334 )








Total available for sale
   $ 79,899       $ (603 ) $ 13,659       $ (85 ) $ 93,558       $ (688 )








   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses
Held to maturity

Mortgage-backed securities: residential
   $ 19,200       $ (54 ) $ 3,826       $ (70 ) $ 23,026       $ (124 )








Total held to maturity
   $ 19,200       $ (54 ) $ 3,826       $ (70 ) $ 23,026       $ (124 )








   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
December 31, 2015

Available for sale

U.S. government sponsored entities and agencies
   $ 2,703       $ (47 ) $ —      $ —   $ 2,703       $ (47 )
Mortgage-backed securities: residential
   313,570       (3,691 ) 23,319       (656 ) 336,889       (4,347 )
Mortgage-backed securities: commercial
   15,980       (180 ) —      —   15,980       (180 )
State and political subdivisions
   716       (3 ) —      —   716       (3 )








Total available for sale
   $ 332,969       $ (3,921 ) $ 23,319       $ (656 ) $ 356,288       $ (4,577 )








   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
September 30, 2017

Available for sale

U.S. government sponsored entities and agencies
   $ 20,082    $ (65 ) $ —      $ —   $ 20,082    $ (65 )
Mortgage-backed securities: Residential
   369,300    (2,279 ) 130,043    (3,181 ) 499,343    (5,460 )
Mortgage-backed securities: Commercial
   15,610    (65 ) —      —   15,610    (65 )
State and political subdivisions
   22,134    (82 ) 61,297    (2,773 ) 83,431    (2,855 )
U.S. Treasury bills
   19,827    (4 ) —      —   19,827    (4 )








Total available for sale
   $ 446,953    $ (2,495 ) $ 191,340    $ (5,954 ) $ 638,293    $ (8,449 )








   Less Than 12 Months 12 Months or Longer Total    Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses    Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses
Held to maturity

U.S. government sponsored entities and agencies
   $ 1,957       $ (43 ) $ 971       $ (29 ) $ 2,928       $ (72 )
Mortgage-backed securities: residential
   9,788       (97 ) 5,481       (311 ) 15,269       (408 )    $ 25,405    $ (335 ) $ 55,224    $ (1,167 ) $ 80,629    $ (1,502 )
State and political subdivisions
   3,351       (13 ) —      —   3,351       (13 )    263    (1 ) 1,154    (31 ) 1,417    (32 )
















Total held to maturity
   $ 15,096       $ (153 ) $ 6,452       $ (340 ) $ 21,548       $ (493 )    $ 25,668    $ (336 ) $ 56,378    $ (1,198 ) $ 82,046    $ (1,534 )
















   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses Fair
Value    Unrealized
Losses
December 31, 2016

Available for sale

Mortgage-backed securities: residential
   $ 465,416    $ (7,833 ) $ 9,907    $ (375 ) $ 475,323    $ (8,208 )
Mortgage-backed securities: commercial
   15,752    (132 ) —      —   15,752    (132 )
State and political subdivisions
   100,020    (5,182 ) —      —   100,020    (5,182 )








Total available for sale
   $ 581,188    $ (13,147 ) $ 9,907    $ (375 ) $ 591,095    $ (13,522 )








   Less Than 12 Months 12 Months or Longer Total
   Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses Fair
Value    Unrecognized
Losses
Held to maturity

Mortgage-backed securities: residential
   $ 89,523    $ (2,244 ) $ 3,025    $ (99 ) $ 92,548    $ (2,343 )
State and political subdivisions
   18,907    (207 ) —      —   18,907    (207 )








Total held to maturity
   $ 108,430    $ (2,451 ) $ 3,025    $ (99 ) $ 111,455    $ (2,550 )








Unrealized ~~and unrecognized~~ losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.
NOTE 3—LOANS
Loans at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows:

   September 30,
2016    December 31,
2015    September 30,
2017    December 31,
2016
Loans that are not PCI loans

Construction and land development
   $ 474,255       $ 372,767       $ 514,934    $ 489,562
Commercial real estate:

Nonfarm, nonresidential
   403,382       353,268       565,536    458,569
Other
   26,866       10,955       33,310    38,571
Residential real estate:

Closed-end 1-4 family
   228,672       162,933
Closed-end1-4 family
   373,536    254,474
Other
   142,374       112,001       158,577    150,515
Commercial and industrial
   372,784       283,888       464,747    376,476
Consumer and other
   3,458       6,577       3,933    3,359








Loans before net deferred loan fees
   1,651,791       1,302,389       2,114,573    1,771,526
Deferred loan fees, net
   (820 )    (2,476 )    (1,201 )    (793 )








Total loans that are not PCI loans
   1,650,971       1,299,913       2,113,372    1,770,733




PCI loans

Construction and land development
   $ 81       $ 78
Commercial real estate:

Nonfarm, nonresidential
   576       1,460
Other
   —      —
Residential real estate:

Closed-end 1-4 family
   497       562
Other
   —      1
Commercial and industrial
   1,933       1,812
Consumer and other
   —      —




Total PCI loans
   3,087       3,913       2,558    2,859




Allowance for loan losses
   (15,590 )    (11,587 )    (19,944 )    (16,553 )








Total loans, net of allowance for loan losses
   $ 1,638,468       $ 1,292,239       $ 2,095,986    $ 1,757,039








The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, ~~2016~~2017 and ~~2015:~~2016:

   Construction
and Land
Development Commercial
Real
Estate    Residential
Real
Estate Commercial
and
Industrial Consumer
and
Other Total
Three Months Ended September 30, 2016

Allowance for loan losses:

Beginning balance
   $ 3,624    $ 3,865       $ 2,060    $ 4,655    $ 49    $ 14,253
Provision for loan losses
   427    43       451    455    16    1,392
Loans charged-off
   (11 ) —      (40 ) —   (19 ) (70 )
Recoveries
   —   —      13    —   2    15




Total ending allowance balance
   $ 4,040    $ 3,908       $ 2,484    $ 5,110    $ 48    $ 15,590




Three Months Ended September 30, 2015

Allowance for loan losses:

Beginning balance
   $ 2,567    $ 2,321       $ 1,739    $ 1,324    $ 65    $ 8,016
Provision for loan losses
   461    135       (71 ) 1,253    (54 ) 1,724
Loans charged-off
   —   —      (15 ) (15 ) (33 ) (63 )
Recoveries
   —   —      6    —   61    67




Total ending allowance balance
   $ 3,028    $ 2,456       $ 1,659    $ 2,562    $ 39    $ 9,744




   Construction
and Land
Development Commercial
Real
Estate    Residential
Real
Estate Commercial
and
Industrial Consumer
and
Other Total
Three Months Ended September 30, 2017

Allowance for loan losses:

Beginning balance
   $ 3,796 $ 5,011    $ 2,939 $ 6,894 $ 49 $ 18,689
Provision for loan losses
   (507 ) 212    169 707 9 590
Loanscharged-off
   —   —      —   (9 ) (11 ) (20 )
Recoveries
   668 —      14 —   3 685




Total ending allowance balance
   $ 3,957 $ 5,223    $ 3,122 $ 7,592 $ 50 $ 19,944




Three Months Ended September 30, 2016

Allowance for loan losses:

Beginning balance
   $ 3,624 $ 3,865    $ 2,060 $ 4,655 $ 49 $ 14,253
Provision for loan losses
   427 43    451 455 16 1,392
Loanscharged-off
   (11 ) —      (40 ) —   (19 ) (70 )
Recoveries
   —   —      13 —   2 15




Total ending allowance balance
   $ 4,040 $ 3,908    $ 2,484 $ 5,110 $ 48 $ 15,590




The following table presents the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, ~~2016~~2017 and ~~2015:~~2016:

   Construction
and Land
Development Commercial
Real
Estate    Residential
Real
Estate Commercial
and
Industrial Consumer
and
Other Total    Construction
and Land
Development Commercial
Real
Estate    Residential
Real
Estate Commercial
and
Industrial Consumer
and
Other Total
Nine Months Ended September 30, 2016

Nine Months Ended September 30, 2017

Allowance for loan losses:

Beginning balance
   $ 3,186    $ 3,146       $ 1,861    $ 3,358    $ 36    $ 11,587       $ 3,776 $ 4,266    $ 2,398 $ 6,068 $ 45 $ 16,553
Provision for loan losses
   865    762       609    1,817    42    4,095       (487 ) 957    687 1,833 28 3,018
Loans charged-off
   (11 ) —      (39 ) (65 ) (35 ) (150 )    —   —      (1 ) (309 ) (36 ) (346 )
Recoveries
   —   —      53    —   5    58       668 —      38 —   13 719








Total ending allowance balance
   $ 4,040    $ 3,908       $ 2,484    $ 5,110    $ 48    $ 15,590       $ 3,957 $ 5,223    $ 3,122 $ 7,592 $ 50 $ 19,944








Nine Months Ended September 30, 2015

Allowance for loan losses:

Beginning balance
   $ 2,690    $ 1,494       $ 1,791    $ 650    $ 55    $ 6,680
Provision for loan losses
   $ 338    962       (114 ) 1,927    41    3,154
Loans charged-off
   —   —      (32 ) (15 ) (121 ) (168 )
Recoveries
   —   —      14    —   64    78




Total ending allowance balance
   $ 3,028    $ 2,456       $ 1,659    $ 2,562    $ 39    $ 9,744




   Construction
and Land
Development Commercial
Real
Estate    Residential
Real
Estate Commercial
and
Industrial Consumer
and
Other Total
Nine Months Ended September 30, 2016

Allowance for loan losses:

Beginning balance
   $ 3,186 $ 3,146    $ 1,861 $ 3,358 $ 36 $ 11,587
Provision for loan losses
   865 762    609 1,817 42 4,095
Loanscharged-off
   (11 ) —      (39 ) (65 ) (35 ) (150 )
Recoveries
   —   —      53 —   5 58




Total ending allowance balance
   $ 4,040 $ 3,908    $ 2,484 $ 5,110 $ 48 $ 15,590




The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and deferred loan fees, net due to immateriality.

   Construction
and Land
Development    Commercial
Real
Estate    Residential
Real
Estate    Commercial
and
Industrial    Consumer
and
Other    Total    Construction
and Land
Development    Commercial
Real
Estate    Residential
Real
Estate    Commercial
and
Industrial    Consumer
and
Other    Total
September 30, 2016

September 30, 2017

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment
   $ —      $ —      $ —      $ 115       $ —      $ 115       $ —      $ —      $ —      $ 1,011    $ —      $ 1,011
Collectively evaluated for impairment
   4,040       3,908       2,484       4,995       48       15,475       3,957    5,223    3,122    6,581    50    18,933
Purchased credit-impaired loans
   —      —      —      —      —      —      —      —      —      —      —      —
























Total ending allowance balance
   $ 4,040       $ 3,908       $ 2,484       $ 5,110       $ 48       $ 15,590       $ 3,957    $ 5,223    $ 3,122    $ 7,592    $ 50    $ 19,944
























Loans:

Individually evaluated for impairment
   $ —      $ 835       $ 1,070       $ 509       $ —      $ 2,414       $ —      $ —      $ 116    $ 3,090    $ —      $ 3,206
Collectively evaluated for impairment
   474,255       429,413       369,976       372,275       3,458       1,649,377       514,934    598,846    531,997    461,657    3,933    2,111,367
Purchased credit-impaired loans
   81       576       497       1,933       —      3,087       —      387    182    1,989    —      2,558
























Total ending loans balance
   $ 474,336       $ 430,824       $ 371,543       $ 374,717       $ 3,458       $ 1,654,878       $ 514,934    $ 599,233    $ 532,295    $ 466,736    $ 3,933    $ 2,117,131
























December 31, 2015

December 31, 2016

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment
   $ —      $ —      $ —      $ 113       $ —      $ 113       $ —      $ —      $ —      $ 1,024    $ —      $ 1,024
Collectively evaluated for impairment
   3,776    4,266    2,398    5,044    45    15,529
Purchased credit-impaired loans
   —      —      —      —      —      —












Total ending allowance balance
   $ 3,776    $ 4,266    $ 2,398    $ 6,068    $ 45    $ 16,553












Loans:

Individually evaluated for impairment
   $ 1,275    $ 2,836    $ 2,190    $ 3,608    $ —      $ 9,909
Collectively evaluated for impairment
   488,287    494,304    402,799    372,868    3,359    1,761,617
Purchased credit-impaired loans
   —      394    496    1,969    —      2,859












Total ending loans balance
   $ 489,562    $ 497,534    $ 405,485    $ 378,445    $ 3,359    $ 1,774,385












   Construction
and Land
Development    Commercial
Real
Estate    Residential
Real
Estate    Commercial
and
Industrial    Consumer
and
Other    Total
Collectively evaluated for impairment
   3,186       3,137       1,861       3,245       36       11,465
Purchased credit-impaired loans
   —         9       —         —         —         9












Total ending allowance balance
   $ 3,186       $ 3,146       $ 1,861       $ 3,358       $ 36       $ 11,587












Loans:

Individually evaluated for impairment
   $ 1,943       $ 908       $ 1,185       $ 134       $ —         $ 4,170
Collectively evaluated for impairment
   370,824       363,315       273,749       283,754       6,577       1,298,219
Purchased credit-impaired loans
   78       1,460       563       1,812       —         3,913












Total ending loans balance
   $ 372,845       $ 365,683       $ 275,497       $ 285,700       $ 6,577       $ 1,306,302












Loans collectively evaluated for impairment reported at September 30, ~~2016~~2017 include certain acquired loans. At September 30, ~~2016,~~2017, thesenon-PCI loans had a carrying value of ~~$82,669,~~$57,663, comprised of contractually unpaid principal totaling ~~$84,848~~$59,227 and discounts totaling ~~$2,179.~~$1,564. Management evaluated these loans for credit deterioration since acquisition and determined that ~~$32~~$11 in allowance for loan losses was necessary at September 30, 2017. As of December 31, 2016, thesenon-PCI loans had a carrying value of $72,367, comprised of contractually unpaid principal totaling $74,373 and discounts totaling $2,006. Management evaluated these loans for credit deterioration since acquisition and determined that a $23 allowance for loan losses was necessary at December 31, 2016.
The following table presents information related to impaired loans by class of loans as of September 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

   Unpaid
Principal
Balance^*    Recorded
Investment    Allowance for
Loan Losses
Allocated    Unpaid
Principal
Balance    Recorded
Investment    Allowance for
Loan Losses
Allocated
September 30, 2016

September 30, 2017

With no allowance recorded:

Construction and land development
   $ —      $ —      $ —
Commercial real estate:

Nonfarm, nonresidential
   $ 2,421       $ 835       $ —      —      —      —
Residential real estate:

Closed-end 1-4 family
   238       238       —
Closed-end1-4 family
   —      —      —
Other
   832       832       —      116    116    —
Commercial and industrial
   19       19       —      92    92    —
Consumer and other
   —      —      —      —      —      —












Subtotal
   3,510       1,924       —      208    208    —
With an allowance recorded:

Commercial and industrial
   490       490       115       2,998    2,998    1,011












Subtotal
   490       490       115       2,998    2,998    1,011












Total
   $ 4,000       $ 2,414       $ 115       $ 3,206    $ 3,206    $ 1,011












December 31, 2015

December 31, 2016

With no allowance recorded:

Construction and land development
   $ 1,943       $ 1,943       $ —      $ 1,275    $ 1,275    $ —
Commercial real estate:

Nonfarm, nonresidential
   2,495       908       —      4,423    2,836    —
Residential real estate:

Closed-end 1-4 family
   476       476       —
Closed-end1-4 family
   2,069    2,069    —
Other
   709       709       —      121    121    —
Commercial and industrial
   21       21       —      934    934    —












Subtotal
   5,644       4,057       —      8,822    7,235    —












With an allowance recorded:

Commercial and industrial
   113       113       113       2,864    2,674    1,024












Subtotal
   113       113       113       2,864    2,674    1,024












Total
   $ 5,757       $ 4,170       $ 113       $ 11,686    $ 9,909    $ 1,024












^* Principal balance before partial charge-off.

The following table presents the average recorded investment of impaired loans by class of loans for the three and nine months ended September 30, ~~2016~~2017 and ~~2015:~~2016:


Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended
September 30,

Nine Months Ended
September 30,

Average Recorded Investment
   2016    2015    2016    2015    2017    2016    2017    2016
With no allowance recorded:

Construction and land development
   $ —      $ —      $ 340       $ —      $ 1,348    $ —      $ 1,199    $ 340
Commercial real estate:

Nonfarm, nonresidential
   1,427       918       1,307       873       812    1,427    2,394    1,307
Residential real estate:

Closed-end 1-4 family
   451       33       533       188
Closed-end1-4 family
   112    451    863    533
Other
   837       712       768       317       199    837    245    768
Commercial and industrial
   46       23       110       77       499    46    657    110
Consumer and other
   —      25       10       8       —      —      1    10
















Subtotal
   2,761       1,711       3,068       1,463       2,970    2,761    5,359    3,068
















With an allowance recorded:

Commercial and industrial
   $ 490       $ 90       $ 247       $ 50       $ 2,998    $ 490    $ 2,820    $ 247
Residential real estate:

Closed-end 1-4 family
   70       —      23       —
Consumer and other
   —      16       —      10
Closed-end1-4 family
   —      70    —      23
















Subtotal
   560       106       270       60       2,998    560    2,820    270
















Total
   $ 3,321       $ 1,817       $ 3,338       $ 1,523       $ 5,968    $ 3,321    $ 8,179    $ 3,338
















The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

   Nonaccrual    Loans Past Due
Over 90 Days    Nonaccrual    Loans Past Due
Over 90 Days
September 30, 2016

Construction and land development
   $ —      $ 149
Commercial real estate:

Nonfarm, nonresidential
   835       —
September 30, 2017

Residential real estate:

Closed-end1-4 family
   $ —      $ 262
Other
   123       —      116    —
Commercial and industrial
   490       —      2,466    16








Total
   $ 1,448       $ 149       $ 2,582    $ 278








December 31, 2015

December 31, 2016

Construction and land development
   $ —      $ 1,943       $ —      $ 1,950
Commercial real estate:

Nonfarm, nonresidential
   835       —      835    —
Residential real estate:

Closed-end 1-4 family
   41       435
Closed-end1-4 family
   —      452
Other
   121    —
Commercial and industrial
   32       —      2,674    150








Total
   $ 908       $ 2,378       $ 3,630    $ 2,552








Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 by class of loans:

   30-59
Days
Past Due    60-89
Days
Past Due    Greater
Than 89
Days
Past Due    Total
Past Due    Loans
Not
Past Due    PCI
Loans    Total
September 30, 2016

Construction and land development
   $ 1,950       $ —      $ 149       $ 2,099       $ 472,156       $ 81       $ 474,336
Commercial real estate:

Nonfarm, nonresidential
   79       —      835       914       402,468       576       403,958
Other
   —      —      —      —      26,866       —      26,866
Residential real estate:

Closed-end 1-4 family
   11       —      —      11       228,661       497       229,169
Other
   714       —      123       837       141,537       —      142,374
Commercial and industrial
   521       875       490       1,886       370,898       1,933       374,717
Consumer and other
   —      —      —      —      3,458       —      3,458














   $ 3,275       $ 875       $ 1,597       $ 5,747       $ 1,646,044       $ 3,087       $ 1,654,878














   30-59
Days
Past Due    60-89
Days
Past Due    Greater
Than 89
Days
Past Due    Total
Past Due    Loans
Not
Past Due    PCI
Loans    Total    30-59
Days
Past Due    60-89
Days
Past Due    Greater
Than 89
Days
Past Due    Nonaccrual    Total
Past Due
and
Nonaccrual    Loans
Not
Past Due    PCI
Loans    Total
December 31, 2015

September 30, 2017

Construction and land development
   $ —      $ 149       $ 1,943       $ 2,092       $ 370,675       $ 78       $ 372,845       $ 1,370    $ —      $ —      $ —      $ 1,370    $ 513,564    $ —      $ 514,934
Commercial real estate:

Nonfarm, nonresidential
   258       —      835       1,093       352,175       1,460       354,728       —      —      —      —      —      565,536    387    565,923
Other
   —      —      —      —      10,955       —      10,955       —      —      —      —      —      33,310    —      33,310
Residential real estate:

Closed-end 1-4 family
   213       —      476       689       162,244       562       163,495
Closed-end1-4 family
   939    1,007    262    —      2,208    371,328    182    373,718
Other
   30       —      —      30       111,971       1       112,002       150    —      —      116    266    158,311    —      158,577
Commercial and industrial
   86       32       —      118       283,770       1,812       285,700       511    301    16    2,466    3,294    461,453    1,989    466,736
Consumer and other
   2       —      —      2       6,575       —      6,577       5    —      —      —      5    3,928    —      3,933






























   $ 589       $ 181       $ 3,254       $ 4,024       $ 1,298,365       $ 3,913       $ 1,306,302       $ 2,975    $ 1,308    $ 278    $ 2,582    $ 7,143    $ 2,107,430    $ 2,558    $ 2,117,131






























December 31, 2016

Construction and land development
   $ 380    $ —      $ 1,950    $ —      $ 2,330    $ 487,232    $ —      $ 489,562
Commercial real estate:

Nonfarm, nonresidential
   664    —      —      835    1,499    457,070    394    458,963
Other
   —      —      —      —      —      38,571    —      38,571
Residential real estate:

Closed-end1-4 family
   428    10    452    —      890    253,584    496    254,970
Other
   231    —      —      121    352    150,163    —      150,515
Commercial and industrial
   155    39    150    2,674    3,018    373,458    1,969    378,445
Consumer and other
   —      —      —         —      3,359    —      3,359
















   $ 1,858    $ 49    $ 2,552    $ 3,630    $ 8,089    $ 1,763,437    $ 2,859    $ 1,774,385
















Credit Quality Indicators: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. This analysis includesnon-homogeneous loans, such as commercial and commercial real estate loans as well asnon-homogeneous residential real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention.Loans classified as special mention 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 classified 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 classified 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.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table includes PCI loans, which are included in the “Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of September 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

   Pass    Special
Mention    Substandard    Total
September 30, 2016

Construction and land development
   $ 472,980       $ —      $ 1,356       $ 474,336
Commercial real estate:

Nonfarm, nonresidential
   395,852       1,791       6,315       403,958
Other
   26,866       —      —      26,866
Residential real estate:

Closed-end 1-4 family
   228,144       —      1,025       229,169
Other
   141,305       —      1,069       142,374
Commercial and industrial
   368,860       —      5,857       374,717
Consumer and other
   3,458       —      —      3,458








   $ 1,637,465       $ 1,791       $ 15,622       $ 1,654,878








   Pass    Special
Mention    Substandard    Total
December 31, 2015

Construction and land development
   $ 370,824       $ —      $ 2,021       $ 372,845
Commercial real estate:

Nonfarm, nonresidential
   352,451       —      2,277       354,728
Other
   10,955       —      —      10,955
Residential real estate:

1-4 family
   162,160       —      1,335       163,495
Other
   111,292       —      710       112,002
Commercial and industrial
   284,144       —      1,556       285,700
Consumer and other
   6,577       —      —      6,577








   $ 1,298,403       $ —      $ 7,899       $ 1,306,302








~~Purchased Credit-impaired (“PCI”) loans~~
Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount is recognized as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.
The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of September 30, 2016 and December 31, 2015.

   Sept 30, 2016    Dec 31, 2015
Contractually required principal and interest
   $ 4,276       $ 5,618
Non-accretable difference
   (321 )    (352 )




Cash flows expected to be collected
   3,955       5,266
Accretable yield
   (868 )    (1,353 )




Carrying value of acquired loans
   3,087       3,913
Allowance for loan losses
   —    (9 )




Carrying value less allowance for loan losses
   $ 3,087       $ 3,904




Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the quarter ended September 30, 2016. These adjustments resulted in changes in expected cash flows, accretable yield, and the non-accretable difference for the three and nine months ended September 30, 2016.
The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three-month periods ended September 30, 2016 and 2015.

