UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended ~~September~~June 30, ~~2017~~2019

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

For the transition period fromto

Commission file number001-36895

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

Tennessee
~~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)

Securities registered pursuant to Section 12(b) of the Act.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	FSB	New York Stock Exchange

Indicate by check mark whether the ~~registrant:~~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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.


Large accelerated filer	☐	☐	Accelerated filer	☒

Non-accelerated filer	☐	~~☐ (Do not check if a smaller reporting company)~~	Smaller reporting company	☐

		Emerging growth company	☒

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 Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock, no par value per share, as of ~~November 7, 2017,~~August 1, 2019, was ~~13,215,564.~~14,624,960.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Cautionary Note Regarding Forward-Looking Statements		1
Item 1. Consolidated Financial Statements (unaudited)			2
Consolidated Balance Sheets		2
Consolidated Statements of Income		3
Consolidated Statements of Comprehensive Income		4
Consolidated Statement of Changes in ~~Shareholders’~~ Equity		5
Consolidated Statements of Cash Flows		6	7
Notes to Consolidated Financial Statements		7	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk		47	53
Item 4. Controls and Procedures		48
	53

PART II OTHER INFORMATION

Item 1. Legal Proceedings		48	54
Item 1A. Risk Factors		48	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49	54
Item 3. Defaults Upon Senior Securities		49	54
Item 4. Mine Safety Disclosures		49	54
Item 5. Other Information		49	54
Item 6. Exhibits		50
	55

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,” “likely,” “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.~~date, unless otherwise required by law.

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 Part I of our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2018.

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL ~~INFORMATION~~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, 2017			December 31, 2016			June 30, 2019			December 31, 2018
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from financial institutions	$	155,842		$	90,927		$	150,721		$	280,212
Certificates of deposit at other financial institutions		2,365			1,055			3,840			3,594
Securities available for sale		980,737			754,755			715,132			1,030,668
Securities held to maturity (fair value 2017—$220,089 and 2016—$227,892)		217,312			228,894
Securities held to maturity (fair value 2019—$120,809 and 2018—$118,955)								118,963			121,617
Loans held for sale, at fair value		11,823			23,699			27,093			11,103
Loans		2,115,930			1,773,592
Loans held for investment								2,880,433			2,665,399
Allowance for loan losses		(19,944	)		(16,553	)		(27,443	)		(23,451	)

Net loans		2,095,986			1,757,039			2,852,990			2,641,948

Restricted equity securities, at cost		18,472			11,843			24,842			21,831
Premises and equipment, net		11,217			9,551			12,948			12,371
Accrued interest receivable		11,156			9,931			14,281			13,337
Bank owned life insurance		23,732			23,267			55,989			55,239
Deferred tax asset		13,592			15,013			10,451			13,189
Foreclosed assets		1,503			—
Servicing rights, net		3,639			3,621			3,299			3,403
Goodwill		9,124			9,124			18,176			18,176
Core deposit intangible, net		1,117			1,480			675			952
Other assets		7,663			2,990			62,571			21,799

Total assets	$	3,565,278		$	2,943,189		$	4,071,971		$	4,249,439

LIABILITIES AND EQUITY
Deposits
Non-interest bearing	$	257,177		$	233,781		$	334,802		$	290,580
Interest bearing		2,567,648			2,158,037			2,811,843			3,141,227

Total deposits		2,824,825			2,391,818			3,146,645			3,431,807
Federal Home Loan Bank advances		337,000			132,000			396,500			368,500
Federal funds purchased and repurchase agreements		32,862			83,301
Subordinated notes, net		58,470			58,337			58,782			58,693
Accrued interest payable		2,597			1,924			4,312			4,700
Other liabilities		5,827			5,448			72,123			12,906

Total liabilities		3,261,581			2,672,828			3,678,362			3,876,606
Commitments and Contingencies (Note 9)
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
Preferred stock, no par value: 1.0 million shares authorized; no shares outstanding at June 30, 2019 and December 31, 2018								—			—
Common stock, no par value: 30.0 million authorized; 14.6 million and 14.5 million issued and outstanding at June 30, 2019 and December 31, 2018, respectively								268,505			264,905
Retained earnings		85,075			59,386			127,840			123,176
Accumulated other comprehensive loss		(3,123	)		(7,482	)		(2,829	)		(15,341	)

Total shareholders’ equity		303,594			270,258			393,516			372,740
Noncontrolling interest in consolidated subsidiary		103			103

Non-controlling interest in consolidated subsidiary								93			93
Total equity	$	303,697		$	270,361			393,609			372,833

Total liabilities and equity	$	3,565,278		$	2,943,189		$	4,071,971		$	4,249,439

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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Interest income and dividends
Loans, including fees	$	25,973		$	20,192		$	73,195		$	56,864		$	40,202		$	32,312		$	78,540		$	61,105
Securities:
Taxable		5,041			3,889			16,358			11,402			4,614			6,905			11,008			13,016
Tax-Exempt		2,217			1,457			6,449			3,776			1,410			1,929			2,880			3,844
Dividends on restricted equity securities		269			133			663			354			350			329			684			603
Federal funds sold and other		280			53			667			175			877			661			1,864			1,615

Total interest income		33,780			25,724			97,332			72,571			47,453			42,136			94,976			80,183

Interest expense
Deposits		7,311			3,683			19,118			10,118			16,679			12,604			33,669			23,247
Federal funds purchased and repurchase agreements		92			69			309			237			90			131			162			227
Federal Home Loan Bank advances		968			215			2,228			511
Subordinated notes and other borrowings		1,083			1,082			3,239			1,820