Activity during the three month period ended September 30, 2016
   Jun 30, 2016 Effect of
Acquisitions    Income
Accretion    All other
Adjustments Sep 30, 2016
Contractually required principal and interest
   $ 4,462    $ —      $ —      $ (186 ) $ 4,276
Non-accretable difference
   (319 ) —      —      (2 ) (321 )






Cash flows expected to be collected
   4,143    —      —      (188 ) 3,955
Accretable yield
   (1,067 ) —      115       84    (868 )






Carrying value of acquired loans
   $ 3,076    $
—

   $ 115       $ (104 ) $ 3,087






Activity during the three month period ended September 30, 2015
   Jun 30, 2015 Effect of
Acquisitions    Income
Accretion    All other
Adjustments Sep 30, 2015
Contractually required principal and interest
   $ 6,000    $
—

   $ —      $ (128 ) $ 5,872
Non-accretable difference
   (973 ) —      839       (173 ) (307 )






Cash flows expected to be collected
   5,027    —      839       (301 ) 5,565
Accretable yield
   (749 ) —      447       (1,350 ) (1,652 )






Carrying value of acquired loans
   $ 4,278    $ —      $ 1,286       $ (1,651 ) $ 3,913






The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the nine-month periods ended September 30, 2016 and 2015.

Activity during the nine month period ended September 30, 2016
   Dec 31, 2015 Effect of
Acquisitions    Income
Accretion    All other
Adjustments Sep 30, 2016
Contractually required principal and interest
   $ 5,618    $ —      $
—

   $ (1,342 ) $ 4,276
Non-accretable difference
   (352 ) —      —      31    (321 )






Cash flows expected to be collected
   5,266    —      —      (1,311 ) 3,955
Accretable yield
   (1,353 ) —      444       41    (868 )






Carrying value of acquired loans
   $ 3,913    $ —      $ 444       $ (1,270 ) $ 3,087






Activity during the nine month period ended September 30, 2015
   Dec 31, 2014 Effect of
Acquisitions    Income
Accretion    All other
Adjustments Sep 30, 2015
Contractually required principal and interest
   $ 6,532    $ —      $ —      $ (660 ) $ 5,872
Non-accretable difference
   (1,270 ) —      839       124    (307 )






Cash flows expected to be collected
   5,262    —      839       (536 ) 5,565
Accretable yield
   (947 ) —      637       (1,342 ) (1,652 )






Carrying value of acquired loans
   $ 4,315    $ —      $ 1,476       $ (1,878 ) $ 3,913






   Pass    Special
Mention    Substandard    Total
September 30, 2017

Construction and land development
   $ 512,912    $ —      $ 2,022    $ 514,934
Commercial real estate:

Nonfarm, nonresidential
   548,792    12,322    4,809    565,923
Other
   32,927    —      383    33,310
Residential real estate:

Closed-end1-4 family
   371,149    —      2,569    373,718
Other
   156,820    —      1,757    158,577
Commercial and industrial
   445,736    12,649    8,351    466,736
Consumer and other
   3,928    5    —      3,933








   $ 2,072,264    $ 24,976    $ 19,891    $ 2,117,131








   Pass    Special
Mention    Substandard    Total
December 31, 2016

Construction and land development
   $ 488,287    $ —      $ 1,275    $ 489,562
Commercial real estate:

Nonfarm, nonresidential
   449,373    1,847    7,743    458,963
Other
   38,571    —      —      38,571
Residential real estate:

1-4 family
   251,919    —      3,051    254,970
Other
   149,504    —      1,011    150,515
Commercial and industrial
   373,243    —      5,202    378,445
Consumer and other
   3,359    —      —      3,359








   $ 1,754,256    $ 1,847    $ 18,282    $ 1,774,385








Troubled Debt Restructurings
~~The~~As of both September 30, 2017 and December 31, 2016, the Company’s loan portfolio contains ~~no loans~~one loan that ~~have~~has been modified in a troubled debt ~~restructuring.~~restructuring with a balance of $608 and $698, respectively.
NOTE 4—LOAN SERVICING
Loans serviced for others are not reported as assets. The principal balances of these loans at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 are as follows:

   September 30,
2016    December 31,
2015    September 30,
2017    December 31,
2016
Loan portfolios serviced for:

Federal Home Loan Mortgage Corporation
   $ 491,466       $ 463,952       $ 506,345    $ 499,385
Other
   3,249       4,037       4,662    2,954
The components of net loan servicing fees for the three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 were as follows:

   Three Months Ended
September 30,    Nine Months Ended
September 30,    Three Months Ended
September 30,    Nine Months Ended
September 30,
   2016    2015    2016    2015    2017    2016    2017    2016
Loan servicing fees, net:

Loan servicing fees
   $ 309       $ 287       $ 903       $ 831       $ 312    $ 309    $ 951    $ 903
Amortization of loan servicing fees
   (349 )    (203 )    (905 )    (644 )    (242 )    (349 )    (721 )    (905 )
Change in impairment
   —      —      —      —      —      —      —      —
















Total
   $ (40 )    $ 84       $ (2 )    $ 187       $ 70    $ (40 )    $ 230    $ (2 )
















The fair value of servicing rights was estimated by management to be approximately ~~$3,948~~$4,916 at September 30, ~~2016.~~2017. Fair value for September 30, 2017 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%. At December 31, 2016, the fair value of servicing rights was estimated by management to be approximately $5,015. Fair value for December 31, 2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 14.7%. At December 31, 2015, the fair value of servicing rights was estimated by management to be approximately $4,635. Fair value for December 31, 2015 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%9.9%.
NOTE 5—SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Our subsidiary bank enters into borrowing arrangements with our retail business customers and correspondent banks through agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its control as collateral against these short-term borrowing arrangements. At maturity the securities underlying the agreements are returned to the Company. At September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, these short-term borrowings totaled ~~$37,343~~$32,862 and ~~$61,261,~~$36,496, respectively, and were secured by securities with carrying amounts of ~~$38,333~~$41,279 and ~~$73,478,~~$41,136, respectively. At September 30, ~~2016,~~2017, all of the Company’s repurchase agreements hadone-day maturities.
The following table provides additional details as of September 30, 2017:
As of September 30, 2017
   Mortgage-
Backed
Securities:
Residential State and
Political
Subdivisions Total
Market value of securities pledged
   $ 651 $ 41,921 $ 42,572
Borrowings related to pledged amounts
   $ —   $ 32,862 $ 32,862
Market value pledged as a % of borrowings
   —   % 128 % 130 %
The following table provides additional details as of December 31, 2016:

As of September 30, 2016
   U.S.
Government
Sponsored
Entities and
Agencies
Securities Mortgage-
Backed
Securities:
Residential State and
Political
Subdivisions Total
Fair value of securities pledged
   $ 210    $ 59    $ 40,565    $ 40,834
Borrowings related to pledged amounts
   $ —   $
—

$ 37,343    $ 37,343
Fair value pledged as a % of borrowings
   —   % —   % 109 % 109 %
As of December 31, 2016
   U.S.
Government
Sponsored
Entities and
Agencies
Securities Mortgage-
Backed
Securities:
Residential State and
Political
Subdivisions Total
Market value of securities pledged
   $ 209 $ 117 $ 41,330 $ 41,656
Borrowings related to pledged amounts
   $ —   $ —   $ 36,496 $ 36,496
Market value pledged as a % of borrowings
   —   % —   % 113 % 114 %
NOTE 6—SHARE-BASED PAYMENTS
In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant ~~allows~~allowed the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and ~~will be~~were exercisable in whole or in part up to seven years following the date of ~~issuance.~~issuance, and they expired on March 30, 2017. The warrants ~~are~~were detachable from the common stock. There were ~~6,575~~12,461 and ~~4,970~~6,575 warrants exercised during the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. A summary of the stock warrant activity for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 follows:

   September 30,
2016    September 30,
2015
Stock warrants exercised:

Intrinsic value of warrants exercised
   $ 136       $ 46
Cash received from warrants exercised
   79       60
At
   September 30,
2017    September 30,
2016
Stock warrants exercised:

Intrinsic value of warrants exercised
   $ 329    $ 136
Cash received from warrants exercised
   150    79
The warrants expired on March 30, 2017; therefore at September 30, ~~2016,~~2017, there were ~~18,732~~no outstanding warrants associated with the 2010 offering.
Since the common stock of the Company is registered under the Securities Act and has been traded on a national securities exchange at $15.00 or more for forty-five (45) consecutive days, the Company may redeem the 2010 warrants at any time with not less than thirty (30) days’ written notice to the holders of such 2010 warrants, in whole or in part, at a redemption price of $1.00 per warrant; provided, however, that the holder of the 2010 warrant may exercise the 2010 warrant, in whole or in part, during such thirty (30) day period.
The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $735 and $406 and ~~$248~~$1,970 and $1,201 for the three and ~~$619~~nine months ended September 30, 2017 and 2016, respectively. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was $261 and $711 for the three and nine months ended September 30, 2017. The total income tax benefit for the three and nine months ended September 30, 2016 was $107 and ~~2015,~~$616, respectively. The total income tax benefit related to vesting of restricted stock and exercises of stock options was $616 and $147 for the nine months ended September 30, 2016 and 2015. The total income tax benefit for the three months ended September 30, 2016 was $107. There was no excess tax benefit from the exercise of stock options for the three months ended September 30, 2015.
Stock ~~Option Plan~~Options: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved, permitted the grant of share options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and ~~to increase the number of~~shareholder-approved, provides for authorized shares up to 1,500,000. The Company believes that such awards better align the interests of its employees with those of its shareholders. Shareholders approved amendments to the Plan to increase the number of authorized shares to 2,000,000 in June 2014 and to 4,000,000 in February 2015.4,000,000. At September 30, ~~2016,~~2017, there were ~~2,041,673~~1,960,041 authorized shares available for ~~issuance.~~issuance under the 2007 Plan, although the Company has ceased issuing awards under the 2007 Plan.
The 2007 Plan provides that no options intended to be ISOs may be granted after April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, a new equity incentive plan, the 2017 Omnibus Equity Incentive Plan. The Company’s shareholders approved the 2017 Omnibus Equity Incentive Plan at the 2017 annual meeting of shareholders. The terms of the 2017 Omnibus Equity Incentive Plan are substantially similar to the terms of the 2007 Omnibus Equity Incentive Plan it was intended to replace. The 2017 Omnibus Equity Incentive Plan provides for authorized shares up to 5,000,000. At September 30, 2017, there were 4,762,750 authorized shares available for issuance under the 2017 Omnibus Equity Incentive Plan.
Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have a vesting period of three to five years and have aten-year contractual term. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or asnon-qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other grants are expected to be treated asnon-qualified.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of ~~the Company’s common stock.~~a peer group. The Company uses historical data to estimate option exercise and post-vesting termination behavior.
The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date.

   September 30,
2016 September 30,
2015    September 30,
2017 September 30,
2016
Risk-free interest rate
   1.60 % 1.84 %    2.16 % 1.60 %
Expected term
   7.5 years    7.5 years       6.8 years 7.5 years
Expected stock price volatility
   30.09 % 25.00 %    32.32 % 30.09 %
Dividend yield
   0.24 % 0.22 %    0.03 % 0.24 %
The weighted average fair value of options granted for the nine months ended September 30, 2017 and 2016 were $14.51 and ~~2015 were~~ $9.78, ~~and $6.41,~~ respectively.
A summary of the activity in the ~~stock option~~ plans for the nine months ended September 30, ~~2016~~2017 follows:

   Shares    Weighted
Average
Exercise
Price    Weighted
Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value    Shares    Weighted
Average
Exercise
Price    Weighted
Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
Outstanding at beginning of year
   1,312,791       $ 13.04       6.23       $ 24,070       1,395,016    $ 16.70    6.39    $ 35,090
Granted
   272,087       27.99             267,195    38.04
Exercised
   (167,899 )    11.27             (146,944 )    11.73
Forfeited, expired, or cancelled
   (2,415 )    19.43             (3,113 )    25.37





Outstanding at period end
   1,414,564       $ 16.12       6.49       $ 30,103       1,512,154    $ 20.93    6.65    $ 22,256
















Vested or expected to vest
   1,343,836       $ 16.12       6.49       $ 28,598       1,436,546    $ 20.93    6.65    $ 21,143
Exercisable at period end
   784,022       $ 11.53       4.83       $ 20,282       787,451    $ 13.43    4.96    $ 17,498

   For the nine months
ended September 30,    For the nine months
ended September 30,
   2016    2015    2017    2016
Stock options exercised:

Intrinsic value of options exercised
   $ 3,463       $ 839       $ 4,141    $ 3,463
Cash received from options exercised
   1,357       780       1,361    1,357
Tax benefit realized from option exercises
   522       147       406    522
As of September 30, ~~2016,~~2017, there was ~~$3,583~~$6,054 of total unrecognized compensation cost related tonon-vested stock options granted under the ~~Plan.~~plans. The cost is expected to be recognized over a weighted-average period of ~~4.1~~1.8 years.
Restricted ~~Share Award Plan~~Stock: Additionally, the ~~Company’s~~ 2007 Omnibus Equity Incentive Plan and the 2017 Omnibus Equity Incentive Plan each provides for the granting of restricted share awards and other performance related incentives. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.
A summary of activity fornon-vested restricted share awards for the nine months ended September 30, ~~2016~~2017 is as follows:

Non-vested Shares
   Shares    Weighted-Average
Grant-Date
Fair Value
Non-vested at December 31, 2015
   105,864       $ 15.89
Granted
   36,396       28.45
Vested
   (32,607 )    16.70
Forfeited
   (1,916 )    16.00



Non-vested at September 30, 2016
   107,737       $ 18.80



Non-vested Shares
   Shares    Weighted-
Average
Grant-
Date
Fair Value
Non-vested at December 31, 2016
   106,458    $ 19.81
Granted
   27,282    37.35
Vested
   (36,767 )    18.22
Forfeited
   (564 )    28.66



Non-vested at September 30, 2017
   96,409    $ 25.32



Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of September 30, ~~2016,~~2017, there was ~~$1,917~~$2,080 of total unrecognized compensation cost related tonon-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~3.2~~3.6 years. The total fair value of shares vested during the nine months ended September 30, 2017 and 2016 was $1,457 and ~~2015~~$974, respectively.
The total income tax benefit realized from the vesting of restricted stock was ~~$974~~$215 and ~~$520,~~$4 and $305 and $170 for the three and nine months ended September 30, 2017 and 2016, respectively.
NOTE 7—REGULATORY CAPITAL MATTERS
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 certainoff-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. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, ~~2015~~2016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.
The Basel III rules additionally provide for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This new capital conservation buffer requirement was phased in beginning January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented at 2.5% in January 2019. The capital conservation buffer in effect for 2017 is 1.25%.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, ~~2016,~~2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes that, as of September 30, ~~2016, that~~2017, the Company and Bank met all capital adequacy requirements to which they are subject. There are no conditions or events since that notification that management believes have changed the institution’s category.
Actual and required capital amounts and ratios are presented below as of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 for the Company and Bank:

   Actual Required
For Capital
Adequacy Purposes⁽¹⁾ To Be Well
Capitalized Under
Prompt Corrective
Action Regulations    Actual Required
For Capital
Adequacy Purposes To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
   Amount    Ratio Amount    Ratio Amount    Ratio    Amount    Ratio Amount    Ratio Amount    Ratio
September 30, 2016

September 30, 2017

Company common equity Tier 1 capital to risk-weighted assets
   $ 188,225       9.09 % $ 93,188       4.50 % N/A       N/A       $ 293,004    11.58 % $ 113,908    4.50 % N/A    N/A
Company Total Capital to risk weighted assets
   $ 262,107       12.66 % $ 165,667       8.00 % N/A       N/A       $ 371,510    14.68 % $ 202,502    8.00 % N/A    N/A
Company Tier 1 (Core) Capital to risk weighted assets
   $ 188,225       9.09 % $ 124,250       6.00 % N/A       N/A       $ 293,004    11.58 % $ 151,877    6.00 % N/A    N/A
Company Tier 1 (Core) Capital to average assets
   $ 188,225       7.15 % $ 105,361       4.00 % N/A       N/A       $ 293,004    8.58 % $ 136,609    4.00 % N/A    N/A
Bank common equity Tier 1 capital to risk-weighted assets
   $ 243,995       11.77 % $ 93,314       4.50 % $ 134,787       6.50 %    $ 347,043    13.71 % $ 113,901    �� 4.50 % $ 164,523    6.50 %
Bank Total Capital to risk weighted assets
   $ 259,585       12.52 % $ 165,892       8.00 % $ 207,365       10.00 %    $ 367,079    14.50 % $ 202,490    8.00 % $ 253,112    10.00 %
Bank Tier 1 (Core) Capital to risk weighted assets
   $ 243,995       11.77 % $ 124,419       6.00 % $ 165,892       8.00 %    $ 347,043    13.71 % $ 151,867    6.00 % $ 202,490    8.00 %
Bank Tier 1 (Core) Capital to average assets
   $ 243,995       9.26 % $ 105,343       4.00 % $ 131,678       5.00 %    $ 347,043    10.17 % $ 136,511    4.00 % $ 170,639    5.00 %
December 31, 2015

December 31, 2016

Company common equity Tier 1 capital to risk-weighted assets
   $ 167,562       10.08 % $ 74,768       4.50 % N/A       N/A       $ 263,693    11.75 % $ 101,022    4.50 % N/A    N/A
Company Total Capital to risk weighted assets
   $ 186,243       11.21 % $ 132,922       8.00 % N/A       N/A       $ 338,675    15.09 % $ 179,595    8.00 % N/A    N/A
Company Tier 1 (Core) Capital to risk weighted assets
   $ 174,656       10.51 % $ 99,691       6.00 % N/A       N/A       $ 263,693    11.75 % $ 134,696    6.00 % N/A    N/A
Company Tier 1 (Core) Capital to average assets
   $ 174,656       8.48 % $ 82,362       4.00 % N/A       N/A       $ 263,693    9.28 % $ 113,697    4.00 % N/A    N/A
Bank common equity Tier 1 capital to risk-weighted assets
   $ 172,205       10.36 % $ 74,772       4.50 % $ 108,004       6.50 %    $ 319,005    14.18 % $ 101,216    4.50 % $ 146,201    6.50 %
Bank Total Capital to risk weighted assets
   $ 183,792       11.06 % $ 132,928       8.00 % $ 166,160       10.00 %    $ 335,650    14.92 % $ 179,939    8.00 % $ 224,924    10.00 %
Bank Tier 1 (Core) Capital to risk weighted assets
   $ 172,205       10.36 % $ 99,696       6.00 % $ 132,928       8.00 %    $ 319,005    14.18 % $ 134,954    6.00 % $ 179,939    8.00 %
Bank Tier 1 (Core) Capital to average assets
   $ 172,205       8.36 % $ 82,357       4.00 % $ 102,946       5.00 %    $ 319,005    11.22 % $ 113,697    4.00 % $ 142,122    5.00 %
⁽¹⁾ ~~NOTE: The~~Note: Minimum ratios presented exclude the capital conservation buffer ~~is not included in capital adequacy amounts.~~
Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. ~~The~~Neither the Company nor the Bank ~~currently~~ may ~~not~~currently pay dividends without prior written approval from its primary regulatory agencies.
NOTE 8—FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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 that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently based on changing circumstances as part of the aforementioned quarterly evaluation.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
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 credit administration 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. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.
Loans Held For ~~Sale:~~Sale: The Company has elected the fair value option for loans held for sale to align with other accounting policies related to mortgage banking, such as mortgage banking derivatives. These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices for similar transactions adjusted for specific attributes of that loan (Level 2).
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

   Fair Value Measurements at
September 30, 2016 Using:
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Financial Assets

Securities available for sale

U.S. government sponsored entities and agencies
   $ —      $ 3,138       $ —
Mortgage-backed securities-residential
   —      556,797       —
Mortgage-backed securities-commercial
   —      19,759       —
State and political subdivisions
   —      91,062       —






Total securities available for sale
   $ —      $ 670,056       $ —






Loans held for sale
   $ —      $ 26,819       $ —






Mortgage banking derivatives
   $ —      $ 858       $ —






Financial Liabilities

Mortgage banking derivatives
   $ —      $ 87       $ —






   Fair Value Measurements at
December 31, 2015 Using:
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Financial Assets

Securities available for sale

U.S. government sponsored entities and agencies
   $ —      $ 6,817       $ —
Mortgage-backed securities-residential
   —      500,955       —
Mortgage-backed securities-commercial
   —      19,835       —
State and political subdivisions
   —      48,231       —






Total securities available for sale
   $ —      $ 575,838       $ —






Loans held for sale
   $ —      $ 14,079       $ —






Mortgage banking derivatives
   $ —      $ 411       $ —






Financial Liabilities

Mortgage banking derivatives
   $ —      $ 29       $ —






   Fair Value Measurements at
September 30, 2017 Using:
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Financial Assets

Securities available for sale

U.S. government sponsored entities and agencies
   $ —      $ 20,082    $ —
Mortgage-backed securities-residential
   —      724,667    —
Mortgage-backed securities-commercial
   —      15,610    —
State and political subdivisions
   —      160,565    —
U.S. Treasury bills
   —      59,813    —






Total securities available for sale
   $ —      $ 980,737    $ —






Loans held for sale
   $ —      $ 11,823    $ —






Mortgage banking derivatives
   $ —      $ 501    $ —






Financial Liabilities

Mortgage banking derivatives
   $ —      $ (88 )    $ —






   Fair Value Measurements at
December 31, 2016 Using:
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Financial Assets

Securities available for sale

Mortgage-backed securities-residential
   $ —      $ 607,085    $ —
Mortgage-backed securities-commercial
   —      19,334    —
State and political subdivisions
   —      128,336    —






Total securities available for sale
   $ —      $ 754,755    $ —






Loans held for sale
   $ —      $ 23,699    $ —






Mortgage banking derivatives
   $ —      $ 229    $ —






Financial Liabilities

Mortgage banking derivatives
   $ —      $ (66 )    $ —






As of September 30, 2017, the unpaid principal balance of loans held for sale was $11,524 resulting in an unrealized gain of $299 included in gains on sale of loans. As of December 31, 2016, the unpaid principal balance of loans held for sale was ~~$25,937~~$23,457, resulting in an unrealized gain of ~~$882 included in gains on sale of loans. As of December 31, 2015, the unpaid principal balance of loans held for sale was $13,754, resulting in an unrealized gain of $325~~$242 included in gains on sale of loans. For the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ~~$326~~$(48) and ~~$248,~~$326, respectively. For the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ~~$558~~$57 and ~~($22),~~$558, respectively. None of these loans were 90 days or more past due or on nonaccrual as of September 30, ~~2016~~2017 and December 31, ~~2015.~~2016.
There were no transfers between level 1 and 2 during ~~2016~~2017 or ~~2015.~~2016.
Assets measured at fair value on anon-recurring basis are summarized below:
There ~~was~~were two collateral-dependent commercial and industrial impaired loans carried at fair value of $1,987 as of September 30, 2017 and one ~~collateral dependent~~collateral-dependent commercial and industrial impaired loan carried at fair value of $1,650 as of December 31, 2016. For the three and nine months ended September 30, ~~2016 that totaled $375.~~2017, there was no additional provision for loan losses recorded related to impaired loans recorded at fair value of collateral. For the three and nine months ended September 30, 2016, ~~and 2015,~~ $115 ~~and $0 in~~ additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. ~~There were no collateral dependent impaired loans carried at fair value as of December 31, 2015.~~
Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of ~~zero~~$1,503 as of September 30, ~~2016~~2017 and ~~$200~~$0 as of December 31, ~~2015.~~2016. The foreclosed property was previously collateral for a commercial real estate loan. There were no properties at September 30, ~~2016~~2017 or ~~2015~~2016 that had required write-downs to fair value resulting in no write downs for the three and nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.
The carrying amounts and estimated fair values of financial instruments at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 are as follows:

   Carrying
Amount    Fair Value Measurements at
September 30, 2016 Using:
      Level 1    Level 2    Level 3    Total
Financial assets

Cash and cash equivalents
   $ 55,749       $ 55,749       $ —      $ —      $ 55,749
Certificates of deposit held at other financial institutions
   1,055       —      1,055       —      1,055
Securities available for sale
   670,756       —      670,756       —      670,756
Securities held to maturity
   235,050       —      243,946       —      243,946
Loans held for sale
   26,819       —      26,819       —      26,819
Net loans
   1,638,468       —      —      1,621,695       1,621,695
Restricted equity securities
   11,829       n/a       n/a       n/a       n/a
Servicing rights, net
   3,566       —      3,948       —      3,948
Accrued interest receivable
   7,871       —      3,634       4,237       7,871
Financial liabilities

Deposits
   $ 2,217,954       $ 1,223,120       $ 996,482       $ —      $ 2,219,602
Federal funds purchased and repurchase agreements
   45,843       —      45,843       —      45,843
Federal Home Loan Bank advances
   162,000       —      162,024       —      162,024
Subordinated notes, net
   58,292       —      —      61,867       61,867
Accrued interest payable
   1,399       123       915       361       1,399
   Carrying
Amount    Fair Value Measurements at
December 31, 2015 Using:    Carrying
Amount Fair Value Measurements at
September 30, 2017 Using:
   Level 1    Level 2    Level 3    Total    Level 1 Level 2 Level 3    Total
Financial assets

Cash and cash equivalents
   $ 52,394       $ 52,394       $ —      $ —      $ 52,394       $ 155,842 $ 155,842 $ —   $ —      $ 155,842
Certificates of deposit held at other financial institutions
   250       —      250       —      250       2,365 —   2,365 —      2,365
Securities available for sale
   575,838       —      575,838       —      575,838       980,737 —   980,737 —      980,737
Securities held to maturity
   158,200       —      161,969       —      161,969       217,312 —   220,089 —      220,089
Loans held for sale
   14,079       —      14,079       —      14,079       11,823 —   11,823 —      11,823
Net loans
   1,292,239       —      —      1,279,849       1,279,849       2,115,930 —   —   2,074,102    2,074,102
Restricted equity securities
   7,998       n/a       n/a       n/a       n/a       18,472 n/a n/a n/a    n/a
Servicing rights, net
   3,455       —      4,635       —      4,635       3,639 —   —   4,916    4,916
Mortgage banking derivative assets
   501 —   501 —      —
Accrued interest receivable
   11,156 (13 ) 5,603 5,566    11,156
Financial liabilities

Deposits
   $ 2,824,825 $ 1,438,459 $ 1,352,945 $ —      $ 2,791,404
Repurchase agreements
   32,862 —   32,862 —      32,862
Federal Home Loan Bank advances
   337,000 —   355,910 —      355,910
Subordinated notes, net
   58,470 —   —   61,576    61,576
Mortgage banking derivative liabilities
   (88 ) —   (88 ) —      —
Accrued interest payable
   2,597 35 2,212 350    2,597
   Carrying
Amount Fair Value Measurements at
December 31, 2016 Using:
   Level 1 Level 2 Level 3    Total
Financial assets

Cash and cash equivalents
   $ 90,927 $ 90,927 $ —   $ —      $ 90,927
Certificates of deposit held at other financial institutions
   1,055 —   1,055 —      1,055
Securities available for sale
   754,755 —   754,755 —      754,755
Securities held to maturity
   228,894 —   227,892 —      227,892
Loans held for sale
   23,699 —   23,699 —      23,699
Net loans
   1,757,039 —   —   1,727,188    1,727,188
Restricted equity securities
   11,843 n/a n/a n/a    n/a
Servicing rights, net
   3,621 —   —   5,015    5,015
Mortgage banking derivative assets
   229 —   229 —      —
Accrued interest receivable
   7,299       3       3,780       3,516       7,299       9,931 —   5,172 4,759    9,931
Financial liabilities

Deposits
   $ 1,814,039       $ 1,062,587       $ 748,961       $ —      $ 1,811,548       $ 2,391,818 $ 1,551,461 $ 836,444 $ —      $ 2,387,905
Federal funds purchased and repurchase agreements
   101,086       —      101,086       —      101,086       83,301 —   83,301 —      83,301
Federal Home Loan Bank advances
   57,000       —      56,931       —      56,931       132,000 —   131,098 —      131,098
Subordinated notes, net
   58,337 —   —   61,762    61,762
Mortgage banking derivative liabilities
   (66 ) —   (66 ) —      —
Accrued interest payable
   644       100       544       —      644       1,924 154 1,075 695    1,924
The methods and assumptions not previously described used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents:The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
(b) Loans:Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(c) Restricted Equity Securities:It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.
(d) Mortgage Servicing Rights:Fair value of mortgage servicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 23 classification.
(e) Deposits:The fair values disclosed for demand deposits (e.g., interest andnon-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Federal Funds Purchased and Repurchase Agreements:The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.
(g) Federal Home Loan Bank Advances:The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
(h) Subordinated Notes:The fair values of the Company’s subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(i) Accrued Interest Receivable/Payable:The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.
(j)Off-balance Sheet Instruments:Fair values foroff-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
NOTE 9—EARNINGS PER SHARE
Thetwo-class method is used in the calculation of basic and diluted earnings per share. Under thetwo-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:


Three Months Ended
September 30,

Nine Months Ended
September 30,

   2016    2015    2016    2015
Basic

Net income available to common shareholders
   $ 7,030       $ 5,125       $ 20,239       $ 11,341
Less: earnings allocated to participating securities
   (69 )    (52 )    (213 )    (127 )








Net income allocated to common shareholders
   $ 6,961       $ 5,073       $ 20,026       $ 11,214








Weighted average common shares outstanding including participating securities
   10,721,253       10,516,290       10,652,223       9,668,497
Less: Participating securities
   (105,343 )    (107,502 )    (111,937 )    (108,617 )








Average shares
   10,615,910       10,408,788       10,540,286       9,559,880








Basic earnings per common share
   $ 0.66       $ 0.49       $ 1.90       $ 1.17









Three Months Ended
September 30,

Nine Months Ended
September 30,

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Basic

Net income available to common shareholders
$ 8,889 $ 7,137 $ 25,689 $ 20,855
Less: earnings allocated to participating securities
(66 ) (70 ) (206 ) (219 )

Net income allocated to common shareholders
$ 8,823 $ 7,067 $ 25,483 $ 20,636

Weighted average common shares outstanding including participating securities
13,188,761 10,721,253 13,119,170 10,652,223
Less: Participating securities
(97,842 ) (105,343 ) (105,350 ) (111,937 )

Average shares
13,090,919 10,615,910 13,013,820 10,540,286

Basic earnings per common share
$ 0.67 $ 0.67 $ 1.96 $ 1.96
   2016    2015    2016    2015

Diluted

Net income allocated to common shareholders
   $ 6,961       $ 5,073       $ 20,026       $ 11,214    $ 8,823 $ 7,067 $ 25,483 $ 20,636
Weighted average common shares outstanding for basic earnings per common share
   10,615,910       10,408,788       10,540,286       9,559,880    13,090,919 10,615,910 13,013,820 10,540,286
Add: Dilutive effects of assumed exercises of stock options
   612,955       534,148       585,326       466,955    584,778 668,674 662,890 652,272
Add: Dilutive effects of assumed exercises of stock warrants
   13,370       13,265       12,937       13,257    —   13,370 2,104 12,937








Average shares and dilutive potential common shares
   11,242,235       10,956,201       11,138,549       10,040,092    13,675,697 11,297,954 13,678,814 11,205,495








Dilutive earnings per common share
   $ 0.62       $ 0.46       $ 1.80       $ 1.12
Diluted earnings per common share
$ 0.65 $ 0.63 $ 1.86 $ 1.84








For the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, stock options for ~~272,087~~352,042 and ~~226,040~~272,087 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for ~~151,544~~254,204 and ~~228,691~~151,544 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, ~~2016~~2017 and ~~2015~~2016 because they were antidilutive.
NOTE 10—SUBORDINATED ~~NOTES~~DEBT ISSUANCE
~~On March~~The Company’s subordinated notes, net of issuance costs, totaled $58,470 and $58,337 at September 30, 2017 and at December 31, 2016, respectively. For regulatory capital purposes, the subordinated notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.
The Company completed the issuance of ~~$40,000~~$60,000 in ~~aggregate~~ principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875%fixed-to-floating rate ~~Subordinated Notes due 2026~~subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional ~~investors. The March 2016 Notes will mature on March 30, 2026, unless redeemed prior to that date. The Company may redeem the March 2016 Notes in whole or in part on or after March 30, 2021,~~investors, and in ~~whole, but not~~June 2016, $20,000 of 7.00%fixed-to-floating rate subordinated notes (the “June 2016 Subordinated Notes”) were issued to certain accredited institutional investors in ~~part, at any time within 90 days following~~ a “Regulatory Capital Treatment Event”, as defined in the First Supplemental Indenture, dated as of March 31, 2016, between the Company and U.S. Bank National Association, as trustee (the “Supplemental Indenture”) governing the March 2016 Notes.private offering. The redemption price for any redemption will be 100% of the principal amount of the March 2016 Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Federal Reserve to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the March 2016 Notes.
The March 2016 Notes initially bear interest at 6.875% per year, payable semi-annually in arrears on March 30 and September 30 of each year, beginning on September 30, 2016, and going through March 29, 2021. Thereafter, the March 2016 Notes will bear interest at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus a spread of 5.636%, with interest payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on June 30, 2021.
~~The March 2016 Notes~~subordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The ~~March 2016 Notes~~subordinated notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the ~~Bank,~~Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the ~~March 2016 Notes~~subordinated notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.
The sale of the March 2016 Notes yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing that had been used to redeem the shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued to the United States Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Small Business Lending Fund and to fund future growth of the Bank.
The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over theten-year term of the March 2016 ~~Notes.~~
On June 30, 2016, the Company completed the issuance of an additional $20,000 aggregate principal amount of its 7.00% fixed-to-floating rate subordinated notes due 2026 (the “June 2016 Notes”) to certain institutional accredited investors in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Rule 506 of Regulation D thereunder.
The June 2016 Notes have a stated maturity of July 1, 2026, and bear interest at a fixed rate of 7.00% per year through June 30, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears on January 1 and July 1 of each year beginning on January 1, 2017. Beginning July 1, 2021 through the maturity date or an early redemption date, the interest rate shall reset quarterly to an interest rate per year equal to the then current three-month LIBOR rate plus 604 basis points, computed on the basis of a 360-day year and the actual number of days elapsed, payable quarterly in arrears. The June 2016 Notes are redeemable, in whole or in part, on or after July 1, 2021 and at any time upon the occurrence of certain events set forth in the June 2016Subordinated Notes. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the June 2016 Notes.
Principal and interest on the June 2016 Notes are subject to acceleration only in limited circumstances. The June 2016 Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness and equal with the Company’s previously issued March 2016 Notes
The June 2016 Notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The June 2016 Notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the Bank, its depositors, and any preferred equity holders of our subsidiaries. The holders of the June 2016 Notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.
The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over theten-year term of the June 2016 Subordinated Notes.
For ~~regulatory capital purposes,~~ the March 2016 Notes and the June 2016 Notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.
~~As of~~three months ended September 30, 2017 and 2016, ~~the Company’s subordinated notes, net~~amortization of issuance costs ~~totaled $58,292.~~has amounted to $45 for both periods. For the nine months ended September 30, 2017 and 2016, amortization of issuance costs has amounted to $133 and $79, respectively.
The following table summarizes the terms of each subordinated note offering:
   March 2016
Subordinated
Notes June 2016
Subordinated
Notes
Principal amount issued
   $40,000 $20,000
Maturity date
   March 30, 2026 July 1, 2026
Initial fixed interest rate
   6.875% 7.00%
Initial interest rate period
   5 years 5 years
First interest rate change date
   March 30, 2021 July 1, 2021
Interest payment frequency through year five*
   Semiannually Semiannually
Interest payment frequency after five years*
   Quarterly Quarterly
Interest repricing index and margin
   3-month LIBOR
plus 5.636%
3-month LIBOR
plus 6.04%
Repricing frequency after five years
   Quarterly Quarterly
* The Company currently may not make interest payments on either series of subordinated notes without prior written approval from its primary regulatory agencies. Through September 30, 2017 all interest payments have been made in accordance with the terms of the agreements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the audited financial statements and accompanying notes included in the Company’s Form10-K filed with the SEC on March ~~15, 2016,~~16, 2017, which includes additional information about critical accounting policies and practices and ~~risk factors, and Item 1A of Part II of this report, which updates those~~ risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations. All amounts are in thousands, except per share data or unless otherwise indicated.
Company Overview
We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly-owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 12 branches and one loan production office in the demographically attractive and growing Williamson, Rutherford and Davidson Counties within the Nashville metropolitan ~~statistical~~ area. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our Company,” “the Company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin ~~Synergy Bank)~~Synergy), any reference to “FFN” refers to Franklin Financial Network, Inc. only and any reference to “Franklin Synergy” or the “Bank” refers to our banking subsidiary, Franklin Synergy Bank.
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements in the Company’s Form10-K that was filed with the SEC on March ~~15, 2016.~~16, 2017. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.
~~Purchased Loans~~
The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, we recorded all acquired loans at fair value as of the date of the acquisition. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by the Company for loans with similar characteristics as those acquired other than purchased credit-impaired loans.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans classified by management as substandard or worse are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component coversnon-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history from the Bank’s peer group over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
~~Mortgage Servicing Rights~~
When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of loans. Fair value is based on market prices for comparable servicing contracts. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with loan servicing fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement as loan servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against mortgage loan servicing fee income.
~~Recent~~Recently Adopted Accounting Pronouncements
~~In January 2016, the FASB issued~~~~ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”~~ ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to securities available-for-sale. ASU 2016-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s consolidated financial statements.
~~In February 2016, the FASB issued~~~~ASU 2016-02, “Leases (Topic 842).”~~ ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the potential impact of ASU 2016-02 on the Company’s consolidated financial statements.
In March 2016, the FASB issuedASU2016-09, ~~“Compensation~~ Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” UnderASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards ~~should~~are to be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additionalpaid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additionalpaid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share ~~should exclude~~excludes the amount of excess tax benefits that would have previously been recognized in additionalpaid-in capital. Additionally, excess tax benefits ~~should be~~are classified along with other income tax cash flows as an operating activity rather than as a financing activity, as was previously the case.ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur.ASU 2016-09 ~~changes~~ changed the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ~~ASU 2016-09 will be effective on January 1, 2017, and early adoption is allowed.~~ The Company ~~has not yet~~ elected to adopt this ASU ~~early, but management is considering potential early adoption during~~in the fourth quarter of 2016, effective as of January 1, 2016. ~~Had the Company adopted~~The adoption of this ASU ~~2016-09 during the quarter ended September 30, 2016, the impact to earnings would have been a decrease in~~decreased income tax expense ~~of approximately $183 and $755~~ for the ~~three and~~ nine months ended September 30, 2016 by $616 and ~~the impact to~~increased diluted earnings per share ~~would have been increases~~by $0.04. The adoption of ~~$0.01~~this ASU also impacted previously reported quarterly earnings and earnings per share in the third quarter of 2016 by decreasing income tax expense by $107 and ~~$0.06~~increasing diluted earnings per share by $0.01.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers (Topic 606). ASU2014-09 creates a new topic in the FASB ASC, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU2014-09 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU2014-09 added a new Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers (“ASC340-40”), to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, andnon-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Most of the Company’s revenues come from financial instruments, like loans, investment securities and other financial instruments which are not included in the scope of this ASU. The Company’s revenue recognition pattern for revenue streams within the scope of ASU2014-09, including but not limited to service charges on deposit accounts, gains/losses on the sale of OREO and wealth management income, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires application of ASU2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the ~~three~~impact of the ASU on uncompleted contracts at the date of adoption. Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU2016-01,Financial Instruments (Topic 825): Recognition and ~~nine~~Measurement of Financial Assets and Financial Liabilities, which amends prior guidance to require an entity to measure its equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Management has not yet determined the impact that adoption of this guidance will have on the Company’s financial statements.
In February 2016, the FASB issued ASU2016-02 which createsTopic 842, Leases and supersedesTopic 840, Leases. ASU2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months ~~ended September 30, 2016, respectively.~~on their balance sheet as lease liabilities with a correspondingright-of-use asset. ASU2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for the Company for fiscal years beginning on or after December 15, 2018. Early adoption is permitted for all entities. At the time this ASU is adopted, the Company will recognize aright-of-use asset, and a lease liability for all leases, which will initially be measured at the present value of lease payments, and a single lease cost calculated so that the costs of the leases are allocated over the terms of the Company’s leases on a generally straight-line basis. Since an asset will be recognized at the time of adoption, the Company’s regulatory capital ratios will be impacted. Management is evaluating the impact ASU2016-02 will have on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU2016-13,~~ASU No. 2016-13,~~ Financial ~~Instruments—~~Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses within this update is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. The income statement reflectsASU requires the measurement of all expected credit losses for ~~newly recognized~~ financial assets ~~as well as~~held at the ~~expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is~~reporting date based on ~~relevant information about past events, including~~ historical experience, current conditions, and reasonable and supportable ~~forecasts that affect the collectibility~~forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the ~~reported~~loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of ~~financial assets. An entity must~~expected credit losses. Organizations will continue to use judgment ~~in determining the relevant information and~~to determine which loss estimation ~~methods that are~~method is appropriate ~~in its~~for their circumstances. The ~~allowance~~ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses ~~for~~onavailable-for-sale debt securities and purchased financial assets with ~~a more-than-insignificant amount of~~ credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that are not considered derivatives under ASC 815 and are not unconditionally cancellable are also within the scope of this amendment. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. For public companies, the updatedeterioration. The ASU is effective for ~~annual periods beginning after December 15, 2019, including~~the Company for fiscal years, and interim periods within those ~~fiscal years. All entities may adopt the amendments in this update earlier as of the~~ fiscal years, beginning after December 15, ~~2018, including~~2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal ~~years. An entity will apply the amendments in~~
~~this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of the~~years, beginning ~~of the first reporting period in which the guidance is effective.~~after December 15, 2018. The Company is currently ~~assessing~~gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering data to enable review scenarios and to determine which calculations will produce the most reliable results. The impact ~~that this guidance will have on its consolidated financial statements.~~of adopting ASU2016-13 is not currently known.
In August 2016, the FASB issued ~~guidance within~~ ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ~~The amendments in this~~This Accounting Standards Update ~~provide guidance on~~addresses the following eight specific cash flow ~~issues with the objective of reducing the existing diversity in presentation and classification in the statement of cash flows. The cash flow issues addressed include: 1)~~issues: debt prepayment or debt extinguishment costs; 2) settlement ofzero-coupon debt ~~instruments; 3)~~instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies ~~including~~(COLIs) (including bank-owned life insurance ~~policies; 6)~~policies (BOLIs)); distributions received from equity method ~~investments; 7)~~investees; beneficial ~~interest~~interests in securitization transactions; and 8) separately identifiable cash flows and ~~the~~ application of the predominance principle. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim ~~period; however,~~period. This ASU is not expected to have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU2017-04, Intangibles – Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged.ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. Adoption ofASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20): Premium Amortization on Purchased Callable Debt Securities. This Update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity.ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions ofASU 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU2017-09,Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting. ASU2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity ~~is required~~will not apply modification accounting to ~~adopt~~a share-based payment award if all of the ~~amendments in~~following are the same ~~period.~~immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU2017-12,Targeted Improvements to Accounting for Hedging Activities. The objective of this ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update ~~require~~make certain targeted improvements to simplify the application ~~using a retrospective transition method~~of the hedge accounting guidance in current GAAP. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and early application is permitted in any interim period after issuance of the Update. The Company currently does not have any hedging activities that would be subject to ~~each period presented. Management~~this Update; however, management may consider hedging activities in the future. Adoption of this Update is ~~in currently evaluating the effects that the Update is~~not expected to have a material impact on the Company’s ~~Consolidated Statement of Cash Flows and is currently planning to adopt the guidance during the first quarter of 2018.~~consolidated financial statements.
COMPARISON OF RESULTS OF OPERATIONS FOR
THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, ~~2016~~2017 AND ~~2015~~2016
(Dollar Amounts in Thousands)
Overview
The Company reported net income of ~~$7,030~~$8,889 and ~~$20,262~~$25,697 for the three and nine months ended September 30, 2017, respectively, compared to $7,137 and $20,878 for the three and nine months ended September 30, 2016, ~~respectively, compared~~respectively. After earnings attributable to ~~$5,150~~noncontrolling interest and ~~$11,416 for the three and nine months ended September 30, 2015. After~~after the payment of preferred dividends on the shares of SeniorNon-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued to the United States Department of the Treasury (“Treasury”) pursuant to the Small Business Lending Fund (“SBLF”), the Company’s net earnings available to common shareholders for the three and nine months ended September 30, ~~2016~~2017 was ~~$7,030~~$8,889 and ~~$20,239,~~$25,689, respectively, compared to ~~$5,125~~$7,137 and ~~$11,341~~$20,855 for the three and nine months ended September 30, ~~2015.~~2016, respectively. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 30, ~~2016~~2017 was increased interest income on loans and investment securities compared with the same periods in ~~2015.~~2016. The increase in loans was due to significant organic growth. The growth in the securities portfolio is primarily attributable to the ~~capital~~Company’s leverage ~~programs implemented during the second quarter of 2016~~program to utilize proceeds received from capital raised during the ~~issuance~~fourth quarter of ~~subordinated notes at the end of the March~~ 2016.
Net Interest Income/Margin
Net interest income consists of interest income generated by earning assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and nine months ended September 30, ~~2016,~~2017, totaled $24,326 and $72,438, respectively, compared to $20,675 and $59,885 ~~respectively, compared to $16,736 and $42,220~~ for the same periods in ~~2015,~~2016, an increase of ~~$3,939~~$3,651 and ~~$17,665,~~$12,553, or ~~23.5%~~17.7% and ~~41.8%~~21.0%, between the respective periods. For the three and nine months ended September 30, ~~2016,~~2017, interest income increased ~~$6,423~~$8,056 and ~~$23,931,~~$24,761, or ~~33.3%~~31.3% and ~~49.2%~~34.1%, respectively, compared with the same periods in 2016, due to growth in both the loan and investment securities portfolios. For the three and nine months ended September 30, ~~2016,~~2017, interest expense increased ~~$2,484~~$4,405 and ~~$6,266,~~$12,208, or ~~96.8%~~87.2% and ~~97.6%~~96.2%, respectively, compared with the same periods in 2016, as a result of increases in interest-bearing deposits, ~~FHLB~~Federal Home Loan Bank (“FHLB”) advances and subordinated notes.
Interest-earning assets averaged ~~$2,576,294~~$3,351,421 and ~~$1,846,372~~$2,576,294 during the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, an increase of ~~$729,922,~~$775,127, or ~~39.5%~~30.1%. This increase was due to growth in all types of interest-earning assets, but the largest growth occurred in loans and investment securities. Average loans increased 26.5%, and investment securities increased 31.8%, when comparing the three months ended September 30, 2017 with the same period in 2016. When comparing the three months ended September 30, 2017 and 2016, the yield on average interest earning assets, adjusted for tax equivalent yield, increased five basis points in 2017 to 4.17% compared to 4.12% for the same period during 2016. For the three months ended September 30, 2017, the tax equivalent yield on available for sale securities was 2.61%, and for the three months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.42%. For the three months ended September 30, 2017, the tax equivalent yield on held to maturity securities was 4.11%, and for the three months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.75%. The primary driver for the increase in yields on securities for the three-month period ended September 30, 2017 was the volume oftax-exempt municipal securities purchased during the past 12 months, which increased tax equivalent yields when comparing the three-month period in 2017 with the same period in 2016.
Interest-bearing liabilities averaged $2,856,337 during the three months ended September 30, 2017, compared to $2,201,206 for the same period in 2016, an increase of $655,131, or 29.8%. Total average interest-bearing deposits grew $460,127, or 22.9%, including increases in average interest checking of $291,152 and average time deposits of $178,786 for the three-month period ended September 30, 2017, as compared to the same period during 2016. Rapid growth in the loan portfolio also resulted in an increase in average FHLB advances of $202,445 when comparing the three months ended September 30, 2017 with the same period in 2016.
For the three-month periods ended September 30, 2017 and 2016, the cost of average interest-bearing liabilities increased 40 basis points to 1.31% from 0.91%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and Federal funds purchased.
Interest-earning assets averaged $3,304,558 and $2,427,824 during the nine months ended September 30, 2017 and 2016, respectively, an increase of $876,734, or 36.1%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased ~~55.1%~~28.6%, and investment securities increased ~~20.9%~~46.8%, when comparing the ~~three~~nine months ended September 30, ~~2016~~2017 with the same period in ~~2015.~~2016. When comparing the ~~three~~nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, the yield on average interest earning assets, adjusted for tax equivalent yield decreased 172 basis points to ~~4.12%~~4.11% in 2017 compared to ~~4.29%~~4.13% for the same period during ~~2015.~~ 2016.
For the ~~three~~nine months ended September 30, 2017 and 2016, the tax equivalent yield on loans was 4.96%, compared with 5.61% tax equivalent yield for same period in 2015. The decrease in yield on loans when comparing these two periods is attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the three months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. and 4.95% respectively. For the three months ended September 30, 2017 and 2016, the tax equivalent yield on loans was 5.03% and 4.96%, respectively. The primary driver for the increase in yields on loans for the three- and nine-month periods ended September 30, 2017 was an increase in loan interest rates when compared with the same periods in 2016.
For the nine months ended September 30, 2017, the tax equivalent yield on available for sale securities was ~~2.42%~~2.66%, and for the three months ended September 30, 2015, the yield on available for sale securities was 2.60%. For the three months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.75%, and for the three months ended September 30, 2015, the yield on held to maturity securities was 3.37%. The primary driver for the collective increase in yields on securities for the three-month period ended September 30, 2016 was the volume of tax-exempt municipal securities that have been purchased, which increased tax equivalent yields when comparing the three months ended September 30, 2016 with the same period in 2015.
Interest-bearing liabilities averaged $2,201,206 during the three months ended September 30, 2016, compared to $1,550,007 for the same period in 2015, an increase of $651,199, or 42.0%. Total average interest-bearing deposits grew $563,418, which included increases in average money market deposits of $103,244 and average time deposits of $432,061 for the three-month period ended
September 30, 2016, as compared to the same period during 2015. Rapid growth in the loan portfolio also resulted in increases in average Federal Home Loan Bank (“FHLB”) advances of $29,783 and subordinated notes and other borrowings of $58,285, when comparing the three months ended September 30, 2016 with the same period in 2015. The growth in FHLB advances is discussed in more detail later in this document in the balance sheet discussion items in the section titled, “Federal Home Loan Bank Advances.”
For the three month periods ended September 30, 2016 and 2015, the cost of average interest-bearing liabilities increased 25 basis points to 0.91% from 0.66%. The increase was primarily due to increases in the cost of funds for FHLB advances and from subordinated notes and other borrowings.
Interest-earning assets averaged $2,427,824 and $1,575,748 during the nine months ended September 30, 2016 and 2015, respectively, an increase of $852,076, or 54.1%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 64.5%, and investment securities increased 41.3%, when comparing the nine months ended September 30, 2016 with the same period in 2015. When comparing the nine months ended September 30, 2016 and 2015, the yield on average interest earning assets, adjusted for tax equivalent yield decreased seven basis points to 4.13% compared to 4.20% for the same period during 2015. For the nine months ended September 30, 2016, the tax equivalent yield on loans was 4.95%, compared with 5.46% tax equivalent yield for the same period in 2015. The decrease in yield on loans when comparing these two periods is primarily attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the nine months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the nine months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.48%~~, and for~~. For the nine months ended September 30, ~~2015,~~2017, the tax equivalent yield on ~~available for sale~~held to maturity securities was ~~2.42%. For~~4.18%, and for the nine months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.92%~~, and for the nine months ended September 30, 2015, the yield on held to maturity securities was 3.10%~~. The primary driver for the increase in yields on securities for the ~~nine months~~nine-month period ended September 30, ~~2016~~2017 was the volume oftax-exempt municipal securities purchased during the past 12 ~~months.~~months, which increased tax equivalent yields when comparing the nine-month period in 2017 with the same period in 2016.
Interest-bearing liabilities averaged ~~$2,044,661~~$2,839,188 during the nine months ended September 30, ~~2016,~~2017, compared to ~~$1,311,229~~$2,044,661 for the same period in ~~2015,~~2016, an increase of ~~$733,432,~~$794,527, or ~~55.9%~~38.9%. Total average interest-bearing deposits grew ~~$665,258, which included~~$606,229, including increases in ~~money market deposits~~interest-bearing checking of ~~$157,287~~$339,569 and average time deposits of ~~$472,321~~$259,409 for the nine-month period ended September 30, ~~2016,~~2017, as compared to the same period during ~~2015.~~2016. Rapid growth in the loan portfolio also resulted in ~~increases~~an increase in average FHLB advances of ~~$32,522~~$167,137, and subordinated notes and other borrowings ~~of $32,882,~~increased $25,516, when comparing the nine months ended September 30, ~~2016~~2017 with the same period in ~~2015.~~2016.
For the ~~nine month~~nine-month periods ended September 30, ~~2016~~2017 and ~~2015,~~2016, the cost of average interest-bearing liabilities increased 1834 basis points from 0.83% to ~~0.83% from 0.65%~~1.17%. The increase was ~~primarily~~ due to ~~increase~~increases in the cost of funds from interest-bearing deposits, FHLB advances, Federal funds purchased and ~~from subordinated notes.~~repurchase agreements.
The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three and nine months ended September 30, ~~2016~~2017 and ~~2015:~~2016:
Average Balances—Yields & ~~Rates(7)~~Rates⁽⁷⁾
(Dollars are in thousands)