Federal Home Loan Bank advances and other borrowings														2,237			1,414			4,196			2,524
Subordinated notes														1,082			1,082			2,164			2,164
Total interest expense		9,454			5,049			24,894			12,686			20,088			15,231			40,191			28,162

Net interest income		24,326			20,675			72,438			59,885			27,365			26,905			54,785			52,021
Provision for loan losses		590			1,392			3,018			4,095			7,031			570			12,086			1,143

Net interest income after provision for loan losses		23,736			19,283			69,420			55,790			20,334			26,335			42,699			50,878

Noninterest income
Service charges on deposit accounts		39			44			114			139			77			51			151			93
Other service charges and fees		787			845			2,297			2,245			903			823			1,660			1,574
Net gains on sale of loans		1,517			2,942			5,918			6,859
Mortgage banking revenue														2,473			2,044			4,145			3,602
Wealth management		643			446			1,884			1,343			673			789			1,300			1,493
Loan servicing fees, net		70			(40	)		230			(2	)
Gain on sale or call of securities		350			430			470			1,535			367			1			517			1
Net (loss) gain on sale of foreclosed assets		(16	)		30			(10	)		36
Net (loss) gain on sale of loans														3			—			(214	)		—
Net gain on sale of foreclosed assets														3			3			7			6
Other		179			179			554			432			424			436			844			834

Total noninterest income		3,569			4,876			11,457			12,587			4,923			4,147			8,410			7,603

Noninterest expense
Salaries and employee benefits		9,011			7,979			26,172			22,099			11,365			10,268			26,108			19,456
Occupancy and equipment		2,399			2,001			6,689			5,563			3,283			2,885			6,396			5,479
FDIC assessment expense		900			570			2,675			1,388			660			778			1,650			1,438
Marketing		192			206			744			611			301			269			620			549
Professional fees		821			935			2,558			3,006			1,073			1,362			1,996			2,231
Amortization of core deposit intangible		115			138			363			431			132			182			277			286
Other		1,840			1,879			5,636			5,354			2,556			2,306			4,939			4,099

Total noninterest expense		15,278			13,708			44,837			38,542			19,370			18,050			41,986			33,538

Income before income tax expense		12,027			10,451			36,040			29,925			5,887			12,432			9,123			24,943
Income tax expense		3,138			3,314			10,343			9,047			706			2,263			1,040			4,722

Net income		8,889			7,137			25,697			20,878			5,181			10,169			8,083			20,221
Earnings attributable to noncontrolling interest		—			—			(8	)		—			(8	)		(8	)		(8	)		(8	)
Dividends paid on Series A preferred stock		—			—			—			(23	)

Net income available to common shareholders	$	8,889		$	7,137		$	25,689		$	20,855		$	5,173		$	10,161		$	8,075		$	20,213

Earnings per share:
Basic	$	0.67		$	0.67		$	1.96		$	1.96		$	0.35		$	0.71		$	0.55		$	1.46
Diluted		0.65			0.63			1.86			1.84			0.34			0.68			0.54			1.41

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Net income	$	8,889		$	7,137		$	25,697		$	20,878		$	5,181		$	10,169		$	8,083		$	20,221
Other comprehensive income, net of tax:
Unrealized gains on securities:
Other comprehensive income (loss):
Unrealized gains/losses on securities:
Unrealized holding gain (loss) arising during the period		1,610			(3,664	)		7,641			13,910			7,116			(3,774	)		19,109			(18,351	)
Reclassification adjustment for gains included in net income		(350	)		(430	)		(470	)		(1,535	)

Net unrealized gains (losses)		1,260			(4,094	)		7,171			12,375
Reclassification adjustment for losses (gains) included in net income														(367	)		(1	)		(517	)		(1	)
Tax effect		(494	)		1,606			(2,812	)		(4,854	)		(1,760	)		988			(4,849	)		4,796

Net of tax														4,989			(2,787	)		13,743			(13,556	)
Unrealized gain/loss on cash flow hedge:
Unrealized holding gain (loss)														(1,667	)		—			(1,667	)		—
Tax effect														436			—			436			—
Net of tax														(1,231	)		—			(1,231	)		—
Total other comprehensive income (loss)		766			(2,488	)		4,359			7,521			3,758			(2,787	)		12,512			(13,556	)

Comprehensive income	$	9,655		$	4,649		$	30,056		$	28,399		$	8,939		$	7,382		$	20,595		$	6,665

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

~~Nine~~Three Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~June 30, 2018

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

(Unaudited)

Accumulated
Other

   Preferred Common Stock Retained Comprehensive Noncontrolling    Total
   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
Exercise of common stock options, net
   —   152,003 1,357 —      1,357
Exercise of common stock warrants
   —   6,575 79 —      79
Redemption of Series A preferred stock
   (10,000 ) —   —   —   —   —      (10,000 )
Dividends paid on Series A preferred stock
   —   —   —   (23 ) —   —      (23 )
Stock based compensation expense, net of restricted share forfeitures
   —   34,480 1,201 —   —   —      1,201
Stock issued (divestment) in conjunction with 401(k) employer match, net of distributions
   —   (6,952 ) (185 ) —   —   —      (185 )
Net income
   —   —   —   20,878 —   —      20,878
Other comprehensive income
   —   —   —   —   7,521 —      7,521




Balance at September 30, 2016
   $ —   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

	Shareholders’ Equity
	Preferred		Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock		Shares			Amount			Earnings			Loss			Interest		Equity
Balance at April 1, 2018	$	—		13,258,142		$	223,594		$	98,723		$	(17,555	)	$	103	$	304,865
Exercise of common stock options, includes net settlement of shares		—		135,883			1,717			—			—			—		1,717
Stock based compensation expense, net of restricted share forfeitures		—		—			1,319			—			—			—		1,319
Stock issued in conjunction with 401(k) employer match, net of distributions		—		(2,481	)		(45	)		—			—			—		(45	)
Issuance of restricted stock, net of forfeitures		—		118,306			—			—			—			—		—
Stock issued for acquisition (net of issuance costs)		—		970,390			32,932			—			—			—		32,932
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			10,169			—			—		10,169
Other comprehensive loss		—		—			—			—			(2,787	)		—		(2,787	)
Balance at June 30, 2018	$	—		14,480,240		$	259,517		$	108,884		$	(20,342	)	$	103	$	348,162


Balance at April 1, 2019	$	—		14,574,339		$	266,758		$	123,250		$	(6,587	)	$	93	$	383,514
Exercise of common stock options, includes net settlement of shares		—		74,116			753			—			—			—		753
Stock based compensation expense, net of restricted share forfeitures		—		—			1,513			—			—			—		1,513
Issuance of restricted stock, net of forfeitures		—		(988	)		—			—			—			—		—
Purchase of treasury stock		—		(19,180	)		(519	)		—			—			—		(519	)
Cash dividends - common stock ($0.04 per share)		—		—			—			(583	)		—			—		(583	)
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			5,181			—			—		5,181
Other comprehensive income		—		—			—			—			3,758			—		3,758
Balance at June 30, 2019	$	—		14,628,287		$	268,505		$	127,840		$	(2,829	)	$	93	$	393,609

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN EQUITY

Six Months Ended June 30, 2019 and June 30, 2018

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

(Unaudited)

Nine Months Ended
September 30,

   2017 2016
Cash flows from operating activities

Net income
   $ 25,697 $ 20,878
Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization on premises and equipment
   1,118 986
Accretion of purchase accounting adjustments
   (873 ) (488 )
Net amortization of securities
   7,654 5,428
Amortization of loan servicing right asset
   721 905
Amortization of core deposit intangible
   363 431
Amortization of debt issuance costs
   133 79
Provision for loan losses
   3,018 4,095
Deferred income tax benefit
   (1,394 ) (1,015 )
Origination of loans held for sale
   (270,876 ) (260,598 )
Proceeds from sale of loans held for sale
   290,669 253,701
Net gain on sale of loans
   (5,918 ) (6,859 )
Gain on sale of available for sale securities
   (470 ) (1,535 )
Income from bank owned life insurance
   (465 ) (486 )
Net loss/(gain) on foreclosed assets
   10 (36 )
Loss on sale of assets held for sale
   —   98
Stock-based compensation
   1,970 1,201
Compensation expense related to common stock issued to 401(k) plan
   —   404
Deferred gain on sale of loans
   (58 ) (46 )
Net change in:

Accrued interest receivable and other assets
   (5,949 ) (1,033 )
Accrued interest payable and other liabilities
   1,120 2,261


Net cash from operating activities
   46,470 18,371
Cash flows from investing activities

Securities available for sale :

Sales
   122,837 74,203
Purchases
   (455,700 ) (223,432 )
Maturities, prepayments and calls
   108,339 64,502
Securities held to maturity :

Purchases
   (1,996 ) (92,646 )
Maturities, prepayments and calls
   12,110 14,088
Net change in loans
   (346,595 ) (349,944 )
Proceeds from sale of assets held for sale
   —   1,542
Purchase of restricted equity securities
   (6,629 ) (3,831 )
Proceeds from sale of foreclosed assets
   1,330 336
Purchases of premises and equipment, net
   (2,784 ) (2,142 )
Capitalization of foreclosed assets
   (35 ) —
Increase in certificates of deposits at other financial institutions
   (1,310 ) (805 )


Net cash from investing activities
   (570,433 ) (518,129 )
Cash flows from financing activities

Increase in deposits
   433,007 403,915
Decrease in federal funds purchased and repurchase agreements
   (50,439 ) (55,243 )
Proceeds from Federal Home Loan Bank advances
   370,000 305,000
Repayment of Federal Home Loan Bank advances
   (165,000 ) (200,000 )
Proceeds from other borrowings
   —   10,000
Repayment of other borrowings
   —   (10,000 )
Proceeds from issuance of subordinated notes, net of issuance costs
   —   58,213
Proceeds from exercise of common stock warrants
   150 79
Proceeds from exercise of common stock options
   1,361 1,357
Divestment of common stock issued to 401(k) plan
   (193 ) (185 )
Redemption of Series A preferred stock
   —   (10,000 )
Dividends paid on preferred stock
   —   (23 )
Earnings attributable to noncontrolling interest
   (8 ) —


Net cash from financing activities
   588,878 503,113


Net change in cash and cash equivalents
   64,915 3,355
Cash and cash equivalents at beginning of period
   90,927 52,394


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


Supplemental information:

Interest paid
   $ 24,221 $ 11,931
Income taxes paid
   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 —

	Shareholders’ Equity
	Preferred		Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock		Shares			Amount			Earnings			Loss			Interest		Equity
Balance at January 1, 2018	$	—		13,237,128		$	222,665		$	88,671		$	(6,786	)	$	103	$	304,653
Exercise of common stock options, includes net settlement of shares		—		157,231			1,937			—			—			—		1,937
Stock based compensation expense, net of restricted share forfeitures		—		—			2,078			—			—			—		2,078
Stock issued in conjunction with 401(k) employer match, net of distributions		—		(2,815	)		(95	)		—			—			—		(95	)
Issuance of restricted stock, net of forfeitures		—		118,306			—			—			—			—		—
Stock issued for acquisition (net of issuance costs)		—		970,390			32,932			—			—			—		32,932
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			20,221			—			—		20,221
Other comprehensive loss		—		—			—			—			(13,556	)		—		(13,556	)
Balance at June 30, 2018	$	—		14,480,240		$	259,517		$	108,884		$	(20,342	)	$	103	$	348,162