   Three Months Ended September 30,    Three Months Ended September 30,
   2016 2015    2017 2016
   Average
Balance Interest
Inc / Exp    Average
Yield /
Rate Average
Balance Interest
Inc / Exp    Average
Yield /
Rate    Average
Balance Interest
Inc / Exp    Average
Yield / Rate Average
Balance Interest
Inc / Exp    Average
Yield / Rate
ASSETS:

Loans (1)(6)
   $ 1,620,347    $ 20,219       4.96 % $ 1,044,520    $ 14,763       5.61 %    $ 2,049,575 $ 26,006    5.03 % $ 1,620,347 $ 20,219    4.96 %
Securities available for sale (6)
   671,725    4,084       2.42 % 674,991    4,422       2.60 %    972,988 6,405    2.61 % 671,725 4,084    2.42 %
Securities held to maturity (6)
   233,986    2,203       3.75 % 74,332    632       3.37 %    220,313 2,283    4.11 % 233,986 2,203    3.75 %
Restricted equity securities
   17,396 269    6.13 % 10,372 133    5.10 %
Certificates of deposit at other financial institutions
   941    4       1.69 % 250    2       3.17 %    2,412 9    1.48 % 941 4    1.69 %
Federal funds sold and other (2)
   49,295    182       1.47 % 52,279    127       0.96 %    88,737 271    1.21 % 38,923 49    0.50 %












TOTAL INTEREST EARNING ASSETS
   $ 2,576,294    $ 26,692       4.12 % $ 1,846,372    $ 19,946       4.29 %    $ 3,351,421 $ 35,243    4.17 % $ 2,576,294 $ 26,692    4.12 %
Allowance for loan losses
   (14,508 )    (8,576 )       (18,891 )    (14,508 )
All other assets
   86,466       74,570          94,334    86,466









TOTAL ASSETS
   $ 2,648,252       $ 1,912,366          $ 3,426,864    $ 2,648,252
LIABILITIES & SHAREHOLDERS’ EQUITY

LIABILITIES & EQUITY

Deposits:

Interest checking
   $ 261,350    $ 256       0.39 % $ 246,584    $ 170       0.27 %    $ 552,502 $ 1,285    0.92 % $ 261,350 $ 256    0.39 %
Money market
   617,913    957       0.62 % 514,669    703       0.54 %    604,416 1,703    1.12 % 617,913 957    0.62 %
Savings
   51,235    40       0.31 % 37,888    44       0.46 %    54,921 42    0.30 % 51,235 40    0.31 %
Time deposits
   1,080,666    2,430       0.89 % 648,605    1,500       0.92 %    1,259,452 4,281    1.35 % 1,080,666 2,430    0.89 %
Federal Home Loan Bank advances
   289,228 968    1.33 % 86,783 215    0.99 %
Federal funds purchased and other (3)
   44,974    69       0.61 % 45,261    69       0.60 %    37,374 92    0.98 % 44,974 69    0.61 %
Federal Home Loan Bank advances
   86,783    215       0.99 % 57,000    79       0.55 %
Subordinated Notes and other borrowings
   58,285    1,082       7.39 % —   —      —   %
Subordinated notes and other borrowings
   58,444 1,083    7.35 % 58,285 1,082    7.39 %












TOTAL INTEREST BEARING LIABILITIES
   $ 2,201,206    $ 5,049       0.91 % $ 1,550,007    $ 2,565       0.66 %    $ 2,856,337 $ 9,454    1.31 % $ 2,201,206 $ 5,049    0.91 %
Demand deposits
   224,387       169,451          261,127    224,387
Other liabilities
   16,650       11,368          11,312    16,650
Total shareholders’ equity
   206,009       181,540
Total equity
   298,088    206,009









TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 2,648,252       $ 1,912,366
TOTAL LIABILITIES AND EQUITY
   $ 3,426,864    $ 2,648,252
NET INTEREST SPREAD (4)
      3.21 %    3.63 %       2.86 %    3.21 %
NET INTEREST INCOME
   $ 21,643       $ 17,381          $ 25,789    $ 21,643
NET INTEREST MARGIN (5)
      3.34 %    3.73 %       3.05 %    3.34 %
   Nine Months Ended September 30,
   2017 2016
   Average
Balance Interest
Inc / Exp    Average
Yield / Rate Average
Balance Interest
Inc / Exp    Average
Yield / Rate
ASSETS:

Loans⁽¹⁾⁽⁶⁾
   $ 1,975,592 $ 73,274    4.96 % $ 1,535,894 $ 56,933    4.95 %
Securities available for sale(⁶⁾
   1,002,118 19,958    2.66 % 641,270 11,917    2.48 %
Securities held to maturity⁽⁶⁾
   224,174 7,012    4.18 % 194,326 5,698    3.92 %
Restricted equity securities
   15,830 663    5.60 % 9,256 354    5.11 %
Certificates of deposit at other financial institutions
   2,178 24    1.47 % 751 11    1.96 %
Federal funds sold and other⁽²⁾
   84,666 643    1.02 % 46,327 164    0.47 %






TOTAL INTEREST EARNING ASSETS
   $ 3,304,558 $ 101,574    4.11 % $ 2,427,824 $ 75,077    4.13 %
Allowance for loan losses
   (18,182 )    (13,179 )
All other assets
   92,425    41,988





TOTAL ASSETS
   $ 3,378,801    $ 2,456,633
LIABILITIES & EQUITY

Deposits:

Interest checking
   $ 631,582 $ 3,586    0.76 % $ 292,013 $ 853    0.39 %
Money market
   608,670 4,412    0.97 % 608,341 2,767    0.61 %
Savings
   55,569 127    0.31 % 48,647 121    0.33 %
Time deposits
   1,196,675 10,993    1.23 % 937,266 6,377    0.91 %
Federal Home Loan Bank advances
   242,549 2,228    1.23 % 75,412 511    0.91 %
Federal funds purchased and other⁽³⁾
   45,745 309    0.90 % 50,100 237    0.63 %
Subordinated notes and other borrowings
   58,398 3,239    7.42 % 32,882 1,820    7.39 %






TOTAL INTEREST BEARING LIABILITIES
   $ 2,839,188 $ 24,894    1.17 % $ 2,044,661 $ 12,686    0.83 %
Demand deposits
   246,675    200,981
Other liabilities
   7,358    12,707
Total equity
   285,580    198,284





TOTAL LIABILITIES AND EQUITY
   $ 3,378,801    $ 2,456,633
NET INTEREST SPREAD⁽⁴⁾
      2.94 %    3.30 %
NET INTEREST INCOME
   $ 76,680    $ 62,391
NET INTEREST MARGIN⁽⁵⁾
      3.10 %    3.43 %

⁽¹⁾ Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs.Non-accrual loans are included in total loan balances.
⁽²⁾ Includes federal funds sold ~~capital stock in the Federal Reserve Bank and Federal Home Loan Bank,~~ and interest-bearing deposits at the Federal Reserve Bank and the Federal Home Loan Bank.
⁽³⁾ Includes repurchase agreements.
⁽⁴⁾ Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
⁽⁵⁾ Represents net interest income (annualized) divided by total average earning assets.
⁽⁶⁾ Interest income and rates include the effects of a tax-equivalent ~~adjustment~~ adjustments to adjusttax-exempt interest income ontax-exempt loans and investment ~~income on tax exempt investment~~ securities ~~and tax-exempt loans~~ to a fully taxable basis.
⁽⁷⁾ ~~Averages~~Average balances are average daily balances. ~~Yields and rates are annualized.~~

   Nine Months Ended September 30,
   2016 2015
   Average
Balance Interest
Inc / Exp    Average
Yield /
Rate Average
Balance Interest
Inc / Exp    Average
Yield /
Rate
ASSETS:

Loans (1)(6)
   $ 1,535,894    $ 56,933       4.95 % $ 933,950    $ 38,127       5.46 %
Securities available for sale (6)
   641,270    11,917       2.48 % 532,754    9,628       2.42 %
Securities held to maturity (6)
   194,326    5,698       3.92 % 58,587    1,358       3.10 %
Certificates of deposit at other financial institutions
   751    11       1.96 % 250    5       2.67 %
Federal funds sold and other (2)
   55,583    518       1.24 % 50,207    325       0.87 %






TOTAL INTEREST EARNING ASSETS
   $ 2,427,824    $ 75,077       4.13 % $ 1,575,748    $ 49,443       4.20 %
Allowance for loan losses
   (13,179 )    (7,705 )
All other assets
   41,988       72,387





TOTAL ASSETS
   $ 2,456,633       $ 1,640,430
LIABILITIES & SHAREHOLDERS’ EQUITY

Deposits:

Interest checking
   $ 292,013    $ 853       0.39 % $ 270,992    $ 605       0.30 %
Money market
   608,341    2,767       0.61 % 451,054    1,918       0.57 %
Savings
   48,647    121       0.33 % 34,018    117       0.46 %
Time deposits
   937,266    6,377       0.91 % 464,945    3,323       0.96 %
Federal funds purchased and other (3)
   50,100    237       0.63 % 47,330    232       0.66 %
Federal Home Loan Bank advances
   75,412    511       0.91 % 42,890    225       0.70 %
Subordinated Notes and other borrowings
   32,882    1,820       7.39 % —   —      —   %






TOTAL INTEREST BEARING LIABILITIES
   $ 2,044,661    $ 12,686       0.83 % $ 1,311,229    $ 6,420       0.65 %
Demand deposits
   200,981       159,093
Other liabilities
   12,707       7,753
Total shareholders’ equity
   198,284       162,355





TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 2,456,633       $ 1,640,430
NET INTEREST SPREAD (4)
      3.30 %    3.55 %
NET INTEREST INCOME
   $ 62,391       $ 43,023
NET INTEREST MARGIN (5)
      3.43 %    3.65 %
~~(1)~~ Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.
~~(2)~~ ~~Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank.~~
~~(3)~~ ~~Includes repurchase agreements.~~
~~(4)~~ ~~Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.~~
~~(5)~~ ~~Represents net interest income (annualized) divided by total average earning assets.~~
~~(6)~~ ~~Interest income and rates include the effects of a tax-equivalent adjustment to adjust tax-exempt investment income on tax exempt investment securities and tax-exempt loans to a fully taxable basis.~~
~~(7)~~ ~~Averages balances are average daily balances. Yields and rates are annualized.~~
The tables below detail the components of the changes in net interest income on a tax-equivalent basis for the periods indicated. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volume 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.
Analysis of Changes in Interest Income and Expenses

   Net change three months ended
September 30, 2016 versus September 30, 2015    Net change three months ended
September 30, 2017 versus September 30, 2016
   Volume    Rate    Net Change    Volume    Rate    Net Change
INTEREST INCOME

Loans
   $ 8,103       $ (2,647 )    $ 5,456       $ 5,425    $ 362    $ 5,787
Securities available for sale
   (34 )    (304 )    (338 )    1,855    466    2,321
Securities held to maturity
   1,347       224       1,571       (120 )    200    80
Restricted equity securities
   91    45    136
Certificates of deposit at other financial institutions
   6       (4 )    2       6    (1 )    5
Federal funds sold and other
   (8 )    63       55       63    159    222












TOTAL INTEREST INCOME
   $ 9,414       $ (2,668 )    $ 6,746       $ 7,320    $ 1,231    $ 8,551












INTEREST EXPENSE

Deposits

Interest checking
   $ 7       $ 79       $ 86       $ 291    $ 738    $ 1,029
Money market accounts
   130       124       254       (16 )    762    746
Savings
   15       (19 )    (4 )    3    (1 )    2
Time deposits
   1,011       (81 )    930       391    1,460    1,851
Federal Home Loan Bank advances
   40       96       136       505    248    753
Other borrowed funds
   —      —      —
Fed funds purchased and other borrowed funds
   (12 )    35    23
Subordinated Notes and other borrowings
   1,082       —      1,082       7    (6 )    1












TOTAL INTEREST EXPENSE
   $ 2,285       $ 199       $ 2,484       $ 1,169    $ 3,236    $ 4,405












NET INTEREST INCOME
   $ 7,129       $ (2,867 )    $ 4,262       $ 6,151    $ (2,005 )    $ 4,146












   Net change nine months ended
September 30, 2017 versus September 30, 2016
   Volume    Rate    Net Change
INTEREST INCOME

Loans
   $ 16,193    $ 148    $ 16,341
Securities available for sale
   6,692    1,349    8,041
Securities held to maturity
   878    436    1,314
Restricted equity securities
   251    58    309
Certificates of deposit at other financial institutions
   21    (8 )    13
Federal funds sold and other
   131    348    479






TOTAL INTEREST INCOME
   $ 24,166    $ 2,331    $ 26,497






INTEREST EXPENSE

Deposits

Interest checking
   $ 985    $ 1,748    $ 2,733
Money market accounts
   6    1,639    1,645
Savings
   14    (8 )    6
Time deposits
   1,752    2,864    4,616
Federal Home Loan Bank advances
   1,136    581    1,717
Fed funds purchased and other borrowed funds
   (20 )    92    72
Subordinated notes and other borrowings
   1,406    13    1,419






TOTAL INTEREST EXPENSE
   $ 5,279    $ 6,929    $ 12,208






NET INTEREST INCOME
   $ 18,887    $ (4,598 )    $ 14,289






   Net change nine months ended
September 30, 2016 versus September 30, 2015
   Volume    Rate    Net Change
INTEREST INCOME

Loans
   $ 24,670       $ (5,864 )    $ 18,806
Securities available for sale
   2,001       288       2,289
Securities held to maturity
   3,147       1,193       4,340
Certificates of deposit at other financial institutions
   10       (4 )    6
Federal funds sold and other
   39       154       193






TOTAL INTEREST INCOME
   $ 29,867       $ (4,233 )    $ 25,634






INTEREST EXPENSE

Deposits

Interest checking
   $ 51       $ 197       $ 248
Money market accounts
   667       182       849
Savings
   51       (47 )    4
Time deposits
   3,405       (351 )    3,054
Federal Home Loan Bank advances
   167       119       286
Other borrowed funds
   16       (11 )    5
Subordinated notes and other borrowings
   1,820       —      1,820






TOTAL INTEREST EXPENSE
   $ 6,177       $ 89       $ 6,266






NET INTEREST INCOME
   $ 23,690       $ (4,322 )    $ 19,368






Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for probable losses incurred in the loan portfolio. The allowance is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.
The provision for loan losses was ~~$1,392~~$590 and ~~$1,724~~$1,392 for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$4,095~~$3,018 and ~~$3,154~~$4,095 for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. The lower provision for the three months ended September 30, 2016 was less than the provision for the same period in 2015 due to loan growth in third quarter 2015 being greater than loan growth in third quarter 2016. The higher provision for theand nine months ended September 30, ~~2016~~2017 compared to the same ~~period~~periods in ~~2015~~2016 is ~~due primarily to~~based on the Company’s analysis of its allowance for loan losses which, based on the loan portfolio’s risk profile and comparatively less loan growth, ~~during the nine months ended September 30, 2016, compared to the same period in 2015.~~required less provision be recorded. Nonperforming loans at September 30, ~~2016~~2017 totaled ~~$1,597~~$2,860 compared to ~~$3,286~~$6,182 at December 31, ~~2015,~~2016, representing 0.1% and 0.3% of total loans, respectively.
Non-Interest Income
~~Non-Interest Income~~
Non-interest income for the three and nine months ended September 30, ~~2016~~2017 was $3,569 and $11,457, respectively, compared to $4,876 and $12,587 ~~compared to $3,798 and $9,864~~ for the same periods in ~~2015.~~2016, respectively. The following is a summary of the components ofnon-interest income (in thousands):

   Three Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2016    2015
Service charges on deposit accounts
   $ 44       $ 44       $ —    — %
Other service charges and fees
   845       679       166       24.4 %
Net gains on sale of loans
   2,942       2,463       479       19.4 %
Wealth management
   446       327       119       36.4 %
Loan servicing fees, net
   (40 )    84       (124 )    (147.6 %)
Gain on sale or call of securities
   430       5       425       8,500.0 %
Net gain on sale of foreclosed assets
   30       3       27       900.0 %
Other
   179       193       (14 )    (7.3 %)








Total non-interest income
   $ 4,876       $ 3,798       $ 1,078       28.4 %








   Nine Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)    Three Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2016    2015       2017    2016
Service charges on deposit accounts
   $ 139       $ 78       $ 61       78.2 %    $ 39    $ 44    $ (5 )    (11.4 %)
Other service charges and fees
   2,245       1,987       258       13.0 %    787    845    (58 )    (6.9 %)
Net gains on sale of loans
   6,859       5,573       1,286       23.1 %    1,517    2,942    (1,425 )    (48.4 %)
Wealth management
   1,343       914       429       46.9 %    643    446    197    44.2 %
Loan servicing fees, net
   (2 )    187       (189 )    (101.1 %)    70    (40 )    110    275.0 %
Gain on sale or call of securities
   1,535       529       1,006       190.2 %
Net gain on sale of foreclosed assets
   36       30       6       20.0 %
Gain on sales of investment securities, net
   350    430    (80 )    (18.6 %)
Net gain on foreclosed assets
   (16 )    30    (46 )    (153.3 %)
Other
   432       566       (134 )    (23.7 %)    179    179    —      —   %
















Total non-interest income
   $ 12,587       $ 9,864       $ 2,723       27.6 %    $ 3,569    $ 4,876    $ (1,307 )    (26.8 %)
















   Nine Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2017    2016
Service charges on deposit accounts
   $ 114    $ 139    $ (25 )    (18.0 %)
Other service charges and fees
   2,297    2,245    52    2.3 %
Net gains on sale of loans
   5,918    6,859    (941 )    (13.7 %)
Wealth management
   1,884    1,343    541    40.3 %
Loan servicing fees, net
   230    (2 )    232    11,600.0 %
Gain on sales of investment securities, net
   470    1,535    (1,065 )    (69.4 %)
Net gain on foreclosed assets
   (10 )    36    (46 )    (127.8 %)
Other
   554    432    122    28.2 %








Totalnon-interest income
   $ 11,457    $ 12,587    $ (1,130 )    (9.0 %)