Balance at January 1, 2019	$	—		14,538,085		$	264,905		$	123,176		$	(15,341	)	$	93	$	372,833
Cumulative-effect of accounting change		—		—			—		$	(2,244	)		—			—		(2,244	)
Balance at January 1, 2019, adjusted	$	—		14,538,085		$	264,905		$	120,932		$	(15,341	)	$	93	$	370,589
Exercise of common stock options, includes net settlement of shares		—		109,162			1,277			—			—			—		1,277
Stock based compensation expense, net of restricted share forfeitures		—		—			2,842			—			—			—		2,842
Issuance of restricted stock, net of forfeitures		—		220			—			—			—			—		—
Purchase of treasury stock		—		(19,180	)		(519	)		—			—			—		(519	)
Cash dividends - common stock ($0.08 per share)		—		—			—			(1,167	)		—			—		(1,167	)
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			8,083			—			—		8,083
Other comprehensive income		—		—			—			—			12,512			—		12,512
Balance at June 30, 2019	$	—		14,628,287		$	268,505		$	127,840		$	(2,829	)	$	93	$	393,609

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

~~NOTES TO~~ CONSOLIDATED ~~FINANCIAL~~ STATEMENTS OF CASH FLOWS

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

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net income	$	8,083		$	20,221
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		850			841
Accretion of purchase accounting adjustments		(346	)		(610	)
Net amortization of securities		3,078			4,073
Amortization of loan servicing right asset		487			441
Amortization of core deposit intangible		277			286
Amortization of debt issuance costs		89			89
Provision for loan losses		12,086			1,143
Deferred income tax benefit		(2,121	)		(216	)
Excess tax benefit related to stock compensation		(205	)		—
Origination of loans held for sale		(208,009	)		(184,835	)
Proceeds from sale of loans held for sale		197,230			183,113
Loss (gain) on sale of loans held for investment		227			—
Net gain on sale of loans held for sale		(5,594	)		(3,380	)
Gain on sale of available for sale securities		(517	)		(1	)
Income from bank owned life insurance		(750	)		(762	)
Stock-based compensation		2,842			2,078
Deferred gain on sale of loans		(7	)		(8	)
Deferred gain on sale of foreclosed assets		(7	)		(6	)
Net change in:
Accrued interest receivable and other assets		4,478			(2,153	)
Accrued interest payable and other liabilities		6,875			(3,327	)
Net cash from operating activities		19,046			16,987
Cash flows from investing activities
Securities available for sale :
Sales and calls		347,037			—
Purchases		(94,860	)		(226,362	)
Maturities and prepayments		82,556			87,779
Securities held to maturity :
Purchases		(3,284	)		(1,676	)
Maturities, prepayments and calls		5,261			6,393
Net change in loans		(241,477	)		(118,539	)
Proceeds from sale of loans held for investment		18,468			—
Purchase of restricted equity securities		(3,011	)		(1,165	)
Purchases of premises and equipment, net		(1,427	)		(885	)
Increase in certificates of deposits at other financial institutions		(246	)		—
Purchase of bank owned life insurance		—			(119	)
Net cash acquired from acquisition		—			24,660
Net cash from investing activities		109,017			(229,914	)
Cash flows from financing activities
(Decrease) increase in deposits		(285,162	)		107,635
Increase (decrease) in federal funds purchased and repurchase agreements		—			(30,659	)
Proceeds from Federal Home Loan Bank advances		340,000			250,000
Repayment of Federal Home Loan Bank advances		(312,000	)		(182,000	)
Proceeds from issuance of common stock, net of offering costs		—			(242	)
Proceeds from exercise of common stock options		1,277			1,937
Divestment of common stock issued to 401(k) plan		—			(95	)
Purchase of treasury stock		(494	)		—
Dividends paid on common stock		(1,167	)		—
Noncontrolling interest distributions		(8	)		(8	)
Net cash from financing activities		(257,554	)		146,568
Net change in cash and cash equivalents		(129,491	)		(66,359	)
Cash and cash equivalents at beginning of period		280,212			251,543
Cash and cash equivalents at end of period	$	150,721		$	185,184
Supplemental information:
Interest paid	$	40,579		$	27,004
Income taxes paid		6,043			6,632
Non-cash supplemental information:
Fair value of stock and stock options issued related to Civic Bank acquisition	$	-		$	33,174
Transfers from loans to foreclosed assets		—			350
Establishment of lease liability and right-of use asset		43,723			—
Transfers from securities available for sale to securities held to maturity	$	1,206		$	—

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 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 ~~16, 2017.~~19, 2019.

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.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases which requires recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

The guidance requires that a lessee should now recognize lease assets and lease liabilities for operating leases. In July 2016, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842, Leases which provides technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements which provides an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in the period of adoption. In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements” whichaddresses lessors and clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. The Company adopted ASU 2016-02 on January 1, 2019, elected the optional transition method, and subsequently adopted ASU 2019-01. The Company recorded a right of use asset and lease liability of $43,723. See Note 5 - Leases for more information.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance became effective for the Company on January 1, 2019, and using a modified retrospective transition adoption approach, we recognized a cumulative effect reduction to retained earnings totaling $2,244.