Service charges on deposit accounts for the three and nine months ended September 30, ~~2016 increased $61,~~2017 decreased $5 and $25, or ~~78.2%~~11.4% and 18.0%, respectively, from the same ~~period~~periods in ~~2015~~2016. The decrease for the nine months ended September 30, 2017 was due ~~to changes made~~ to the Company’s ~~schedule of~~waiving service charges ~~and due to~~on deposit accounts during March 2017 while the ~~reduction of the amount of service charges waived during 2016.~~Company was going through a core system conversion.
Other service charges and fees for the three and nine months ended September 30, ~~2016~~2017 decreased $58 and increased ~~$166~~$52, or 6.9% and ~~$258, or 24.4% and 13.0%~~2.3%, respectively, from the same periods in ~~2015~~2016. The fluctuation for the nine months ended September 30, 2017 was due to ~~several variances. The larger variances for these~~a combination of increases and decreases, with the following types of fees having the largest fluctuation in the comparative ~~periods were as follows: (1) underwriting, processing and application fees related to mortgage lending activities increased $113 and $91; (2)~~periods: unused commitment fees ~~increased $39 and $95; and (3)~~($108), ATM foreign surcharge fees ~~increased $22~~($42), and ~~$64.~~underwriting fees ($32).
Net gain on sale of loans ~~increased $479~~decreased $1,425, or 48.4% and ~~$1,286,~~$941, or ~~19.4% and 23.1%~~13.7%, when comparing the three and nine months ended September 30, ~~2016~~2017 to the same ~~periods~~period in ~~2015.~~2016, respectively. The ~~increase~~changes in both periods ~~was~~were due to ~~favorable mark-to-market pricing on mortgage loan derivatives and increased~~the volume of ~~mortgage~~ loans ~~during 2016.~~sold and the margins related to the loans sold.
Wealth management income for the three and nine months ended September 30, ~~2016~~2017 increased ~~$119~~$197 and ~~$429,~~$541, or ~~36.4%~~44.2% and ~~46.9%~~40.3%, respectively, in comparison with the same periods in ~~2015.~~2016. The increase was attributed to the growth in the client base and ~~the~~ assets under management in the wealth management division, as well as ~~some~~ improvement in the stock markets. As a comparison, the Company had assets under management at September 30, 2017 and 2016 of $351,932 and $262,879, respectively.
~~Gain~~Net loan servicing fees for the three and nine months ended September 30, 2017 increased $110 and $232, or 275.0% and 11,600.0%, respectively, in comparison with the same periods in 2016. The increase was attributed to the growth in the mortgage loans serviced and the related valuation increase of the mortgage servicing rights.
Net gain on sale ~~or call~~ of investment securities ~~increased $425~~decreased $80 and ~~$1,006,~~$1,065, or ~~8,500.0%~~18.6% and ~~190.2%~~69.4%, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods in ~~2015.~~2016. The ~~increase was~~decreases were primarily due to the gains on securities that were recognized in the ~~second and~~ third ~~quarters~~quarter of 2016, which were related to management selling a number of smaller securities to consolidate the number of securities carried in the portfolio, and ~~to reposition~~selling securities of two municipalities whose credit rating had fallen below management’s credit score limit.
Othernon-interest income remained consistent when comparing the ~~Company’s investment portfolio into more tax-exempt municipal securities.~~
~~Other non-interest income decreased~~three months ended September 30, 2017 with the same period in 2016 and increased by ~~$14 and $134,~~$122, or ~~7.3% and 23.7%~~28.2%, when comparing ~~three and~~the nine months ended September 30, ~~2016~~2017 with the same ~~periods 2015.~~period in 2016. The ~~decrease~~increase for the nine months ended September 30, ~~2016~~2017 is primarily attributed to the loss of $98 recorded on the sale of the Company’s real estate in downtown Murfreesboro, Tennessee during first quarter 2016. ~~That compares with a gain of $15 being recorded in first nine months of 2015 on the sale of three of the Company’s branch locations in Rutherford County, Tennessee.~~
Non-Interest Expense
Non-interest expense for the three and nine months ended September 30, ~~2016~~2017 was $15,278 and $44,837, respectively, compared to $13,708 and $38,452 ~~compared to $10,853 and $31,046~~ for the same periods in ~~2015.~~2016, respectively. The increases were the result of the following components listed in the table below (in thousands):

   Three Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2016    2015
Salaries and employee benefits
   $ 7,979       $ 6,208       $ 1,771       28.5 %
Occupancy and equipment
   2,001       1,683       318       18.9 %
FDIC assessment expense
   570       362       208       57.5 %
Marketing
   206       277       (71 )    (25.6 %)
Professional fees
   935       516       419       81.2 %
Amortization of core deposit intangible
   138       160       (22 )    (13.8 %)
Indirect expenses related to public offering
   —    —    —    — %
Other
   1,879       1,647       232       14.1 %








Total non-interest expense
   $ 13,708       $ 10,853       $ 2,855       26.3 %








   Nine Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)    Three Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2016    2015       2017    2016
Salaries and employee benefits
   $ 22,099       $ 17,960       $ 4,139       23.0 %    $ 9,011    $ 7,979    $ 1,032    12.9 %
Occupancy and equipment
   5,563       4,961       602       12.1 %    2,399    2,001    398    19.9 %
FDIC assessment expense
   1,388       792       596       75.3 %    900    570    330    57.9 %
Marketing
   611       695       (84 )    (12.1 %)    192    206    (14 )    (6.8 %)
Professional fees
   3,006       1,382       1,624       117.5 %    821    935    (114 )    (12.2 %)
Amortization of core deposit intangible
   431       499       (68 )    (13.6 %)    115    138    (23 )    (16.7 %)
Indirect expenses related to public offering
   —    314       (314 )    (100.0 %)
Other
   5,354       4,443       911       20.5 %    1,840    1,879    (39 )    (2.1 %)
















Total non-interest expense
   $ 38,452       $ 31,046       $ 7,406       23.9 %    $ 15,278    $ 13,708    $ 1,570    11.5 %
















   Nine Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2017    2016
Salaries and employee benefits
   $ 26,172    $ 22,099    $ 4,073    18.4 %
Occupancy and equipment
   6,689    5,563    1,126    20.2 %
FDIC assessment expense
   2,675    1,388    1,287    92.7 %
Marketing
   744    611    133    21.8 %
Professional fees
   2,558    3,006    (448 )    (14.9 %)
Amortization of core deposit intangible
   363    431    (68 )    (15.8 %)
Other
   5,636    5,354    282    5.3 %








Totalnon-interest expense
   $ 44,837    $ 38,452    $ 6,385    16.3 %








The increase innon-interest expense noted in the table above is related to the Company’s overall growth. The Company’s ~~biggest variances~~largest increases for the three and nine months ended September 30, ~~2016,~~2017, in comparison with the same periods of ~~2015,~~2016, were in salaries and employee benefits, occupancy and equipment, FDIC assessment expense, ~~professional fees~~ and othernon-interest expense.
Salaries and employee benefits increased ~~$1,771~~$1,032 and ~~$4,139,~~$4,073, or ~~28.5%~~12.9% and ~~23.0%~~18.4%, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods in ~~2015.~~2016. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from ~~219~~261 full-time equivalent employees as of September 30, ~~2015,~~2016, to ~~261~~279 as of September 30, ~~2016,~~2017, many of which were officer level positions as the Company has worked to enhance its management team to properly oversee the Company’s growth and ~~has added key commercial bankers and support staff~~ to ~~provide continued growth for~~grow its team of lenders to further grow the ~~Company.~~loan portfolio. In addition to ~~the increase in~~ salaries, ~~mortgage commissions~~incentive expenses increased ~~$732~~$405 and ~~$887~~$309, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods of ~~2015~~2016 due to the ~~volume of loans closed~~Company’s financial performance during the three and nine months ended September 30, ~~2016.~~2017. Stock-based compensation expense also increased ~~$156~~$266 and ~~$581~~$657, respectively, for the three and nine months ended September 30, ~~2016~~2017 in comparison with the same periods in 2015. Personnel-related insurance expense increased $92 and $235 for the three and nine months ended September 30, 2016 in comparison with the same periods in 2015 due to the Company’s increased number of employees. The Company also experienced growth in incentive expenses related to the Company’s financial performance.2016.
Occupancy and equipment expense increased ~~$318~~$398 and ~~$602,~~$1,126, or ~~18.9%~~19.9% and ~~12.1%~~20.2%, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods in ~~2015.~~2016. The variance for the three months ended September 30, ~~2016~~2017 versus the three months ended September 30, ~~2015~~2016 is primarily attributable to increases in building rent expense ($~~232)~~222), software maintenance fees ($~~22)~~114), ~~building maintenance~~and software depreciation ($~~20), utilities ($16), equipment maintenance ($14) and other furniture, fixtures and equipment expense ($18), which were offset by a decrease in property insurance expense ($13)~~21). The variance when comparing the nine months ended September 30, ~~2016~~2017 with the nine months ended September 30, ~~2015~~2016 is attributable to increases in building rent expense ($~~430)~~634), software maintenance fees ($~~77), equipment maintenance~~281) and leasehold improvement depreciation ($~~43), utilities ($29) and building maintenance ($27)~~69). During the first quarter of 2016, the Company opened two new leased facilities – a new branch location in Nolensville, Tennessee and an expansion of its headquarters in downtown Franklin, Tennessee, the latter of which is leased from a related party of the Company. The Company also began leasing space for its loan production office in Nashville, Tennessee during first quarter 2016.
The Company’s FDIC assessment expense increased ~~$208~~$330 and ~~$596,~~$1,287, or ~~57.5%~~57.9% and ~~75.3%~~92.7%, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods in ~~2015.~~2016. The increases are due to the year-over-year asset growth of the Company, ~~assets,~~ on which FDIC assessments are calculated, and ~~due~~are also related to ~~the impact of~~ the change in the FDIC insurance assessment calculation ~~methodology implemented by~~in the ~~FDIC effective July 1, 2016.~~third quarter of 2016, which caused an increase in the Company’s insurance assessments based on the calculation’s components.
Professional fees ~~increased $419~~decreased $114 and ~~$1,624,~~$448, or ~~81.2%~~12.2% and ~~117.5%~~14.9%, respectively, when comparing the three and nine months ended September 30, ~~2016~~2017 with the same periods in ~~2015.~~2016. The ~~increase for~~decrease when comparing the three months ended September 30, ~~2016 and~~2017 with the same period in ~~2015~~2016 is due to ~~increases~~decreases in other professional fees ($~~225),~~85) and compliance fees ($~~165), accounting/audit fees ($58), and brokerage settlement expenses ($23)~~152). The ~~increase,~~decrease, when comparing the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, is due to ~~increases~~decreases in ~~other professional fees ($675),~~ merger-related expenses ($~~317)~~316), ~~accounting/audit fees ($263), compliance fees ($160), brokerage settlement expenses ($89)~~ legal fees ($~~72),~~79) and SEC filing expense ($~~47)~~67). The ~~increases~~decreases in other professional fees are related to the following 2016 expenses: (1) the design and implementation of subsidiaries (Franklin Synergy Risk Management, Inc., Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc.),; (2) a consulting engagement related to the Company’s core systems and related ~~processes,~~processes; and (3) professional placement service fees for the hiring of several key lending and management professionals.
For the three months ended September 30, 2017, othernon-interest expenses decreased $39, or 2.1%, and for the nine months ended September 30, ~~2016,~~2017, other ~~non-interest~~noninterest expenses increased ~~$232 and $911,~~$282, or ~~14.1% and 20.5%~~5.3%, from the same comparative periods during ~~2015.~~2016. The increase in othernon-interest expense for the three months ended September 30, 2016 versus September 30, 2015 is attributed to increases in the following expense types: insurance loss reserves ($139); and electronic banking expenses ($96). The increase in other non-interest expense for the nine months ended September 30, ~~2016~~2017 versus September 30, ~~2015~~2016 is attributed to increases in ~~various~~several types of expenses, ~~with~~but the following expense types ~~having~~represent the largest ~~increases:~~variances: insurance expense ($~~204); electronic banking expenses ($180); insurance loss reserves ($139); loan-related expenses ($115); regulatory expenses ($91)~~78); franchise taxes ($~~68)~~162); travel expenses ($74); management fees ($200); and ~~board-related~~loan servicing expense ($219). These variances were offset by decreases in various expense types, with the following account having the largest decrease: loan-related expenses ($~~57)~~283).
Income Tax Expense
The Company recognized income tax expense for the three and nine months ended September 30, ~~2016,~~2017, of ~~$3,421~~$3,138 and ~~$9,663,~~$10,343, respectively, compared to ~~$2,807~~$3,314 and ~~$6,468,~~$9,047, respectively, for the three and nine months ended September 30, ~~2015.~~2016. The Company’syear-to-date income tax expense for the ~~nine months~~period ended September 30, ~~2016~~2017 reflects an effective income tax rate of ~~32.3%~~28.7%, a decrease compared to ~~36.2%~~30.2% for the same period in 2015. The decrease in the effective tax rate resulted from the Company’s investments in tax-exempt municipal securities, from the establishment and funding of a real estate investment trust subsidiary of Franklin Synergy Bank in the first quarter of 2016, and from the establishment of a captive insurance subsidiary at the end of 2015.2016.
COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, ~~2016~~2017 AND DECEMBER 31, ~~2015~~2016
Overview
The Company’s total assets increased by ~~$535,403,~~$622,089, or ~~24.7%~~21.1%, from December 31, ~~2015~~2016 to September 30, ~~2016.~~2017. The increase in total assets has primarily been the result of organic growth in the loan portfolio and from purchases of additional investment ~~securities portfolios.~~securities.
Loans
Lending-related income is the most important component of the Company’s net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.
The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 were ~~$1,654,058~~$2,115,930 and ~~$1,303,826,~~$1,773,592, respectively, an increase of ~~$350,232,~~$342,338, or ~~26.9%~~19.3%. As a percentage of total assets, total loans, net of deferred fees, at September 30, 2017 and December 31, 2016 were 59.3% and 60.3%, respectively. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. The Company has also attracted a number of experienced commercial and mortgage lenders ~~over the last year~~ to help increase penetration in its primary markets in Middle Tennessee, Williamson County, Rutherford County and ~~Rutherford~~Davidson County.
The table below provides a summary of the loan portfolio composition for the periods noted.

   September 30, 2016 December 31, 2015    September 30, 2017 December 31, 2016
Types of Loans
   Amount    % of Total
Loans Amount    % of Total
Loans    Amount    % of Total
Loans Amount    % of Total
Loans
Total loans, excluding PCI loans

Total loans, excluding purchased credit impaired (“PCI”) loans

Real estate:

Construction and land development
   $ 474,255       28.7 % $ 372,767       28.5 %    $ 514,934    24.3 % $ 489,562    27.6 %
Commercial
   430,248       26.0 % 364,223       27.9 %    598,846    28.3 % 497,140    28.0 %
Residential
   371,046       22.4 % 274,934       21.1 %    532,113    25.1 % 404,989    22.8 %
Commercial and industrial
   372,784       22.5 % 283,888       21.7 %    464,747    22.0 % 376,476    21.2 %
Consumer and other
   3,458       0.2 % 6,577       0.5 %    3,933    0.2 % 3,359    0.2 %












Total loans—gross, excluding PCI loans
   1,651,791       99.8 % 1,302,389       99.7 %    2,114,573    99.9 % 1,771,526    99.8 %












Total PCI loans
   3,087       0.2 % 3,913       0.3 %    2,558    0.1 % 2,859    0.2 %












Total gross loans
   1,654,878       100.0 % 1,306,302       100.0 %    2,117,131    100.0 % 1,774,385    100.0 %








Less: deferred loan fees, net
   (820 )    (2,476 )       (1,201 )    (793 )
Allowance for loan losses
   (15,590 )    (11,587 )       (19,944 )    (16,553 )









Total loans, net allowance for loan losses
   $ 1,638,468       $ 1,292,239          $ 2,095,986    $ 1,757,039









~~As presented~~The discussion in the ~~above table,~~following paragraphs includes the PCI loans in the breakdown of the various categories of loans.
Total gross loans increased ~~26.7%~~19.3% during the first nine months of ~~2016,~~2017, due to organic growth as a result of continued market penetration and the strength of the local ~~economies.~~economy. During this period, the Company experienced growth in real estate loans of ~~26.0%~~18.2% with growth occurring in the ~~construction and land development (27.2%~~residential real estate (31.3%), commercial real estate ~~(18.1%~~(20.4%) and ~~residential real estate (35.0%~~construction and land development (5.2%) segments. The Company also experienced growth of ~~31.3%~~23.3% in the commercial and industrial segment during the first nine months of ~~2016.~~2017.
Real estate loans comprised ~~77.2%~~77.7% of the loan portfolio at September 30, ~~2016.~~2017. The largest portion of the real estate ~~segment~~segments as of September 30, ~~2016,~~2017, was ~~construction~~commercial real estate loans, which totaled 36.4% of real estate loans. Commercial real estate loans totaled $599,233 at September 30, 2017, and comprised 28.3% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.
Construction and land development loans ~~which~~ totaled ~~$474,336~~$514,934 at September 30, ~~2016,~~2017, and comprised ~~37.2%~~31.3% of total real estate loans and ~~28.7%~~24.3% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.
Commercial real estate loans totaled $430,824 at September 30, 2016, and comprised 33.7% of real estate loans and 26.0% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.
The residential real estate classification primarily includes1-4 family residential loans which are typically conventional first-lien home mortgages, not including loansheld-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled ~~$371,543~~$532,295 and comprised ~~29.1%~~32.3% of real estate loans and ~~22.5%~~25.1% of total loans at September 30, ~~2016.~~2017.
Commercial and industrial loans totaled ~~$374,717~~$466,736 at September 30, ~~2016~~2017 and grew ~~31.2%~~23.3% during the first nine months of ~~2016.~~2017. Loans in this classification comprised ~~22.6%~~22.0% of total loans at September 30, ~~2016.~~2017. The commercial and industrial classification consists of commercial loans tosmall-to-medium sized businesses, shared national credits, and healthcare loans.
The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at September 30, ~~2016,~~2017, excluding unearned net fees and costs.
Loan Maturity Schedule

   September 30, 2016    September 30, 2017
   One year
or less    Over one
year to five
years    Over five
years    Total    One year
or less    Over one
year to five
years    Over five
years    Total
Real estate:

Construction and land development
   $ 240,131       $ 154,043       $ 80,162       $ 474,336       $ 276,021    $ 165,429    $ 73,484    $ 514,934
Commercial
   23,838       101,685       305,301       430,824       28,239    154,309    416,685    599,233
Residential
   26,885       109,889       234,769       371,543       37,849    116,899    377,547    532,295
Commercial and industrial
   54,808       256,336       63,573       374,717       75,035    308,537    83,164    466,736
Consumer and other
   1,778       1,571       109       3,458       2,249    1,281    403    3,933
















Total
   $ 347,440       $ 623,524       $ 683,914       $ 1,654,878       $ 419,393    $ 746,455    $ 951,283    $ 2,117,131
















Fixed interest rate
   $ 203,971       $ 327,758       $ 240,183       $ 771,912       $ 205,808    $ 306,701    $ 433,595    $ 946,104
Variable interest rate
   143,469       295,766       443,731       882,966       213,585    439,754    517,688    1,171,027
















Total
   $ 347,440       $ 623,524       $ 683,914       $ 1,654,878       $ 419,393    $ 746,455    $ 951,283    $ 2,117,131
















The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio.
Allowance for Loan Losses
The Company maintains an allowance for loan losses that management believes is adequate to absorb the probable incurred losses inherent in the Company’s loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased by loan charge-offs net of recoveries of prior period loan charge-offs. The level of the allowance is determined on a quarterly basis, although management is engaged in monitoring the adequacy of the allowance on a more frequent basis. In estimating the allowance balance, the following factors are considered:

past loan experience;

the nature and volume of the portfolio;

risks known about specific borrowers;

underlying estimated values of collateral securing loans;

current and anticipated economic conditions; and

other factors which may affect the allowance for probable incurred losses.
The allowance for loan losses consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired and (2) a general component which coversnon-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group data over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
The following loan portfolio segments have been identified: (1) Construction and land development loans, (2) Commercial real estate loans, (3) Residential real estate loans, (4) Commercial and industrial loans, and (5) Consumer and other loans. Management evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions, and the borrower’s cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available to provide for probable incurred loan losses in the entire portfolio.
In the table below, the components, as discussed above, of the allowance for loan losses are shown as of September 30, 2017 and December 31, 2016.
September 30, 2017 December 31, 2016 Increase (Decrease)
Loan
Balance ALLL
Balance % Loan
Balance ALLL
Balance % Loan
Balance ALLL
Balance
Non impaired loans
$ 2,053,704 $ 18,922 0.92 % $ 1,687,244 $ 15,506 0.92 % $ 366,460 $ 3,416 —
Non-PCI acquired loans (Note 1)
57,663 11 0.02 % 74,373 23 0.03 % (16,710 ) (12 ) -1 bps
Impaired loans
3,206 1,011 31.53 % 9,909 1,024 10.33 % (6,703 ) (13 ) 2,120 bps

Non-PCI loans
2,114,573 19,944 0.94 % 1,771,526 16,553 0.93 % 343,047 3,391 1 bps
PCI loans
2,558 —   —   % 2,859 —   —   % (301 ) —   —

Total loans
$ 2,117,131 $ 19,944 0.94 % $ 1,774,385 $ 16,553 0.93 % $ 342,746 $ 3,391 1 bps

Note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth Bank (“MidSouth”) that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstandingnon-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of September 30, 2017, $11 in allowance for loan loss was recorded at September 30, ~~2016 and December 31, 2015.~~2017 related to the loans acquired from MidSouth.

   September 30, 2016 December 31, 2015 Increase (Decrease)
   Loan
Balance    ALLL
Balance    % Loan
Balance    ALLL
Balance    % Loan
Balance ALLL
Balance
Non impaired loans
   $ 1,566,708       $ 15,443       0.99 % $ 1,198,891       $ 11,465       0.96 % $ 367,817    $ 3,978    3 bps
Non-PCI acquired loans (Note 1)
   82,669       32       0.04 % 99,328       —      —   % (16,659 ) 32    4 bps
Impaired loans
   2,414       115       4.76 % 4,170       113       2.71 % (1,756 ) 2    205 bps










Non-PCI loans
   1,651,791       15,590       0.94 % 1,302,389       11,578       0.89 % 349,402    4,012    5 bps
PCI loans
   3,087       —      —   % 3,913       9       0.23 % (826 ) (9 ) -23 bps










Total loans
   $ 1,654,878       $ 15,590       0.94 % $ 1,306,302       $ 11,587       0.89 % $ 348,576    $ 4,003    5 bps










~~Note 1:~~ Acquired loans that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstanding non-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of September 30, 2016, $32 in allowance for loan loss was recorded at September 30, 2016 related to the loans acquired from MidSouth.
At September 30, ~~2016,~~2017, the allowance for loan losses was ~~$15,590,~~$19,944, compared to ~~$11,587~~$16,553 at December 31, ~~2015.~~2016. The allowance for loan losses as a percentage of total loans was 0.94% ~~and 0.89%~~ at September 30, ~~2016 and~~2017 compared to 0.94% at December 31, ~~2015, respectively.~~2016. Loan growth during the first nine months of ~~2016~~2017 is the primary reason for the increase in the allowance amount.
The table below sets forth the activity in the allowance for loan losses for the periods presented.

   Nine Months Ended
September 30,
2016 Nine Months Ended
September 30,
2015 Nine Months Ended
September 30,
2017 Nine Months Ended
September 30,
2016
Beginning balance
   $ 11,587    $ 6,680    $ 16,553 $ 11,587
Loans charged-off:

Construction & land development
   11    —   —   11
Commercial real estate
   —   —   —   —
Residential real estate
   39    32    1 39
Commercial & industrial
   65    15    309 65
Consumer & other
   35    121    36 35


Total loans charged-off
   150    168    346 150
Recoveries on loans previously charged-off:

Construction & land development
   —   —   668 —
Commercial real estate
   —   —   —   —
Residential real estate
   53    14    38 53
Commercial & industrial
   —   —   —   —
Consumer & other
   5    64    13 5


Total loan recoveries
   58    78    719 58
Net recoveries (charge-offs)
   (92 ) (90 ) 373 (92 )
Provision for loan losses charged to expense
   4,095    3,154    3,018 4,095


Total allowance at end of period
   $ 15,590    $ 9,744    $ 19,944 $ 15,590


Total loans, gross, at end of period (1)
   $ 1,654,878    $ 1,125,941    $ 2,117,131 $ 1,654,878


Average gross loans (1)
   $ 1,525,359    $ 921,412    $ 1,966,635 $ 1,525,359


Allowance to total loans
   0.94 % 0.87 % 0.94 % 0.94 %


Net charge-offs (recoveries) to average loans, annualized
   0.01 % 0.01 % (0.03 %) 0.01 %


⁽¹⁾ Loan balances exclude loans held for sale
While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes the allocation of allowance for loan losses by loan category and loans in each category as a percentage of total loans, for the periods presented.