In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” This update expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on the SOFR. Due to concerns about the sustainability of the London Interbank Offered Rate (“LIBOR”), a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York initiated an effort to introduce an alternative reference rate in the U.S. The committee identified SOFR as the preferred alternative reference rate to LIBOR. The OIS rate based on SOFR was added as a U.S. benchmark interest rate to facilitate broader use in the marketplace and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies. The Company adopted the provisions of ASU No. 2018-16 on January 1, 2019, and it did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The 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 on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 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, beginning after December 15, 2018; however, the Company does not currently plan to early adopt this ASU. The following amendments to ASU 2016-13 are also in consideration by the Company: ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. The Company is currently gathering information and working to determine the methodology to be used. The Company is gathering as much data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The Company is still evaluating the impact of this new guidance on our financial statements; however an increase in the overall ALLL is likely upon adoption to provide for expected credit losses over the life of the loan portfolio.

In January 2017, the FASB issued ASU 2017-04, “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 of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for the Company on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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, 2017
June 30, 2019
U.S. government sponsored entities and agencies	$	20,147	$	—	$	(65	)	$	20,082	$	1,695		1		(8	)	$	1,688
Mortgage-backed securities: residential		729,014		1,113		(5,460	)		724,667		476,378		1,417		(3,744	)		474,051
Mortgage-backed securities: commercial		15,675		—		(65	)		15,610		18,544		275		(120	)		18,699
Asset-backed securities											25,746		27		(565	)		25,208
Corporate notes											22,360		356		—			22,716
State and political subdivisions		161,223		2,197		(2,855	)		160,565		172,585		279		(94	)		172,770
U.S Treasury bills		59,816		1		(4	)		59,813

Total	$	985,875	$	3,311	$	(8,449	)	$	980,737	$	717,308	$	2,355	$	(4,531	)	$	715,132

										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016
December 31, 2018
U.S. Treasury securities										$	253,015	$	59	$	(60	)	$	253,014
U.S. government sponsored entities and agencies											21,999		1		(112	)		21,888
Mortgage-backed securities: residential	$	614,344	$	949	$	(8,208	)	$	607,085		596,766		27		(16,094	)		580,699
Mortgage-backed securities: commercial		19,439		27		(132	)		19,334
Asset-backed securities											25,744		—		(900	)		24,844
Corporate notes											12,480		21		(77	)		12,424
State and political subdivisions		133,280		238		(5,182	)		128,336		141,432		863		(4,496	)		137,799

Total	$	767,063	$	1,214	$	(13,522	)	$	754,755	$	1,051,436	$	971	$	(21,739	)	$	1,030,668

The amortized cost and fair value of the securities held to maturity portfolio at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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, 2017
June 30, 2019
Mortgage backed securities: residential	$	95,560	$	354	$	(1,502	)	$	94,412	$	74,163	$	198	$	(1,029	)	$	73,332
State and political subdivisions		121,752		3,957		(32	)		125,677		44,800		2,677		—			47,477

Total	$	217,312	$	4,311	$	(1,534	)	$	220,089	$	118,963	$	2,875	$	(1,029	)	$	120,809

December 31, 2018
Mortgage backed securities: residential										$	75,944	$	34	$	(3,072	)	$	72,906
State and political subdivisions											45,673		466		(90	)		46,049
Total										$	121,617	$	500	$	(3,162	)	$	118,955

   Gross
Amortized
Cost    Gross
Unrecognized
Gains    Gross
Unrecognized
Losses    Fair
Value
December 31, 2016

U.S. government sponsored entities and agencies
   $ 203    $ 6    $ —      $ 209
Mortgage backed securities: residential
   106,169    328    (2,343 )    104,154
State and political subdivisions
   122,522    1,214    (207 )    123,529








Total
   $ 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,						Three Months Ended June 30,				Six Months Ended June 30,
	2017			2016		2017			2016			2019		2018		2019			2018
Proceeds	$	61,647		$	11,939	$	122,837		$	74,203		$	87,424	$	1	$	347,037		$	1
Gross gains		414			430		659			1,920			367		1		2,168			1
Gross losses		(64	)		—		(189	)		(385	)		—		—		(1,651	)		—

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, 2017				June 30, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
One year or less	$	74,815	$	74,800	$	10,502	$	10,498
Over one year through five years		20,147		20,082		697		697
Over five years through ten years		4,681		4,811		27,586		28,033
Over ten years		141,543		140,767		157,855		157,946
Asset-backed securities						25,746		25,208
Mortgage-backed securities: residential		729,014		724,667		476,378		474,051
Mortgage-backed securities: commercial		15,675		15,610		18,544		18,699

Total	$	985,875	$	980,737	$	717,308	$	715,132

Held to maturity
Over one year through five years	$	1,607	$	1,665		1,106		1,138
Over five years through ten years		6,322		6,496		1,034		1,076
Over ten years		113,823		117,516		42,660		45,263
Mortgage-backed securities: residential		95,560		94,412		74,163		73,332

Total	$	217,312	$	220,089	$	118,963	$	120,809

Securities pledged at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 had a carrying amount of ~~$944,463~~$468,429 and ~~$808,224,~~$939,440, respectively, and were pledged to secure public ~~deposits and repurchase agreements.~~deposits.