   September 30, 2016 December 31, 2015    September 30, 2017 December 31, 2016
   Amount    % of
Allowance
to Total Amount    % of
Allowance
to Total    Amount    % of
Loans
to Total Amount    % of
Loans
to Total
Real estate loans:

Construction and land development
   $ 4,040       25.9 % $ 3,186       27.5 %    $ 3,957    24.3 % $ 3,776    27.6 %
Commercial
   3,908       25.1 % 3,146       27.1 %    5,223    28.3 % 4,266    28.0 %
Residential
   2,484       15.9 % 1,861       16.1 %    3,122    25.1 % 2,398    22.9 %












Total real estate
   10,432       66.9 % 8,193       70.7 %    12,302    77.7 % 10,440    78.5 %












Commercial and industrial
   5,110       32.8 % 3,358       29.0 %    7,592    22.1 % 6,068    21.3 %
Consumer and other
   48       0.3 % 36       0.3 %    50    0.2 % 45    0.2 %












   15,590       100.0 % 11,587       100.0 %    $ 19,944    100.0 % $ 16,553    100.0 %












Nonperforming Assets
Non-performing loans consist ofnon-accrual loans and loans that are past due 90 days or more and still accruing interest.Non-performing assets consist ofnon-performing loans plus OREO (i.e., real estate acquired through foreclosure or deed in lieu of foreclosure). Loans ~~are placed on non-accrual status when they are~~that become past due 90 days ~~and management believes the borrower’s financial condition,~~are reviewed to determine if they should be placed onnon-accrual status. Loans where, after giving consideration to economic conditions, collateral value, and collection efforts, ~~is such that~~the full collection of principal and interest is ~~doubtful.~~in doubt, or a portion of principal has been charged off, will be placed onnon-accrual. When a loan is placed onnon-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The primary component ofnon-performing loans isnon-accrual loans, which as of September 30, ~~2016~~2017 totaled ~~$1,448.~~$2,582. The other component ofnon-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed onnon-accrual status, unless they are both well-secured and in the process of collection. There were outstanding loans totaling ~~$149~~$278 that were past due 90 days or more and still accruing interest at September 30, ~~2016.~~2017.
The table below summarizesnon-performing loans and assets for the periods presented.

   September 30,
2016 December 31,
2015
Non-accrual loans
   $ 1,448    $ 908
Past due loans 90 days or more and still accruing interest
   149    2,378


Total non-performing loans
   1,597    3,286
Foreclosed real estate (“OREO”)
   —   200


Total non-performing assets
   1,597    3,486
Total non-performing loans as a percentage of total loans
   0.1 % 0.3 %
Total non-performing assets as a percentage of total assets
   0.1 % 0.2 %
Allowance for loan losses as a percentage of non-performing loans
   976 % 353 %
   September 30,
2017 December 31,
2016
Non-accrual loans
   $ 2,582 $ 3,630
Past due loans 90 days or more and still accruing interest
   278 2,552


Totalnon-performing loans
   2,860 6,182
Foreclosed real estate (“OREO”)
   1,503 —


Totalnon-performing assets
   4,363 6,182
Totalnon-performing loans as a percentage of total loans
   0.1 % 0.3 %
Totalnon-performing assets as a percentage of total assets
   0.1 % 0.2 %
Allowance for loan losses as a percentage of
non-performing loans
   697 % 268 %
As of September 30, ~~2016,~~2017, there were three loans onnon-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

   Total Amount    Percentage of Total
Non-
Accrual Loans Number of
Non-
Accrual
Loans    Total Amount    Percentage of Total
Non-Accrual Loans Number of
Non-Accrual
Loans
Construction & land development
   $ —      —   % —      $ —      —   % —
Commercial real estate
   835       57.7 % 1       116    4.5 % 1
Residential real estate
   123       8.5 % 1       —      —   % —
Commercial & industrial
   490       33.8 % 1       2,466    95.5 % 2
Consumer
   —      —   % —      —      —   % —








Total non-accrual loans
   $ 1,448       100.0 % 3       $ 2,582    100.0 % 3








Investment Securities and Other Earning Assets
The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is ~~intended to be~~ structured with minimal credit exposure to the Company and consists of both securities classified asavailable-for-sale and securities classified asheld-to-maturity. Allavailable-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best ~~interest to do so.~~interest. Securitiesavailable-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were ~~$670,756~~$980,737 at September 30, ~~2016,~~2017, compared to ~~$575,838~~$754,755 at December 31, ~~2015,~~2016, an increase of ~~$94,918~~$225,982, or ~~16.5%~~29.9%. The increase inavailable-for-sale securities was primarily attributed to the volume of securities purchased during the first nine months of ~~2016 as part of the Company’s leveraging strategy to deploy capital from the issuance of subordinated notes at the end of the first and second quarters of 2016.~~2017.
Theheld-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled ~~$235,050~~$217,312 at September 30, ~~2016,~~2017, compared to ~~$158,200~~$228,894 at December 31, ~~2015, an increase~~2016, a decrease of ~~$76,850,~~$11,582, or ~~48.6%~~5.1%. The ~~increase~~decrease is attributable to securities that ~~were purchased~~matured or had principal pay downs during the ~~second quarter~~first nine months of ~~2016 as part of the Company’s leveraging strategy to deploy capital from the issuance of subordinated notes at the end of the first and second quarters of 2016.~~2017.
The combined portfolios represented ~~33.5%~~33.6% and ~~33.9%~~33.4% of total assets at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. At September 30, ~~2016,~~2017, the Company had no securities that were classified as having ~~Other Than Temporary Impairment.~~other than temporary impairment.
The Company also had other investments of ~~$11,829~~$18,472 and ~~$7,998~~$11,843 at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.
Bank Premises and Equipment
Bank premises and equipment totaled ~~$8,796~~$11,217 at September 30, ~~2016~~2017 compared to ~~$7,640~~$9,551 at December 31, ~~2015,~~2016, an increase of ~~$1,156,~~$1,666, or ~~15.1%~~17.4%. This increase was the result of adding leasehold improvements and furniture and equipment as needed in the normal course of business and related to the ~~opening~~build-out of ~~the Nolensville branch in January 2016.~~
~~Assets Held for Sale~~
~~At September 30, 2016, the balance in assets held for sale was zero, compared with the balance of $1,640 at December 31, 2015. The Company’s College Street branch real estate~~a new leased bank office building in Murfreesboro, Tennessee, was reclassified at December 31, 2015 as held for sale, since the property had been identified to be sold, and the sale of the property was probable at that time. The sale of the property settled on March 29, 2016,a new leased office space in Franklin, Tennessee, and a ~~loss of $98 was realized as a result of the sale and was recorded~~new leased bank building located in ~~other noninterest income.~~Spring Hill, Tennessee.
Deposits
Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number ofnon-deposit investment alternatives available to depositors, such as mutual funds,
money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products ornon-deposit investment alternatives.
At September 30, ~~2016,~~2017, total deposits were ~~$2,217,954,~~$2,824,825, an increase of ~~$403,915,~~$433,007, or ~~22.3%~~18.1%, compared to ~~$1,814,039~~$2,391,818 at December 31, ~~2015.~~2016. The growth in deposits is attributable to growth in ~~brokered deposits,~~ time ~~deposits, money market~~ deposits and noninterest-bearing deposits.
~~Brokered deposits are an integral part of~~Included in the Company’s funding ~~strategy.~~strategy are brokered deposits. Total brokered deposits ~~decreased 1.5%~~increased from ~~$478,257~~$472,515 at December 31, ~~2015~~2016 to ~~$471,187~~$878,565 at September 30, ~~2016, primarily~~2017, due to the ~~Company’s strategy~~increased need for funding for the Bank’s loan growth and due to ~~reduce dependence on~~the fluctuation in certain brokered deposits ~~by allowing matured brokered certificates of deposit to be redeemed rather than renewing them or replacing them with other brokered deposits~~that are interest-bearing checking and money market accounts that can fluctuate daily.
Public funds deposits in the form of county deposits are a part of the Company’s funding strategy and are ~~usually~~ cyclical in nature, with the ~~highest period~~peak of ~~growth being~~those deposit balances occurring during the middle of the first quarter of each calendar year. ~~County deposits increased $26,410,~~Public funds declined $214,866, or ~~8.1%~~32.9%, from ~~$327,766~~$653,572 at December 31, ~~2015~~2016 to ~~$354,176~~$438,706 at September 30, ~~2016. This growth was attributed to the addition of more county entities during 2016, which brought additional deposits into the Company during 2016.~~2017.
Time deposits excluding brokered deposits as of September 30, ~~2016,~~2017, amounted to ~~$720,417,~~$736,067, compared to ~~$470,284~~$555,732 as of December 31, ~~2015,~~2016, an increase of ~~$250,133,~~$180,335, or ~~53.2%. Of the~~32.4%, primarily due to an increase in ~~time deposits, 64.0% is attributed to the Company’s addition of~~ Local Government Investment Pool (LGIP) deposits ~~during 2016, which have become a component~~ of ~~the Company’s funding strategy. As of September 30, 2016, the Company’s LGIP deposits amounted to $280,000, compared with $120,000 of those deposits at December 31, 2015.~~
~~Other non-maturity deposits also increased~~$185,030 during the first nine months of ~~2016.~~2017.Non-public funds money market accounts, excluding brokered deposits, increased $90,039, or 33.8%, from December 31, 2016 to September 30, 2017. Noninterest-bearing checking deposits grew ~~$55,375,~~$23,396, or ~~31.3%; money market accounts increased $65,407, or 31.4%; savings deposits increased $7,519, or 17.2%;~~10.0%, and ~~interest-bearing~~non-public funds interest checking accounts, ~~increased $6,141,~~excluding brokered deposits, grew $12,560, or ~~5.6%~~11.0%, respectively, when comparing deposit balances from September 30, ~~2016~~2017 with balances at December 31, ~~2015.~~2016.
The following table shows time deposits in denominations of $100 or more ~~by category~~ based on time remaining until ~~maturity.~~
~~Maturity of non-brokered time deposits of $100 or more~~maturity:

   September 30, 2016    September 30,
2017
Three months or less
   $ 316,713       $ 448,951
Three through six months
   57,739       92,911
Six through twelve months
   59,151       76,147
Over twelve months
   136,297       151,497




Total
   $ 569,900       $ 769,506




Federal Funds Purchased and Repurchase Agreements
As of September 30, ~~2016,~~2017, the Company had ~~$8,500~~$0 in federal funds purchased from correspondent banks compared to ~~$39,825~~$46,805 outstanding as of December 31, ~~2015.~~2016. Securities sold under agreements to repurchase had an outstanding balance of ~~$37,343~~$32,862 as of September 30, ~~2016,~~2017, compared to ~~$61,261~~$36,496 as of December 31, ~~2015.~~2016. Securities sold under agreements to repurchase are financing arrangements that mature daily or within a short period of time. At maturity, the securities underlying the agreements are returned to the Company.
Federal Home Loan Bank Advances
The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of1-4 family residential mortgages and home equity lines of credit. At September 30, ~~2016~~2017 and at December 31, ~~2015,~~2016, advances totaled ~~$162,000~~$337,000 and ~~$57,000,~~$132,000, respectively. ~~The Company strategically added $110,000 in FHLB advances in the third quarter of 2016, replacing brokered deposits that were maturing in the third quarter.~~
At September 30, ~~2016,~~2017, the scheduled maturities and ~~weighted average~~ interest rates of these advances were as follows:

Scheduled Maturities
   Amount    Weighted
Average Rates    Amount    Weighted
Average Rates
2016
   110,000       0.49 %
2017
   10,000       1.27 %    $ 75,000    1.17 %
2018
   7,000       1.61 %    157,000    1.19 %
2019
   35,000       1.30 %    50,000    1.41 %
2020
   55,000    1.72 %








Total
   $ 162,000       0.76 %    $ 337,000    1.31 %








Subordinated Notes
On March 31, 2016, the Company issued $40,000 in aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “March 2016 Notes”) in a public offering to accredited institutional investors. The March 2016 Notes will mature on March 30, 2026 unless redeemed prior to that date. The Company may redeem the March 2016 Notes in whole or in part on or after March 30, 2021, and in whole, but not in part, at any time within 90 days following a “Regulatory Capital Treatment Event”, as defined in the Supplemental Indenture governing the March 2016 Notes. The redemption price for any redemption will be 100% of the principal amount of the March 2016 Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the March 2016 Notes.
~~The March 2016 Notes initially bear interest at 6.875% per year, payable semi-annually in arrears on March 30 and~~At September 30, of each year, beginning on September 30, 2016, and going through March 29, 2021. Thereafter, the March 2016 Notes will bear interest at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus a spread of 5.636%, with interest payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on June 30, 2021.
The sale of the March 2016 Notes initially yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing, which had been used to redeem the shares of Series A Preferred Stock issued to Treasury in connection with2017, the Company’s ~~participation in the SBLF, and to fund future growth~~subordinated notes, net of ~~the Bank.~~
~~The~~ issuance costs, totaled $58,470, compared with $58,337 at December 31, 2016. For more information related to the ~~March 2016 Notes amounted to $1,382 and are being amortized as interest expense over the ten-year term of the March 2016 Notes.~~
~~On June 30, 2016, the Company issued $20,000 in aggregate principal amount of fixed-to-floating rate~~ subordinated Notes due 2026 (the “June 2016 Notes”) in a private offering to certain institutional accredited investors. The June 2016 Notes have a stated maturity of July 1, 2026, and bear interest at a fixed rate of 7.00% per year, from and including June 30, 2016 through June 30, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears on January 1 and July 1 of each year beginning on January 1, 2017. Beginning July 1, 2021 through the maturity date or an early redemption date, the interest rate shall reset quarterly to an interest rate per year equal to the then current three-month LIBOR rate plus 6.04%, computed on the basis of a 360-day yearnotes and the actual number of days elapsed, payable quarterly in arrears. The June 2016 Notes are redeemable, in whole or in part, on or after July 1, 2021 and at any time upon the occurrence of certain events set forth in the June 2016 Notes.
The June 2016 Notes were offered and sold by the Company to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Rule 506 of Regulation D thereunder.
The June 2016 Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries and are not subject to redemption at the option of the holder. Prior to July 1, 2021, the Company may redeem the June 2016 Notes, in whole at any time, or in part from time to time, only under certain limited circumstances set forth in the June 2016 Notes. On or after July 1, 2021, the Company may redeem the June 2016 Notes at its option, in whole at any time, or in part on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the outstanding principal amount of the June 2016 Notes being redeemed, together with any accrued and unpaid interest on the June 2016 Notes being redeemed up to the date of redemption.
Principal and interest on the June 2016 Notes are subject to acceleration only in limited circumstances. The June 2016 Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness and equal with the Company’s previously issued and outstanding March 2016 Notes, initially issued in the aggregate principal amount of $40,000 pursuant to that certain Indenture and that certain Supplemental Indenture, each by and between the Company and U.S. Bank National Association, as Trustee, and each dated March 31, 2016.
The sale of the June 2016 Notes initially yielded net proceeds of approximately $19,660 after deducting the estimated expenses payable by the Company. The net proceeds from the offering of the June 2016 Notes were used to inject capital into the Bank to fund future growth.
~~The~~related issuance costs, ~~related to the June 2016 Notes amounted to $404 and are being amortized as interest expense over the ten-year term of the June 2016 Notes.~~
For regulatory capital purposes, the March 2016 Notes and the June 2016 Notes are treated as Tier 2 capital, subject to certain limitations and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated inplease see Note 710 of the consolidated financial statements.
Liquidity
Liquidity is defined as the ability ~~of the Bank~~ to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely ~~basis and the ability of the Company to fund the servicing of its subordinated notes.~~basis.
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the Company’s needs. ~~The Company’s~~Our source of funds to pay interest on ~~the previously discussed~~our subordinated notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash balances held by the Company. Under the terms of the informal agreement with the Federal Reserve Bank of Atlanta (the “Reserve Bank”) and the Tennessee Department of Financial Institutions (“TDFI”), described in “Other Events” ~~in Management’s Discussion and Analysis and in “ITEM 1A. RISK FACTORS” under “PART II OTHER INFORMATION,”~~below, the Bank is required to receive prior written approval from its regulatory agencies to pay dividends to the Company.
Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified asavailable-for-sale, and sales of brokered deposits. As of September 30, ~~2016, $670,756~~2017, $980,737 of the investment securities portfolio was classified asavailable-for-sale and is reported at fair value on the consolidated balance sheet. Another ~~$235,050~~$217,312 of the portfolio was classified asheld-to-maturity and is reported at amortized cost. Approximately ~~$742,828~~$944,463 of the total ~~$905,806~~$1,198,049 investment securities portfolio on hand at September 30, ~~2016,~~2017, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.
~~Shareholders’~~ Equity
As of September 30, ~~2016,~~2017, the Company’s ~~shareholders’~~ equity was ~~$209,644,~~$303,697, as compared with ~~$188,816~~$270,361 as of December 31, ~~2015.~~2016. The increase in ~~shareholders’~~ equity was primarily due to the Company’s earnings of ~~$20,262~~$25,697 in the first nine months of ~~2016,~~2017, the increase in ~~accumulated~~common stock of $3,288 during the first nine months of 2017, and the $4,359 increase in other comprehensive income from the increase in the valuation of $7,521, exercises of the Company’s warrants and stock options of $1,436, and $1,817 related to the Company’s share-based compensation. These were offset by a $10,000 reduction in preferred stock due to the Company’s redemption of the Series A Preferred Stock related to the SBLF on March 25, 2016 and due to net divestments of $185 in conjunction with the Company’s 401(k) employer match.available for sale securities.
Effects of Inflation and Changing Prices
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities.
Off Balance Sheet Arrangements
The Company generally does not have anyoff-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At September 30, ~~2016,~~2017, the Company had unfunded loan commitments outstanding of ~~$67,489,~~$43,611, unused lines of credit of ~~$448,542,~~$563,178, and outstanding standby letters of credit of ~~$23,995.~~$41,523.
GAAP Reconciliation and Management Explanation ofNon-GAAP Financial Measures
Some of the financial data included in our selected historical consolidated financial information are not measures of financial performance recognized by GAAP. Our management uses thesenon-GAAP financial measures in its analysis of our performance:

“Common shareholders’ equity” is defined as total shareholders’ equity at end of period less the liquidation preference value of the preferred stock;

“Tangible common shareholders’ equity” is common shareholders’ equity less goodwill and other intangible assets;

“Total tangible assets” is defined as total assets less goodwill and other intangible assets;

“Other intangible assets” is defined as the sum of core deposit intangible and SBA servicing rights;

“Tangible book value per share” is defined as tangible common shareholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes fromperiod-to-period in book value per share exclusive of changes in intangible assets;

“Tangible common shareholders’ equity ratio” is defined as the ratio of tangible common shareholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes fromperiod-to period in common equity and total assets, each exclusive of changes in intangible assets;

“Return on Average Tangible Common Equity” is defined as net income available to common shareholders divided by average tangible common shareholders’ equity; and

“Efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest ~~income;~~income.
“Adjusted yield on loans” is our yield on loans after excluding loan accretion from our acquired loan portfolio. Our management uses this metric to better assess the impact of purchase accounting on our yield on loans, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet;
~~“Net interest margin” is defined as annualized net interest income divided by average interest-earning assets for the period;~~
“Adjusted net interest margin” is net interest margin after excluding loan accretion from the acquired loan portfolio and premiums for acquired time deposits. Our management uses this metric to better assess the impact of purchase accounting on net interest margin, as the effect of loan discount accretion and accretion of net discounts and premiums related to deposits is expected to decrease as the acquired loans and deposits mature or roll off of our balance sheet.
We believe thesenon-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that ournon-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable tonon-GAAP financial measures that other companies use.
The following reconciliation table provides a more detailed analysis of thesenon-GAAP financial measures:

   As of or for the Three Months Ended
(Amounts in thousands, except share/
per share data and percentages)
   Sept 30,
2016 Jun 30,
2016 Mar 31,
2016 Dec 31,
2015 Sept 30,
2015
Total shareholders’ equity
   $ 209,644    $ 204,276    $ 191,910    $ 188,816    $ 187,610
Less: Preferred stock
   —   —   —   10,000    10,000


Total common shareholders’ equity
   209,644    204,276    191,910    178,816    177,610
Common shares outstanding
   10,757,483    10,689,481    10,586,592    10,571,377    10,524,630


Book value per share
   $ 19.49    $ 19.11    $ 18.13    $ 16.92    $ 16.88


Total shareholders’ equity
   $ 209,644    $ 204,276    $ 191,910    $ 188,816    $ 187,610
Less: Preferred stock
   —   —   —   10,000    10,000


Total common shareholders’ equity
   209,644    204,276    191,910    178,816    177,610
Less: Goodwill and other intangibles
   10,774    10,916    11,070    11,231    11,373


Tangible common shareholders’ equity
   $ 198,870    $ 193,360    $ 180,840    $ 167,585    $ 166,237
Common shares outstanding
   10,757,483    10,689,481    10,586,592    10,571,377    10,524,630


Tangible book value per share
   $ 18.49    $ 18.09    $ 17.08    $ 15.85    $ 15.80


Average total shareholders’ equity
   206,009    194,385    194,383    188,460    181,540
Less: Average preferred stock
   —   —   9,231    10,000    10,000
Less: Average goodwill and other intangibles
   10,885    11,006    11,165    11,309    11,469


Average tangible common shareholders’ equity
   $ 195,154    $ 183,379    $ 173,987    $ 167,151    $ 160,071


Net income available to common shareholders
   $ 7,030    $ 6,999    $ 6,210    $ 4,639    $ 5,125
Average tangible common equity
   195,154    183,379    173,987    167,151    160,071


Return on average tangible common equity
   14.33 % 15.35 % 14.36 % 11.01 % 12.70 %


Efficiency Ratio:

Net interest income
   $ 20,675    $ 19,934    $ 19,276    $ 17,195    $ 16,736
Noninterest income
   4,876    4,626    3,085    2,992    3,798


Operating revenue
   25,551    24,560    22,361    20,187    20,534
Expense

Total noninterest expense
   13,708    12,913    11,831    11,094    10,853


Efficiency ratio
   53.65 % 52.58 % 52.91 % 54.96 % 52.85 %


Annualized interest and fees on loans(1)
   $ 80,329    $ 76,136    $ 71,358    $ 61,506    $ 58,495
Average loans
   1,620,347    1,497,556    1,364,467    1,232,218    1,044,520


Yield on loans
   4.96 % 5.08 % 5.23 % 4.99 % 5.60 %


Annualized accretion income on acquired loans
   $ 841    $ 1,108    $ 1,447    $ 1,409    $ 4,374
Less: Effect of accretion income on acquired loans
   (0.05 %) (0.07 %) (0.11 %) (0.11 %) (0.42 %)


Adjusted yield on loans
   4.91 % 5.01 % 5.12 % 4.88 % 5.18 %


⁽¹⁾ ~~This item does not include tax-equivalent adjustments.~~

As of or for the Three Months Ended
(Amounts in thousands, except share/
per share data and percentages)
Sept 30,
2016 Jun 30,
2016 Mar 31,
2016 Dec 31,
2015 Sept 30,
2015
Annualized net interest income(1)
$ 82,251    $ 80,174    $ 77,528    $ 68,219    $ 66,398
Average earning assets
2,576,294    2,404,060    2,177,905    2,009,481    1,846,372

Net interest margin
3.19 % 3.33 % 3.56 % 3.39 % 3.60 %

Annualized accretion income on acquired loans
$ 841    $ 1,108    $ 1,447    $ 1,409    $ 4,374

Less: Effect of accretion income on acquired loans
(0.03 %) (0.05 %) (0.07 %) (0.07 %) (0.24 %)

Annualized premium amortization of acquired deposits
$ —   $ —   $ —   $ —   $ 4

Less: Effect of premium amortization of acquired deposits
(0.00 %) (0.00 %) (0.00 %) (0.00 %) (0.00 %)

Adjusted net interest margin
3.16 % 3.28 % 3.49 % 3.32 % 3.36 %

⁽¹⁾ ~~This item does not include tax-equivalent adjustments.~~
(Amounts in thousands, except share/per share data and
percentages)
   As of or for the Three Months Ended
   Sept 30,
2017 Jun 30,
2017 Mar 31,
2017 Dec 31,
2016 Sept 30,
2016
Total shareholders’ equity
   $ 303,594 $ 292,918 $ 278,407 $ 270,258 $ 209,644
Less: Preferred stock
   —   —   —   —   —