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, aggregated by major security type and length of time in a continuous unrealized loss position:

																Less Than 12 Months					12 Months or Longer					Total
	Less Than 12 Months					12 Months or Longer					Total					Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2017
June 30, 2019
Available for sale
U.S. government sponsored entities and agencies	$	20,082	$	(65	)	$	—	$	—		$	20,082	$	(65	)	$	48	$	—		$	483	$	(8	)	$	531	$	(8	)
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
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
Mortgage-backed securities: residential	$	25,405	$	(335	)	$	55,224	$	(1,167	)	$	80,629	$	(1,502	)
State and political subdivisions		263		(1	)		1,154		(31	)		1,417		(32	)

Total held to maturity	$	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	)		8,385		(44	)		329,225		(3,700	)		337,610		(3,744	)
Mortgage-backed securities: commercial		15,752		(132	)		—		—			15,752		(132	)		—		—			7,532		(120	)		7,532		(120	)
Asset-backed securities																	22,713		(565	)		—		—			22,713		(565	)
State and political subdivisions		100,020		(5,182	)		—		—			100,020		(5,182	)		9,996		(4	)		30,152		(90	)		40,148		(94	)

Total available for sale	$	581,188	$	(13,147	)	$	9,907	$	(375	)	$	591,095	$	(13,522	)	$	41,142	$	(613	)	$	367,392	$	(3,918	)	$	408,534	$	(4,531	)


	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	)

	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	$	1,639	$	(6	)	$	59,548	$	(1,023	)	$	61,187	$	(1,029	)
Total held to maturity	$	1,639	$	(6	)	$	59,548	$	(1,023	)	$	61,187	$	(1,029	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
Available for sale
U.S. Treasury securities	$	163,722	$	(60	)	$	—	$	—		$	163,722	$	(60	)
U.S. government sponsored entities and agencies		1,355		(12	)		19,937		(100	)		21,292		(112	)
Mortgage-backed securities: residential		83,203		(755	)		490,752		(15,339	)		573,955		(16,094	)
Asset-backed securities		24,845		(900	)		—		—			24,845		(900	)
Corporate		9,839		(77	)		—		—			9,839		(77	)
State and political subdivisions		10,446		(106	)		69,238		(4,390	)		79,684		(4,496	)
Total available for sale	$	293,410	$	(1,910	)	$	579,927	$	(19,829	)	$	873,337	$	(21,739	)

	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	$	2,239	$	(40	)	$	68,067	$	(3,032	)	$	70,306	$	(3,072	)
State and political subdivisions		8,362		(39	)		3,675		(51	)		12,037		(90	)
Total held to maturity	$	10,601	$	(79	)	$	71,742	$	(3,083	)	$	82,343	$	(3,162	)

Unrealized losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher),. As of June 30, 2019, management does not intend to sell and it is more likely than not 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~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows:

							June 30, 2019			December 31, 2018
	September 30, 2017			December 31, 2016
Loans that are not PCI loans
Loans
Construction and land development	$	514,934		$	489,562		$	584,599		$	584,440
Commercial real estate:
Nonfarm, nonresidential		565,536			458,569			894,910			754,243
Other		33,310			38,571			37,845			48,017
Residential real estate:
Closed-end1-4 family		373,536			254,474
Closed-end 1-4 family								496,597			493,065
Other		158,577			150,515			197,549			189,817
Commercial and industrial		464,747			376,476			668,065			592,793
Consumer and other		3,933			3,359			4,945			5,568

Loans before net deferred loan fees		2,114,573			1,771,526			2,884,510			2,667,943
Deferred loan fees, net		(1,201	)		(793	)		(4,077	)		(2,544	)

Total loans that are not PCI loans		2,113,372			1,770,733
Total PCI loans		2,558			2,859
Total loans								2,880,433			2,665,399
Allowance for loan losses		(19,944	)		(16,553	)		(27,443	)		(23,451	)

Total loans, net of allowance for loan losses	$	2,095,986		$	1,757,039		$	2,852,990		$	2,641,948

The following table presents the activity in the allowance for loan losses by portfolio segment for the ~~three month~~three-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

																		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
Three Months Ended September 30, 2017
Three Months Ended June 30, 2019
Allowance for loan losses:
Beginning balance	$	3,796		$	5,011	$	2,939		$	6,894		$	49		$	18,689		$	4,742	$	7,027	$	4,810	$	11,229		$	49		$	27,857
Provision for loan losses		(507	)		212		169			707			9			590			42		614		18		6,382			(25	)		7,031
Loanscharged-off		—			—		—			(9	)		(11	)		(20	)		—		—		—		(7,563	)		(29	)		(7,592	)
Recoveries		668			—		14			—			3			685			—		—		16		70			61			147

Total ending allowance balance	$	3,957		$	5,223	$	3,122		$	7,592		$	50		$	19,944		$	4,784	$	7,641	$	4,844	$	10,118		$	56		$	27,443

Three Months Ended September 30, 2016
Three Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance	$	3,624		$	3,865	$	2,060		$	4,655		$	49		$	14,253		$	4,345	$	5,875	$	3,605	$	7,866		$	47		$	21,738
Provision for loan losses		427			43		451			455			16			1,392			267		288		909		(900	)		6			570
Loanscharged-off		(11	)		—		(40	)		—			(19	)		(70	)		—		—		—		—			(5	)		(5	)
Recoveries		—			—		13			—			2			15			1		—		19		10			8			38

Total ending allowance balance	$	4,040		$	3,908	$	2,484		$	5,110		$	48		$	15,590		$	4,613	$	6,163	$	4,533	$	6,976		$	56		$	22,341

The following table presents the activity in the allowance for loan losses by portfolio segment for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018.