Total common shareholders’ equity
   303,594 292,918 278,407 270,258 209,644
Less: Goodwill and other intangible assets
   10,294 10,356 10,477 10,633 10,774


Tangible common shareholders’ equity
   $ 293,300 $ 282,562 $ 267,930 $ 259,625 $ 198,870
Common shares outstanding
   13,209,055 13,181,501 13,064,110 13,036,954 10,757,483


Tangible book value per share
   $ 22.20 $ 21.44 $ 20.51 $ 19.91 $ 18.49


Average total common equity
   298,088 285,659 $ 272,713 $ 235,984 $ 206,009
Less: Average Goodwill and other intangible assets
   10,321 10,427 10,565 10,719 10,855


Average tangible common shareholders’ equity
   $ 287,767 $ 275,232 $ 262,148 $ 225,265 $ 195,154
Net income available to common shareholders
   8,889 8,866 7,934 7,179 7,137
Average tangible common equity
   287,767 275,232 262,148 225,265 195,154


Return on average tangible common equity
   12.26 % 12.92 % 12.27 % 12.68 % 14.55 %


Efficiency Ratio:

Net interest income
   $ 24,326 $ 24,469 $ 23,643 $ 21,699 $ 20,675
Noninterest income
   3,569 3,880 4,008 2,553 4,876


Operating revenue
   27,895 28,349 27,651 24,252 25,551
Expense

Total noninterest expense
   15,278 15,283 14,276 13,229 13,708


Efficiency ratio
   54.77 % 53.91 % 51.63 % 54.55 % 53.65 %


FRANKLIN FINANCIAL NETWORK, INC.
SUMMARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(Amounts in thousands, except per share data and percentages)

   As of and for the three months ended    As of and for the three months ended
   Sept 30,
2016    Jun 30,
2016    Mar 31,
2016    Dec 31,
2015    Sept 30,
2015    Sept 30, 2017 Jun 30, 2017    Mar 31, 2017    Dec 31, 2016    Sept 30, 2016
Income Statement Data ($):

Income Statement Data ($):


Interest income
   25,724       24,286       22,561       20,081       19,301       33,780 33,011    30,541    27,336    25,724
Interest expense
   5,049       4,352       3,285       2,886       2,565       9,454 8,542    6,898    5,637    5,049
Net interest income
   20,675       19,934       19,276       17,195       16,736       24,326 24,469    23,643    21,699    20,675
Provision for loan losses
   1,392       1,567       1,136       1,876       1,724       590 573    1,855    1,145    1,392
Noninterest income
   4,876       4,626       3,085       2,992       3,798       3,569 3,880    4,008    2,553    4,876
Noninterest expense
   13,708       12,913       11,831       11,094       10,853       15,278 15,283    14,276    13,229    13,708
Net Income before taxes
   10,451       10,080       9,394       7,217       7,957
Provision for taxes
   3,421       3,081       3,161       2,553       2,807
Net income before taxes
   12,027 12,493    11,520    9,878    10,451
Income tax expense⁽¹⁾
   3,138 3,619    3,586    2,699    3,314
Net income(1)
   7,030       6,999       6,233       4,664       5,150       8,889 8,874    7,934    7,179    7,137
Earnings before interest and taxes
   15,500       14,432       12,679       10,103       10,522       21,481 21,035    18,418    15,515    15,500
Net income available to common shareholders
   7,030       6,999       6,210       4,639       5,125       8,889 8,866    7,934    7,179    7,137
Weighted average diluted common shares
   13,773,539 13,701,762    13,657,357    12,473,725    11,415,422
Earnings per share, basic
   0.66       0.66       0.59       0.44       0.49       0.67 0.68    0.61    0.61    0.67
Earnings per share, diluted
   0.62       0.62       0.56       0.41       0.46       0.65 0.64    0.58    0.58    0.63
Profitability (%)

Return on average assets
   1.06       1.14       1.12       0.89       1.07       1.03 1.03    0.99    1.00    1.07
Return on average equity
   13.58       14.48       12.90       9.82       11.25       11.83 12.46    11.80    12.10    13.78
Return on average tangible common equity
   14.33       15.35       14.36       11.01       12.70
Efficiency ratio
   53.65       52.58       52.91       54.96       52.85
Net Interest margin (1)
   3.19       3.33       3.56       3.39       3.60
Return on average tangible common equity⁽³⁾
   12.26 12.92    12.27    12.68    14.55
Efficiency ratio⁽³⁾
   54.77 53.91    51.63    54.55    53.65
Net interest margin⁽⁴⁾
   3.05 3.08    3.18    3.27    3.34
Balance Sheet Data ($):

Loans (including HFS)
   1,680,877       1,567,537       1,433,623       1,317,905       1,138,492       2,127,753 2,023,679    1,962,397    1,797,291    1,680,877
Loan loss reserve
   15,590       14,253       12,676       11,587       9,744       19,944 18,689    18,105    16,553    15,590
Cash
   55,749       72,050       62,054       52,394       47,658       155,842 96,741    114,664    90,927    56,804
Securities
   905,806       909,531       746,781       734,038       756,554       1,198,049 1,243,406    1,299,349    983,649    905,806
Goodwill
   9,124       9,124       9,124       9,124       9,124       9,124 9,124    9,124    9,124    9,124
Intangible assets
   1,650       1,792       1,946       2,107       2,249
Intangible assets (Sum of core deposit intangible and SBA servicing rights)
   1,170 1,232    1,353    1,509    1,650
Assets
   2,703,195       2,607,101       2,300,094       2,167,792       2,002,538       3,565,278 3,443,593    3,454,788    2,943,189    2,703,195
Deposits
   2,217,954       2,249,735       1,953,573       1,814,039       1,714,594       2,824,825 2,754,425    2,817,212    2,391,818    2,217,954
Liabilities
   2,493,551       2,402,825       2,108,184       1,978,976       1,814,928       3,261,581 3,150,572    3,176,278    2,672,828    2,493,551
Total equity
   209,644       204,276       191,910       188,816       187,610       303,697 293,021    278,510    270,361    209,644
Common equity
   209,644       204,276       191,910       178,816       177,610       303,594 292,918    278,407    270,258    209,644
Tangible common equity
   198,870       193,360       180,840       167,585       166,237
Tangible common equity⁽³⁾
   293,300 282,562    267,930    259,625    198,870
Asset Quality (%)

Nonperforming loans/ total loans (2)
   0.10       0.10       0.12       0.25       0.07       0.14 0.19    0.21    0.35    0.10
Nonperforming assets / total loans(2) + foreclosed assets
   0.10       0.12       0.14       0.27       0.09
Loan loss reserve / loans(2)
   0.94       0.92       0.89       0.89       0.87
Nonperforming assets / (total loans⁽²⁾ + foreclosed assets)
   0.21 0.26    0.27    0.35    0.10
Loan loss reserve / total loans⁽²⁾
   0.94 0.93    0.93    0.93    0.94
Net charge-offs / average loans
   0.01       0.00       0.01       0.01       0.00       (0.13 ) 0.00    0.07    0.04    0.01
Capital (%)

Tangible common equity to tangible assets
   7.39       7.45       7.90       7.77       8.35
Tangible common equity to tangible assets⁽³⁾
   8.25 8.23    7.78    8.85    7.39
Leverage ratio
   7.15       7.33       7.69       8.48       8.90       8.58 8.21    8.36    9.28    7.15
Common equity Tier 1 ratio
   9.09       9.22       9.60       10.08       11.03
Common Equity Tier 1 ratio
   11.58 11.54    11.32    11.75    9.09
Tier 1 risk-based capital ratio
   9.09       9.22       9.60       10.51       11.52       11.58 11.54    11.32    11.75    9.09
Total risk-based capital ratio
   12.66       12.93       12.49       11.21       12.18       14.68 14.69    14.51    15.09    12.66

⁽¹⁾ ~~Net interest margins shown~~This item reflects the retrospective adoption of Accounting Standard Update2016-09 during fourth quarter 2016, which impacted previously reported quarterly earnings and/or earnings per share (“EPS”) in ~~the table above do not include tax-equivalent adjustments.~~2016, as follows: third quarter 2016 – decreased income tax expense by $107 and increased diluted EPS by $0.01.
⁽²⁾ Total loans in this ratio exclude loans held for sale.
⁽³⁾ SeeNon-GAAP table in the preceding pages.
⁽⁴⁾ Net interest margins shown in the table above includetax-equivalent adjustments to adjust interest income ontax-exempt loans andtax-exempt investment securities to a fully taxable basis.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the effectiveness of our Registration Statement on FormS-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have more than ~~$1.0~~$1.07 billion in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act; or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion innon-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply tonon-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or revised standard. This election is irrevocable.
Other Events
On October 18, 2017, the Bank received regulatory approval from the Reserve Bank to open a new branch at 1605 Medical Center Parkway, Murfreesboro, Tennessee. The TDFI previously approved this new branch on July 14, 2017. The Bank plans to open this new branch during the fourth quarter of 2017.
On November 3, 2016, the Bank entered into an informal agreement with the ~~Federal~~ Reserve Bank ~~of Atlanta (“Reserve Bank”)~~ and the ~~Tennessee Department of Financial Institutions (“TDFI”)~~TDFI in the form of a Memorandum of Understanding (“MOU”). Under the terms of the MOU, the Bank agreed, among other things, to (1) enhance and periodically update its Commercial Real Estate (“CRE”) concentration risk management policy; (2) augment credit risk management practices; and (3) enhance capital and liquidity plans. The Bank has also agreed that it will seek prior written approval of the Reserve Bank and the TDFI to pay dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s subordinated debt. In addition, the Company currently may not make interest payments on its subordinated debt without prior written approval from its primary regulatory agencies.
The Company has also ~~expects to execute~~executed an agreement with the Board of Governors of the Federal Reserve System (the “Agreement”) under section 4(m)(2) of the Bank Holding Company Act, which ~~will include~~includes specific actions designed to address the Bank’s risk profile and to strengthen the underlying condition of the Bank. Until the Bank and Company satisfy the requirements of the MOU and the Agreement, any plans for business combinations or location expansion will be limited and subject to prior written approval from the appropriate regulatory body.
Management believes the effect of these regulatory actions will not have a material impact on the Bank’s ability to continue to serve its customers and communities. In addition, the company’s ongoing investment in its people and technology has and will continue to support solid growth, asset quality measures, and safety and soundness standards.
~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.~~
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.
Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing interest rates using various rate change (shock) scenarios. The Company’s rate sensitivity position has an important impact on earnings. Senior management monitors the Company’s rate sensitivity position throughout each month, and then the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.
Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a12-month time period ended September 30, ~~2016,~~2017, net interest income was estimated to decrease ~~1.14%~~3.02% and ~~4.20%~~7.13% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to increase 1.26% and decrease ~~5.71% and 16.91%~~5.25% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.
The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of September 30, ~~2016.~~2017.

Projected Interest Rate
Change

Net Interest
Income

Net Interest Income $
Change from Base

% Change from Base
   Net Interest
Income    Net Interest Income $
Change from Base    % Change
from Base
-200 60,738 -12,360 -16.91%    90,629    (5,024 )    (5.25 %)
-100 68,923 -4,175 -5.71%    96,857    1,205    1.26 %
Base 73,098 —   0.00%    95,652    —      0.00 %
+100 72,266 -832 -1.14%    92,762    (2,890 )    (3.02 %)
+200 70,030 -3,067 -4.20%    88,832    (6,820 )    (7.13 %)
+300 67,468 -5,630 -7.70%    84,852    (10,800 )    (11.29 %)
+400 65,627 -7,470 -10.22%    81,364    (14,288 )    (14.94 %)
The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any management action that might be taken in responding to or anticipating changes in interest rates. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.
~~ITEM 4. CONTROLS AND PROCEDURES.~~
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule13a-15(e) under the Exchange Act) as of September 30, ~~2016,~~2017, the end of the fiscal quarter covered by this Quarterly Report on Form10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
~~ITEM 1. LEGAL PROCEEDINGS.~~
ITEM 1. LEGAL PROCEEDINGS.
Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.
~~ITEM 1A. RISK FACTORS~~
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in our Annual Report on Form10-K filed with the SEC on March 15, 2016, as supplemented by the risk factors disclosed in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, other than the additional disclosure of the risk factors listed below.
We are Required to Comply with the Terms of a Memorandum of Understanding (“MOU”) that the Bank has Entered into with the Reserve Bank and the TDFI, and Lack of Compliance Could Result in Additional Regulatory Actions.
On November 3, 2016, the Bank entered into an MOU with the Reserve Bank and the TDFI. Under the terms of the MOU, the Bank agreed, among other things, to enhance its policies, practices and processes to reflect the Bank’s increasingly complex business model and risk profile. The Bank has also agreed that it will seek prior written approval of the Reserve Bank and the TDFI to pay dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s subordinated debt.
The MOU will remain in effect until stayed, modified, terminated or suspended by the Reserve Bank and the TDFI. Management has been actively implementing plans and processes to comply with the requirements of the MOU. The Reserve Bank and the TDFI may determine in their sole discretion that the matters covered by the MOU have not been addressed satisfactorily, which could result in limitations on our business, including restricting growth and requiring increased capital, and negatively affect our ability to implement our business plan or the value of our common stock, as well as our financial condition, liquidity and results of operations.
The Rights of Our Common Shareholders Are Subordinate to the Rights of the Holders of Our Debt Securities and May Be Subordinate to the Holders of Any Class of Preferred Stock That We May Issue in the Future
On March 31, 2016, we completed the public offering of $40,000,000 aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “March 2016 Notes”). The net proceeds from the offering of the March 2016 Notes was used, in part, to pay down a line of credit, which we used on March 25, 2016 to redeem 10,000 outstanding shares of our Series A Preferred Stock issued to the Treasury pursuant to our participation in the Small Business Lending Fund program.
On June 30, 2016, we completed the private offering of $20,000,000 aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “June 2016 Notes”). The net proceeds from the offering of the June 2016 Notes were used to inject capital into Franklin Synergy Bank, the Company’s primary subsidiary, to fund growth and for other corporate purposes.16, 2017.
Upon our voluntary or involuntary dissolution, liquidation, or winding up of affairs, holders of shares of our common stock will not receive a distribution, if any, until after the payment in full of our debts and other liabilities, and the payment of any accrued but unpaid dividends and any liquidation preference on outstanding shares of preferred stock. Our Board of Directors has the authority to issue in the aggregate up to 1,000,000 shares of preferred stock and to determine the terms of each issue of preferred stock without shareholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will be senior to our common stock and could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital-raising efforts is uncertain. Thus, common shareholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
~~The Amount of Interest Payable on the March 2016 Notes Will Vary Beginning on March 30, 2021~~
The interest rate on the March 2016 Notes will vary beginning on March 30, 2021. From and including the date of issuance of the March 2016 Notes, to but excluding March 30, 2021, the March 2016 Notes will bear interest at an initial rate of 6.875% per annum. From and including March 30, 2021 and thereafter, the March 2016 Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination, plus a spread of 5.636%. If interest rates rise, the cost of the March 2016 Notes may increase, thereby negatively affecting our net income.
~~The Amount of Interest Payable on the June 2016 Notes Will Vary Beginning on July 1, 2021~~
The interest rate on the June 2016 Notes will vary beginning on July 1, 2021. From and including the date of issuance of the June 2016 Notes, to and including June 30, 2021, the June 2016 Notes will bear interest at an initial rate of 7.00% per annum. From and including July 1, 2021 and thereafter, the June 2016 Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination, plus a spread of 6.04%. If interest rates rise, the cost of the June 2016 Notes may increase, thereby negatively affecting our net income.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~
~~Shares of the Company’s common stock were issued during the third quarter of 2016 pursuant to the exercise of warrants and options issued by the Company, as follows:~~None.

Date of Sale
   Number of Shares of
Common Stock Sold
Type of Issuance
   Price Per Share    Aggregate Price
07/22/2016
   500       Warrants Exercised    $ 12.00       $ 6,000.00
   500       Warrants Exercised    $ 12.00       $ 6,000.00
   125       Warrants Exercised    $ 12.00       $ 1,500.00
07/28/2016
   4,000       Options Exercised    $ 10.00       $ 40,000.00
   6,000       Options Exercised    $ 11.75       $ 70,500.00
   1,296       Options Exercised    $ 10.00       $ 12,960.00
   600       Options Exercised    $ 13.00       $ 7,800.00
   480       Options Exercised    $ 13.50       $ 6,480.00
   290       Options Exercised    $ 20.69       $ 6,000.10
08/03/2016
   401       Options Exercised    $ 8.57       $ 3,436.57
08/04/2016
   877       Options Exercised    $ 8.57       $ 7,515.89
08/09/2016
   7,500       Options Exercised    $ 10.00       $ 75,000.00
   781       Options Exercised    $ 10.00       $ 7,810.00
   1,719       Options Exercised    $ 10.00       $ 17,190.00
08/10/2016
   50       Warrants Exercised    $ 12.00       $ 600.00
08/12/2016
   7,500       Options Exercised    $ 10.00       $ 75,000.00
   2,313       Options Exercised    $ 11.75       $ 27,177.75
   2,225       Options Exercised    $ 10.00       $ 22,250.00
   3,500       Options Exercised    $ 10.50       $ 36,750.00
   4,500       Options Exercised    $ 12.00       $ 54,000.00
   1,229       Options Exercised    $ 13.00       $ 15,977.00
   819       Options Exercised    $ 13.50       $ 11,056.50
   438       Options Exercised    $ 20.69       $ 9,062.22
08/16/2016
   1,141       Options Exercised    $ 11.75       $ 13,406.75
   652       Options Exercised    $ 10.00       $ 6,520.00

Date of Sale
   Number of Shares of
Common Stock Sold
Type of Issuance
   Price Per Share    Aggregate Price
   1,139       Options Exercised    $ 10.50       $ 11,959.50
08/17/2016
   839       Options Exercised    $ 10.00       $ 8,390.00
08/18/2016
   1,842       Options Exercised    $ 10.00       $ 18,420.00
   12       Options Exercised    $ 10.50       $ 126.00
08/25/2016
   2,680       Options Exercised    $ 11.75       $ 31,490.00
   60       Options Exercised    $ 11.75       $ 705.00
   398       Options Exercised    $ 10.50       $ 4,179.00
   106       Options Exercised    $ 20.69       $ 4,179.00
08/26/2016
   2,526       Options Exercised    $ 10.50       $ 26,523.00
08/29/2016
   839       Options Exercised    $ 10.00       $ 8,390.00
08/30/2016
   4,569       Options Exercised    $ 11.75       $ 53,685.75
09/01/2016
   125       Warrants Exercised    $ 12.00       $ 1,500.00
09/06/2016
   839       Options Exercised    $ 10.00       $ 8,390.00
   838       Options Exercised    $ 10.00       $ 8,380.00
09/07/2016
   1,000       Options Exercised    $ 10.00       $ 10,000.00
09/08/2016
   1,000       Options Exercised    $ 10.00       $ 10,000.00
   1,000       Options Exercised    $ 10.00       $ 10,000.00
   10       Options Exercised    $ 10.00       $ 100.00
   990       Options Exercised    $ 10.00       $ 9,900.00
   125       Warrants Exercised    $ 12.00       $ 1,500.00
09/12/2016
   1,000       Options Exercised    $ 10.00       $ 10,000.00
09/13/2016
   6,196       Options Exercised    $ 10.50       $ 65,058.00
09/16/2016
   500       Warrants Exercised    $ 12.00       $ 6,000.00
   750       Warrants Exercised    $ 12.00       $ 9,000.00
09/20/2016
   1,278       Options Exercised    $ 8.57       $ 10,952.46
   125       Warrants Exercised    $ 12.00       $ 1,500.00
Neither the exercises of the warrants and options nor their original issuances involved any underwriters, underwriting discounts or commissions, or any public offering, and the Company believes that such transactions were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated thereunder) as transactions by an issuer not involving a public offering.
~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES.~~
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
~~ITEM 4. MINE SAFETY DISCLOSURES.~~
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
~~ITEM 5. OTHER INFORMATION.~~
ITEM 5. OTHER INFORMATION.
None.
~~ITEM 6. EXHIBITS~~
ITEM 6. EXHIBITS

Exhibit
No.
   Description
    2.1 Amendment No. 3 to the Agreement and Plan of Reorganization and Bank Merger (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on October 5, 2017)
10.1    ~~Standard Form of~~Triple Net Office Lease Agreement, ~~Between Owner and Contractor,~~ by and between Petra Real Estate Partners II, LLC and Franklin Synergy Bank ~~and Century Skanska~~ (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on July ~~13, 2016)~~ 27, 2017)
  10.2 Lease Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 27, 2017)
  31.1*    Certification of Chief Executive Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
  31.2*    Certification of Chief Financial Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
  32*    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101*    Interactive Data Files.

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

FRANKLIN FINANCIAL NETWORK, INC.
November 9, ~~2016~~2017 By:
/s/ Sarah Meyerrose
Sarah Meyerrose

On behalf of the registrant and as Chief Financial Officer
(Principal Financial Officer)
~~EXHIBIT INDEX~~
~~Exhibit~~
~~No.~~
~~Description~~
  ~~10.1~~ Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2016)
  31.1* ~~Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).~~
  31.2* ~~Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).~~
  32* ~~Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).~~
101* ~~Interactive Data Files.~~
* ~~Filed herewith~~


	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2016
Available for sale
Mortgage-backed securities: residential	$	36,585	$	(269	)	$	13,659	$	(85	)	$	50,244	$	(354	)
State and political subdivisions		43,314		(334	)		—		—			43,314		(334	)

Total available for sale	$	79,899	$	(603	)	$	13,659	$	(85	)	$	93,558	$	(688	)


	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
Loans that are not PCI loans
Construction and land development	$	474,255		$	372,767		$	514,934		$	489,562
Commercial real estate:
Nonfarm, nonresidential		403,382			353,268			565,536			458,569
Other		26,866			10,955			33,310			38,571
Residential real estate:
Closed-end 1-4 family		228,672			162,933
Closed-end1-4 family								373,536			254,474
Other		142,374			112,001			158,577			150,515
Commercial and industrial		372,784			283,888			464,747			376,476
Consumer and other		3,458			6,577			3,933			3,359

Loans before net deferred loan fees		1,651,791			1,302,389			2,114,573			1,771,526
Deferred loan fees, net		(820	)		(2,476	)		(1,201	)		(793	)

Total loans that are not PCI loans		1,650,971			1,299,913			2,113,372			1,770,733

PCI loans
Construction and land development	$	81		$	78
Commercial real estate:
Nonfarm, nonresidential		576			1,460
Other		—			—
Residential real estate:
Closed-end 1-4 family		497			562
Other		—			1
Commercial and industrial		1,933			1,812
Consumer and other		—			—

Total PCI loans		3,087			3,913			2,558			2,859

Allowance for loan losses		(15,590	)		(11,587	)		(19,944	)		(16,553	)

Total loans, net of allowance for loan losses	$	1,638,468		$	1,292,239		$	2,095,986		$	1,757,039


	Construction and Land Development			Commercial Real Estate		Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Three Months Ended September 30, 2016
Allowance for loan losses:
Beginning balance	$	3,624		$	3,865	$	2,060		$	4,655		$	49		$	14,253
Provision for loan losses		427			43		451			455			16			1,392
Loans charged-off		(11	)		—		(40	)		—			(19	)		(70	)
Recoveries		—			—		13			—			2			15

Total ending allowance balance	$	4,040		$	3,908	$	2,484		$	5,110		$	48		$	15,590

Three Months Ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	2,567		$	2,321	$	1,739		$	1,324		$	65		$	8,016
Provision for loan losses		461			135		(71	)		1,253			(54	)		1,724
Loans charged-off		—			—		(15	)		(15	)		(33	)		(63	)
Recoveries		—			—		6			—			61			67

Total ending allowance balance	$	3,028		$	2,456	$	1,659		$	2,562		$	39		$	9,744


	Unpaid Principal Balance^*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
September 30, 2016
September 30, 2017
With no allowance recorded:
Construction and land development							$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential	$	2,421	$	835	$	—		—		—		—
Residential real estate:
Closed-end 1-4 family		238		238		—
Closed-end1-4 family								—		—		—
Other		832		832		—		116		116		—
Commercial and industrial		19		19		—		92		92		—
Consumer and other		—		—		—		—		—		—

Subtotal		3,510		1,924		—		208		208		—
With an allowance recorded:
Commercial and industrial		490		490		115		2,998		2,998		1,011

Subtotal		490		490		115		2,998		2,998		1,011

Total	$	4,000	$	2,414	$	115	$	3,206	$	3,206	$	1,011

December 31, 2015
December 31, 2016
With no allowance recorded:
Construction and land development	$	1,943	$	1,943	$	—	$	1,275	$	1,275	$	—
Commercial real estate:
Nonfarm, nonresidential		2,495		908		—		4,423		2,836		—
Residential real estate:
Closed-end 1-4 family		476		476		—
Closed-end1-4 family								2,069		2,069		—
Other		709		709		—		121		121		—
Commercial and industrial		21		21		—		934		934		—

Subtotal		5,644		4,057		—		8,822		7,235		—

With an allowance recorded:
Commercial and industrial		113		113		113		2,864		2,674		1,024

Subtotal		113		113		113		2,864		2,674		1,024

Total	$	5,757	$	4,170	$	113	$	11,686	$	9,909	$	1,024


^* Principal balance before partial charge-off.


	Nonaccrual		Loans Past Due Over 90 Days		Nonaccrual		Loans Past Due Over 90 Days
September 30, 2016
Construction and land development	$	—	$	149
Commercial real estate:
Nonfarm, nonresidential		835		—
September 30, 2017
Residential real estate:
Closed-end1-4 family					$	—	$	262
Other		123		—		116		—
Commercial and industrial		490		—		2,466		16

Total	$	1,448	$	149	$	2,582	$	278

December 31, 2015
December 31, 2016
Construction and land development	$	—	$	1,943	$	—	$	1,950
Commercial real estate:
Nonfarm, nonresidential		835		—		835		—
Residential real estate:
Closed-end 1-4 family		41		435
Closed-end1-4 family						—		452
Other						121		—
Commercial and industrial		32		—		2,674		150

Total	$	908	$	2,378	$	3,630	$	2,552


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		PCI Loans		Total
September 30, 2016
Construction and land development	$	1,950	$	—	$	149	$	2,099	$	472,156	$	81	$	474,336
Commercial real estate:
Nonfarm, nonresidential		79		—		835		914		402,468		576		403,958
Other		—		—		—		—		26,866		—		26,866
Residential real estate:
Closed-end 1-4 family		11		—		—		11		228,661		497		229,169
Other		714		—		123		837		141,537		—		142,374
Commercial and industrial		521		875		490		1,886		370,898		1,933		374,717
Consumer and other		—		—		—		—		3,458		—		3,458

	$	3,275	$	875	$	1,597	$	5,747	$	1,646,044	$	3,087	$	1,654,878


	Pass		Special Mention		Substandard		Total
September 30, 2016
Construction and land development	$	472,980	$	—	$	1,356	$	474,336
Commercial real estate:
Nonfarm, nonresidential		395,852		1,791		6,315		403,958
Other		26,866		—		—		26,866
Residential real estate:
Closed-end 1-4 family		228,144		—		1,025		229,169
Other		141,305		—		1,069		142,374
Commercial and industrial		368,860		—		5,857		374,717
Consumer and other		3,458		—		—		3,458

	$	1,637,465	$	1,791	$	15,622	$	1,654,878


	Sept 30, 2016			Dec 31, 2015
Contractually required principal and interest	$	4,276		$	5,618
Non-accretable difference		(321	)		(352	)

Cash flows expected to be collected		3,955			5,266
Accretable yield		(868	)		(1,353	)

Carrying value of acquired loans		3,087			3,913
Allowance for loan losses		—			(9	)

Carrying value less allowance for loan losses	$	3,087		$	3,904


Activity during the three month period ended September 30, 2016	Jun 30, 2016			Effect of Acquisitions		Income Accretion		All other Adjustments			Sep 30, 2016
Contractually required principal and interest	$	4,462		$	—	$	—	$	(186	)	$	4,276
Non-accretable difference		(319	)		—		—		(2	)		(321	)

Cash flows expected to be collected		4,143			—		—		(188	)		3,955
Accretable yield		(1,067	)		—		115		84			(868	)

Carrying value of acquired loans	$	3,076		$	—	$	115	$	(104	)	$	3,087


Activity during the three month period ended September 30, 2015	Jun 30, 2015			Effect of Acquisitions		Income Accretion		All other Adjustments			Sep 30, 2015
Contractually required principal and interest	$	6,000		$	—	$	—	$	(128	)	$	5,872
Non-accretable difference		(973	)		—		839		(173	)		(307	)

Cash flows expected to be collected		5,027			—		839		(301	)		5,565
Accretable yield		(749	)		—		447		(1,350	)		(1,652	)

Carrying value of acquired loans	$	4,278		$	—	$	1,286	$	(1,651	)	$	3,913


Activity during the nine month period ended September 30, 2016	Dec 31, 2015			Effect of Acquisitions		Income Accretion		All other Adjustments			Sep 30, 2016
Contractually required principal and interest	$	5,618		$	—	$	—	$	(1,342	)	$	4,276
Non-accretable difference		(352	)		—		—		31			(321	)

Cash flows expected to be collected		5,266			—		—		(1,311	)		3,955
Accretable yield		(1,353	)		—		444		41			(868	)

Carrying value of acquired loans	$	3,913		$	—	$	444	$	(1,270	)	$	3,087


Activity during the nine month period ended September 30, 2015	Dec 31, 2014			Effect of Acquisitions		Income Accretion		All other Adjustments			Sep 30, 2015
Contractually required principal and interest	$	6,532		$	—	$	—	$	(660	)	$	5,872
Non-accretable difference		(1,270	)		—		839		124			(307	)

Cash flows expected to be collected		5,262			—		839		(536	)		5,565
Accretable yield		(947	)		—		637		(1,342	)		(1,652	)

Carrying value of acquired loans	$	4,315		$	—	$	1,476	$	(1,878	)	$	3,913


As of September 30, 2017	Mortgage- Backed Securities: Residential			State and Political Subdivisions			Total
Market value of securities pledged	$	651		$	41,921		$	42,572
Borrowings related to pledged amounts	$	—		$	32,862		$	32,862
Market value pledged as a % of borrowings		—	%		128	%		130	%


As of September 30, 2016	U.S. Government Sponsored Entities and Agencies Securities			Mortgage- Backed Securities: Residential			State and Political Subdivisions			Total
Fair value of securities pledged	$	210		$	59		$	40,565		$	40,834
Borrowings related to pledged amounts	$	—		$	—		$	37,343		$	37,343
Fair value pledged as a % of borrowings		—	%		—	%		109	%		109	%


As of December 31, 2016	U.S. Government Sponsored Entities and Agencies Securities			Mortgage- Backed Securities: Residential			State and Political Subdivisions			Total
Market value of securities pledged	$	209		$	117		$	41,330		$	41,656
Borrowings related to pledged amounts	$	—		$	—		$	36,496		$	36,496
Market value pledged as a % of borrowings		—	%		—	%		113	%		114	%


	September 30, 2016		September 30, 2015
Stock warrants exercised:
Intrinsic value of warrants exercised	$	136	$	46
Cash received from warrants exercised		79		60


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		1,312,791		$	13.04		6.23	$	24,070		1,395,016		$	16.70		6.39	$	35,090
Granted		272,087			27.99						267,195			38.04
Exercised		(167,899	)		11.27						(146,944	)		11.73
Forfeited, expired, or cancelled		(2,415	)		19.43						(3,113	)		25.37

Outstanding at period end		1,414,564		$	16.12		6.49	$	30,103		1,512,154		$	20.93		6.65	$	22,256

Vested or expected to vest		1,343,836		$	16.12		6.49	$	28,598		1,436,546		$	20.93		6.65	$	21,143
Exercisable at period end		784,022		$	11.53		4.83	$	20,282		787,451		$	13.43		4.96	$	17,498


	For the nine months ended September 30,				For the nine months ended September 30,
	2016		2015		2017		2016
Stock options exercised:
Intrinsic value of options exercised	$	3,463	$	839	$	4,141	$	3,463
Cash received from options exercised		1,357		780		1,361		1,357
Tax benefit realized from option exercises		522		147		406		522


Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2015		105,864		$	15.89
Granted		36,396			28.45
Vested		(32,607	)		16.70
Forfeited		(1,916	)		16.00

Non-vested at September 30, 2016		107,737		$	18.80


Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value
Non-vested at December 31, 2016		106,458		$	19.81
Granted		27,282			37.35
Vested		(36,767	)		18.22
Forfeited		(564	)		28.66

Non-vested at September 30, 2017		96,409		$	25.32


	Actual					Required For Capital Adequacy Purposes⁽¹⁾					To Be Well Capitalized Under Prompt Corrective Action Regulations					Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2016
September 30, 2017
Company common equity Tier 1 capital to risk-weighted assets	$	188,225		9.09	%	$	93,188		4.50	%		N/A		N/A		$	293,004		11.58	%	$	113,908		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	262,107		12.66	%	$	165,667		8.00	%		N/A		N/A		$	371,510		14.68	%	$	202,502		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	188,225		9.09	%	$	124,250		6.00	%		N/A		N/A		$	293,004		11.58	%	$	151,877		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	188,225		7.15	%	$	105,361		4.00	%		N/A		N/A		$	293,004		8.58	%	$	136,609		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	243,995		11.77	%	$	93,314		4.50	%	$	134,787		6.50	%	$	347,043		13.71	%	$	113,901	��	4.50	%	$	164,523		6.50	%
Bank Total Capital to risk weighted assets	$	259,585		12.52	%	$	165,892		8.00	%	$	207,365		10.00	%	$	367,079		14.50	%	$	202,490		8.00	%	$	253,112		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	243,995		11.77	%	$	124,419		6.00	%	$	165,892		8.00	%	$	347,043		13.71	%	$	151,867		6.00	%	$	202,490		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	243,995		9.26	%	$	105,343		4.00	%	$	131,678		5.00	%	$	347,043		10.17	%	$	136,511		4.00	%	$	170,639		5.00	%

December 31, 2015
December 31, 2016
Company common equity Tier 1 capital to risk-weighted assets	$	167,562		10.08	%	$	74,768		4.50	%		N/A		N/A		$	263,693		11.75	%	$	101,022		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	186,243		11.21	%	$	132,922		8.00	%		N/A		N/A		$	338,675		15.09	%	$	179,595		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	174,656		10.51	%	$	99,691		6.00	%		N/A		N/A		$	263,693		11.75	%	$	134,696		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	174,656		8.48	%	$	82,362		4.00	%		N/A		N/A		$	263,693		9.28	%	$	113,697		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	172,205		10.36	%	$	74,772		4.50	%	$	108,004		6.50	%	$	319,005		14.18	%	$	101,216		4.50	%	$	146,201		6.50	%
Bank Total Capital to risk weighted assets	$	183,792		11.06	%	$	132,928		8.00	%	$	166,160		10.00	%	$	335,650		14.92	%	$	179,939		8.00	%	$	224,924		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	172,205		10.36	%	$	99,696		6.00	%	$	132,928		8.00	%	$	319,005		14.18	%	$	134,954		6.00	%	$	179,939		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	172,205		8.36	%	$	82,357		4.00	%	$	102,946		5.00	%	$	319,005		11.22	%	$	113,697		4.00	%	$	142,122		5.00	%


	Fair Value Measurements at September 30, 2016 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
U.S. government sponsored entities and agencies	$	—	$	3,138	$	—
Mortgage-backed securities-residential		—		556,797		—
Mortgage-backed securities-commercial		—		19,759		—
State and political subdivisions		—		91,062		—

Total securities available for sale	$	—	$	670,056	$	—

Loans held for sale	$	—	$	26,819	$	—

Mortgage banking derivatives	$	—	$	858	$	—

Financial Liabilities
Mortgage banking derivatives	$	—	$	87	$	—


	Fair Value Measurements at December 31, 2015 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
U.S. government sponsored entities and agencies	$	—	$	6,817	$	—
Mortgage-backed securities-residential		—		500,955		—
Mortgage-backed securities-commercial		—		19,835		—
State and political subdivisions		—		48,231		—

Total securities available for sale	$	—	$	575,838	$	—

Loans held for sale	$	—	$	14,079	$	—

Mortgage banking derivatives	$	—	$	411	$	—

Financial Liabilities
Mortgage banking derivatives	$	—	$	29	$	—


	Carrying Amount		Fair Value Measurements at September 30, 2016 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	55,749	$	55,749	$	—	$	—	$	55,749
Certificates of deposit held at other financial institutions		1,055		—		1,055		—		1,055
Securities available for sale		670,756		—		670,756		—		670,756
Securities held to maturity		235,050		—		243,946		—		243,946
Loans held for sale		26,819		—		26,819		—		26,819
Net loans		1,638,468		—		—		1,621,695		1,621,695
Restricted equity securities		11,829		n/a		n/a		n/a		n/a
Servicing rights, net		3,566		—		3,948		—		3,948
Accrued interest receivable		7,871		—		3,634		4,237		7,871
Financial liabilities
Deposits	$	2,217,954	$	1,223,120	$	996,482	$	—	$	2,219,602
Federal funds purchased and repurchase agreements		45,843		—		45,843		—		45,843
Federal Home Loan Bank advances		162,000		—		162,024		—		162,024
Subordinated notes, net		58,292		—		—		61,867		61,867
Accrued interest payable		1,399		123		915		361		1,399


	March 2016 Subordinated Notes	June 2016 Subordinated Notes
Principal amount issued	$40,000	$20,000
Maturity date	March 30, 2026	July 1, 2026
Initial fixed interest rate	6.875%	7.00%
Initial interest rate period	5 years	5 years
First interest rate change date	March 30, 2021	July 1, 2021
Interest payment frequency through year five*	Semiannually	Semiannually
Interest payment frequency after five years*	Quarterly	Quarterly
Interest repricing index and margin	3-month LIBOR plus 5.636%	3-month LIBOR plus 6.04%
Repricing frequency after five years	Quarterly	Quarterly


	Three Months Ended September 30,																Three Months Ended September 30,
	2016								2015								2017								2016
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans (1)(6)	$	1,620,347		$	20,219		4.96	%	$	1,044,520		$	14,763		5.61	%	$	2,049,575		$	26,006		5.03	%	$	1,620,347		$	20,219		4.96	%
Securities available for sale (6)		671,725			4,084		2.42	%		674,991			4,422		2.60	%		972,988			6,405		2.61	%		671,725			4,084		2.42	%
Securities held to maturity (6)		233,986			2,203		3.75	%		74,332			632		3.37	%		220,313			2,283		4.11	%		233,986			2,203		3.75	%
Restricted equity securities																		17,396			269		6.13	%		10,372			133		5.10	%
Certificates of deposit at other financial institutions		941			4		1.69	%		250			2		3.17	%		2,412			9		1.48	%		941			4		1.69	%
Federal funds sold and other (2)		49,295			182		1.47	%		52,279			127		0.96	%		88,737			271		1.21	%		38,923			49		0.50	%

TOTAL INTEREST EARNING ASSETS	$	2,576,294		$	26,692		4.12	%	$	1,846,372		$	19,946		4.29	%	$	3,351,421		$	35,243		4.17	%	$	2,576,294		$	26,692		4.12	%
Allowance for loan losses		(14,508	)							(8,576	)							(18,891	)							(14,508	)
All other assets		86,466								74,570								94,334								86,466

TOTAL ASSETS	$	2,648,252							$	1,912,366							$	3,426,864							$	2,648,252
LIABILITIES & SHAREHOLDERS’ EQUITY
LIABILITIES & EQUITY
Deposits:
Interest checking	$	261,350		$	256		0.39	%	$	246,584		$	170		0.27	%	$	552,502		$	1,285		0.92	%	$	261,350		$	256		0.39	%
Money market		617,913			957		0.62	%		514,669			703		0.54	%		604,416			1,703		1.12	%		617,913			957		0.62	%
Savings		51,235			40		0.31	%		37,888			44		0.46	%		54,921			42		0.30	%		51,235			40		0.31	%
Time deposits		1,080,666			2,430		0.89	%		648,605			1,500		0.92	%		1,259,452			4,281		1.35	%		1,080,666			2,430		0.89	%
Federal Home Loan Bank advances																		289,228			968		1.33	%		86,783			215		0.99	%
Federal funds purchased and other (3)		44,974			69		0.61	%		45,261			69		0.60	%		37,374			92		0.98	%		44,974			69		0.61	%
Federal Home Loan Bank advances		86,783			215		0.99	%		57,000			79		0.55	%
Subordinated Notes and other borrowings		58,285			1,082		7.39	%		—			—		—	%
Subordinated notes and other borrowings																		58,444			1,083		7.35	%		58,285			1,082		7.39	%

TOTAL INTEREST BEARING LIABILITIES	$	2,201,206		$	5,049		0.91	%	$	1,550,007		$	2,565		0.66	%	$	2,856,337		$	9,454		1.31	%	$	2,201,206		$	5,049		0.91	%
Demand deposits		224,387								169,451								261,127								224,387
Other liabilities		16,650								11,368								11,312								16,650
Total shareholders’ equity		206,009								181,540
Total equity																		298,088								206,009

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,648,252							$	1,912,366
TOTAL LIABILITIES AND EQUITY																	$	3,426,864							$	2,648,252
NET INTEREST SPREAD (4)							3.21	%							3.63	%							2.86	%							3.21	%
NET INTEREST INCOME				$	21,643							$	17,381							$	25,789							$	21,643
NET INTEREST MARGIN (5)							3.34	%							3.73	%							3.05	%							3.34	%


	Nine Months Ended September 30,
	2017								2016
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	1,975,592		$	73,274		4.96	%	$	1,535,894		$	56,933		4.95	%
Securities available for sale(⁶⁾		1,002,118			19,958		2.66	%		641,270			11,917		2.48	%
Securities held to maturity⁽⁶⁾		224,174			7,012		4.18	%		194,326			5,698		3.92	%
Restricted equity securities		15,830			663		5.60	%		9,256			354		5.11	%
Certificates of deposit at other financial institutions		2,178			24		1.47	%		751			11		1.96	%
Federal funds sold and other⁽²⁾		84,666			643		1.02	%		46,327			164		0.47	%

TOTAL INTEREST EARNING ASSETS	$	3,304,558		$	101,574		4.11	%	$	2,427,824		$	75,077		4.13	%
Allowance for loan losses		(18,182	)							(13,179	)
All other assets		92,425								41,988

TOTAL ASSETS	$	3,378,801							$	2,456,633
LIABILITIES & EQUITY
Deposits:
Interest checking	$	631,582		$	3,586		0.76	%	$	292,013		$	853		0.39	%
Money market		608,670			4,412		0.97	%		608,341			2,767		0.61	%
Savings		55,569			127		0.31	%		48,647			121		0.33	%
Time deposits		1,196,675			10,993		1.23	%		937,266			6,377		0.91	%
Federal Home Loan Bank advances		242,549			2,228		1.23	%		75,412			511		0.91	%
Federal funds purchased and other⁽³⁾		45,745			309		0.90	%		50,100			237		0.63	%
Subordinated notes and other borrowings		58,398			3,239		7.42	%		32,882			1,820		7.39	%

TOTAL INTEREST BEARING LIABILITIES	$	2,839,188		$	24,894		1.17	%	$	2,044,661		$	12,686		0.83	%
Demand deposits		246,675								200,981
Other liabilities		7,358								12,707
Total equity		285,580								198,284

TOTAL LIABILITIES AND EQUITY	$	3,378,801							$	2,456,633
NET INTEREST SPREAD⁽⁴⁾							2.94	%							3.30	%
NET INTEREST INCOME				$	76,680							$	62,391
NET INTEREST MARGIN⁽⁵⁾							3.10	%							3.43	%


	Net change three months ended September 30, 2016 versus September 30, 2015									Net change three months ended September 30, 2017 versus September 30, 2016
	Volume			Rate			Net Change			Volume			Rate			Net Change
INTEREST INCOME
Loans	$	8,103		$	(2,647	)	$	5,456		$	5,425		$	362		$	5,787
Securities available for sale		(34	)		(304	)		(338	)		1,855			466			2,321
Securities held to maturity		1,347			224			1,571			(120	)		200			80
Restricted equity securities											91			45			136
Certificates of deposit at other financial institutions		6			(4	)		2			6			(1	)		5
Federal funds sold and other		(8	)		63			55			63			159			222

TOTAL INTEREST INCOME	$	9,414		$	(2,668	)	$	6,746		$	7,320		$	1,231		$	8,551

INTEREST EXPENSE
Deposits
Interest checking	$	7		$	79		$	86		$	291		$	738		$	1,029
Money market accounts		130			124			254			(16	)		762			746
Savings		15			(19	)		(4	)		3			(1	)		2
Time deposits		1,011			(81	)		930			391			1,460			1,851
Federal Home Loan Bank advances		40			96			136			505			248			753
Other borrowed funds		—			—			—
Fed funds purchased and other borrowed funds											(12	)		35			23
Subordinated Notes and other borrowings		1,082			—			1,082			7			(6	)		1

TOTAL INTEREST EXPENSE	$	2,285		$	199		$	2,484		$	1,169		$	3,236		$	4,405

NET INTEREST INCOME	$	7,129		$	(2,867	)	$	4,262		$	6,151		$	(2,005	)	$	4,146


										Net change nine months ended September 30, 2017 versus September 30, 2016
										Volume			Rate			Net Change
INTEREST INCOME
Loans										$	16,193		$	148		$	16,341
Securities available for sale											6,692			1,349			8,041
Securities held to maturity											878			436			1,314
Restricted equity securities											251			58			309
Certificates of deposit at other financial institutions											21			(8	)		13
Federal funds sold and other											131			348			479

TOTAL INTEREST INCOME										$	24,166		$	2,331		$	26,497

INTEREST EXPENSE
Deposits
Interest checking										$	985		$	1,748		$	2,733
Money market accounts											6			1,639			1,645
Savings											14			(8	)		6
Time deposits											1,752			2,864			4,616
Federal Home Loan Bank advances											1,136			581			1,717
Fed funds purchased and other borrowed funds											(20	)		92			72
Subordinated notes and other borrowings											1,406			13			1,419

TOTAL INTEREST EXPENSE										$	5,279		$	6,929		$	12,208

NET INTEREST INCOME										$	18,887		$	(4,598	)	$	14,289


	Three Months Ended September 30,					$ Increase (Decrease)			% Increase (Decrease)
	2016			2015		$ Increase (Decrease)			% Increase (Decrease)
Service charges on deposit accounts	$	44		$	44	$	—			—	%
Other service charges and fees		845			679		166			24.4	%
Net gains on sale of loans		2,942			2,463		479			19.4	%
Wealth management		446			327		119			36.4	%
Loan servicing fees, net		(40	)		84		(124	)		(147.6	%)
Gain on sale or call of securities		430			5		425			8,500.0	%
Net gain on sale of foreclosed assets		30			3		27			900.0	%
Other		179			193		(14	)		(7.3	%)

Total non-interest income	$	4,876		$	3,798	$	1,078			28.4	%


	September 30, 2016								September 30, 2017
	One year or less		Over one year to five years		Over five years		Total		One year or less		Over one year to five years		Over five years		Total
Real estate:
Construction and land development	$	240,131	$	154,043	$	80,162	$	474,336	$	276,021	$	165,429	$	73,484	$	514,934
Commercial		23,838		101,685		305,301		430,824		28,239		154,309		416,685		599,233
Residential		26,885		109,889		234,769		371,543		37,849		116,899		377,547		532,295
Commercial and industrial		54,808		256,336		63,573		374,717		75,035		308,537		83,164		466,736
Consumer and other		1,778		1,571		109		3,458		2,249		1,281		403		3,933

Total	$	347,440	$	623,524	$	683,914	$	1,654,878	$	419,393	$	746,455	$	951,283	$	2,117,131

Fixed interest rate	$	203,971	$	327,758	$	240,183	$	771,912	$	205,808	$	306,701	$	433,595	$	946,104
Variable interest rate		143,469		295,766		443,731		882,966		213,585		439,754		517,688		1,171,027

Total	$	347,440	$	623,524	$	683,914	$	1,654,878	$	419,393	$	746,455	$	951,283	$	2,117,131

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