	Construction and Land Development			Commercial Real Estate		Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Six Months Ended June 30, 2019
Allowance for loan losses:
Beginning balance	$	4,743		$	6,725	$	4,743		$	7,166		$	74		$	23,451
Provision for loan losses		41			916		101			11,012			16			12,086
Loans charged-off		—			—		(15	)		(8,131	)		(99	)		(8,245	)
Recoveries		—			—		15			71			65			151
Total ending allowance balance	$	4,784		$	7,641	$	4,844		$	10,118		$	56		$	27,443
Six Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance	$	3,802		$	5,981	$	3,834		$	7,587		$	43		$	21,247
Provision for loan losses		848			182		668			(572	)		17			1,143
Loans charged-off		(38	)		—		(7	)		(49	)		(17	)		(111	)
Recoveries		1			—		38			10			13			62
Total ending allowance balance	$	4,613		$	6,163	$	4,533		$	6,976		$	56		$	22,341

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

Allowance for loan losses:

Beginning balance
   $ 3,776 $ 4,266    $ 2,398 $ 6,068 $ 45 $ 16,553
Provision for loan losses
   (487 ) 957    687 1,833 28 3,018
Loanscharged-off
   —   —      (1 ) (309 ) (36 ) (346 )
Recoveries
   668 —      38 —   13 719




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

   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~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and net 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, 2017
June 30, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,011	$	—	$	1,011	$	—	$	—	$	—	$	2,193	$	—	$	2,193
Collectively evaluated for impairment		3,957		5,223		3,122		6,581		50		18,933		4,784		7,641		4,844		7,925		56		25,250
Purchased credit-impaired loans		—		—		—		—		—		—

Total ending allowance balance	$	3,957	$	5,223	$	3,122	$	7,592	$	50	$	19,944	$	4,784	$	7,641	$	4,844	$	10,118	$	56	$	27,443

Loans:
Individually evaluated for impairment	$	—	$	—	$	116	$	3,090	$	—	$	3,206	$	—	$	—	$	1,837	$	2,193	$	—	$	4,030
Collectively evaluated for impairment		514,934		598,846		531,997		461,657		3,933		2,111,367		584,599		932,755		692,309		665,872		4,945		2,880,480
Purchased credit-impaired loans		—		387		182		1,989		—		2,558

Total ending loans balance	$	514,934	$	599,233	$	532,295	$	466,736	$	3,933	$	2,117,131	$	584,599	$	932,755	$	694,146	$	668,065	$	4,945	$	2,884,510

December 31, 2016
December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,024	$	—	$	1,024	$	—	$	—	$	—	$	17	$	—	$	17
Collectively evaluated for impairment		3,776		4,266		2,398		5,044		45		15,529		4,743		6,725		4,743		7,149		74		23,434
Purchased credit-impaired loans		—		—		—		—		—		—

Total ending allowance balance	$	3,776	$	4,266	$	2,398	$	6,068	$	45	$	16,553	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451

Loans:
Individually evaluated for impairment	$	1,275	$	2,836	$	2,190	$	3,608	$	—	$	9,909	$	2,298	$	—	$	3,189	$	167	$	—	$	5,654
Collectively evaluated for impairment		488,287		494,304		402,799		372,868		3,359		1,761,617		582,142		802,260		679,693		592,626		5,568		2,662,289
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	$	584,440	$	802,260	$	682,882	$	592,793	$	5,568	$	2,667,943

Loans collectively evaluated for impairment reported at ~~September~~June 30, ~~2017~~2019 include certain acquired loans. At ~~September~~June 30, ~~2017,~~2019, thesenon-PCI loans had a carrying value of ~~$57,663,~~$72,774, comprised of contractually unpaid principal totaling ~~$59,227~~$73,717 and discounts totaling ~~$1,564.~~$943. Management evaluated these loans for credit deterioration since acquisition and determined that ~~$11 in~~an allowance for loan losses of $115 was necessary at ~~September~~June 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, 2016.2019.

The following table presents information related to impaired loans by class of loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

							Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
September 30, 2017
June 30, 2019
With no allowance recorded:
Construction and land development	$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential		—		—		—
Residential real estate:
Closed-end1-4 family		—		—		—
Closed-end 1-4 family							$	491		484	$	—
Other		116		116		—		1,353		1,353		—
Commercial and industrial		92		92		—		—		—		—
Consumer and other		—		—		—

Subtotal		208		208		—		1,844		1,837		—
With an allowance recorded:
Commercial and industrial		2,998		2,998		1,011		5,722		2,193		2,193

Subtotal		2,998		2,998		1,011		5,722		2,193		2,193

Total	$	3,206	$	3,206	$	1,011	$	7,566	$	4,030	$	2,193

December 31, 2016
December 31, 2018
With no allowance recorded:
Construction and land development	$	1,275	$	1,275	$	—	$	2,298	$	2,298	$	—
Commercial real estate:
Nonfarm, nonresidential		4,423		2,836		—
Residential real estate:
Closed-end1-4 family		2,069		2,069		—
Closed-end 1-4 family								1,280		1,272		—
Other		121		121		—		1,917		1,917		—
Commercial and industrial		934		934		—

Subtotal		8,822		7,235		—		5,495		5,487		—

With an allowance recorded:
Commercial and industrial		2,864		2,674		1,024		167		167		17

Subtotal		2,864		2,674		1,024		167		167		17

Total	$	11,686	$	9,909	$	1,024	$	5,662	$	5,654	$	17

The following table presents the average recorded investment of impaired loans by class of loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
Average Recorded Investment	2017		2016		2017		2016		2019		2018		2019		2018
With no allowance recorded:
Construction and land development	$	1,348	$	—	$	1,199	$	340	$	—	$	—	$	384	$	100
Commercial real estate:
Nonfarm, nonresidential		812		1,427		2,394		1,307		—		—		25		—
Residential real estate:
Closed-end1-4 family		112		451		863		533
Closed-end 1-4 family										681		496		744		432
Other		199		837		245		768		1,086		112		1,174		192
Commercial and industrial		499		46		657		110		2,638		883		1,319		867
Consumer and other		—		—		1		10

Subtotal		2,970		2,761		5,359		3,068		4,405		1,491		3,646		1,591

With an allowance recorded:
Construction and land development									$	—	$	—	$	91	$	—
Commercial and industrial	$	2,998	$	490	$	2,820	$	247		4,404		1,638		3,787		1,785
Residential real estate:
Closed-end1-4 family		—		70		—		23

Subtotal		2,998		560		2,820		270		4,404		1,638		3,878		1,785

Total	$	5,968	$	3,321	$	8,179	$	3,338

Total average recorded investment									$	8,809	$	3,129	$	7,524	$	3,376

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

					Nonaccrual		Loans Past Due Over 90 Days And Still Accruing Interest
	Nonaccrual		Loans Past Due Over 90 Days
September 30, 2017
June 30, 2019
Residential real estate:
Closed-end1-4 family	$	—	$	262
Closed-end 1-4 family					$	484	$	—
Other		116		—		1,353		250
Commercial and industrial		2,466		16		2,193		426

Total	$	2,582	$	278	$	4,030	$	676

December 31, 2016
December 31, 2018
Construction and land development	$	—	$	1,950	$	2,298	$	—
Commercial real estate:
Nonfarm, nonresidential		835		—
Residential real estate:
Closed-end1-4 family		—		452
Closed-end 1-4 family						1,273		—
Other		121		—		1,917		—
Commercial and industrial		2,674		150		—		208

Total	$	3,630	$	2,552	$	5,488	$	208

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~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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		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
September 30, 2017
June 30, 2019
Construction and land development	$	1,370	$	—	$	—	$	—	$	1,370	$	513,564	$	—	$	514,934	$	—	$	380	$	—	$	380	$	584,219	$	584,599
Commercial real estate:
Nonfarm, nonresidential		—		—		—		—		—		565,536		387		565,923		—		—		—		—		894,910		894,910
Other		—		—		—		—		—		33,310		—		33,310		—		—		—		—		37,845		37,845
Residential real estate:
Closed-end1-4 family		939		1,007		262		—		2,208		371,328		182		373,718
Closed-end 1-4 family																		350		—		159		509		496,088		496,597
Other		150		—		—		116		266		158,311		—		158,577		218		404		609		1,231		196,318		197,549
Commercial and industrial		511		301		16		2,466		3,294		461,453		1,989		466,736		601		289		2,619		3,509		664,556		668,065
Consumer and other		5		—		—		—		5		3,928		—		3,933		33		—		—		33		4,912		4,945
																	$	1,202	$	1,073	$	3,387	$	5,662	$	2,878,848	$	2,884,510
	$	2,975	$	1,308	$	278	$	2,582	$	7,143	$	2,107,430	$	2,558	$	2,117,131

December 31, 2016
December 31, 2018
Construction and land development	$	380	$	—	$	1,950	$	—	$	2,330	$	487,232	$	—	$	489,562	$	294	$	1,986	$	548	$	2,828	$	581,612	$	584,440
Commercial real estate:
Nonfarm, nonresidential		664		—		—		835		1,499		457,070		394		458,963		515		—		—		515		753,728		754,243
Other		—		—		—		—		—		38,571		—		38,571		—		—		—		—		48,017		48,017
Residential real estate:
Closed-end1-4 family		428		10		452		—		890		253,584		496		254,970
Closed-end 1-4 family																		2,390		404		228		3,022		490,043		493,065
Other		231		—		—		121		352		150,163		—		150,515		142		—		1,810		1,952		187,865		189,817
Commercial and industrial		155		39		150		2,674		3,018		373,458		1,969		378,445		241		252		208		701		592,092		592,793
Consumer and other		—		—		—				—		3,359		—		3,359		—		—		—		—		5,568		5,568
																	$	3,582	$	2,642	$	2,794	$	9,018	$	2,658,925	$	2,667,943
	$	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 excludes deferred loan fees and 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~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

									Pass		Special Mention		Substandard		Total
	Pass		Special Mention		Substandard		Total
September 30, 2017
June 30, 2019
Construction and land development	$	512,912	$	—	$	2,022	$	514,934	$	584,251		113		235	$	584,599
Commercial real estate:
Nonfarm, nonresidential		548,792		12,322		4,809		565,923		894,430		480		—		894,910
Other		32,927		—		383		33,310		37,229		616		—		37,845
Residential real estate:
Closed-end1-4 family		371,149		—		2,569		373,718
Closed-end 1-4 family										494,306		—		2,291		496,597
Other		156,820		—		1,757		158,577		195,207		—		2,342		197,549
Commercial and industrial		445,736		12,649		8,351		466,736		642,120		2,662		23,283		668,065
Consumer and other		3,928		5		—		3,933		4,945		—		—		4,945
									$	2,852,488	$	3,871	$	28,151	$	2,884,510
	$	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

	Pass		Special Mention		Substandard		Total
December 31, 2018
Construction and land development	$	580,468	$	1,416	$	2,556	$	584,440
Commercial real estate:
Nonfarm, nonresidential		739,469		14,774		—		754,243
Other		48,017		—		—		48,017
Residential real estate:
Closed-end 1-4 family		489,781		948		2,336		493,065
Other		186,485		404		2,928		189,817
Commercial and industrial		553,589		8,313		30,891		592,793
Consumer and other		5,567		1		—		5,568
	$	2,603,376	$	25,856	$	38,711	$	2,667,943

Troubled Debt Restructurings

As of ~~both September~~June 30, ~~2017 and December 31, 2016,~~2019, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of ~~$608 and $698, respectively.~~$316. As of December 31, 2018, the Company’s loan portfolio contained one loan that had been modified in a troubled debt restructuring with a balance of $167.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	506,345	$	499,385	$	491,388	$	492,761
Other		4,662		2,954		3,614		3,689

The related loan servicing rights activity for the three and six months ended June 30, 2019 and 2018 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Servicing rights:
Beginning of period	$	3,366		$	3,602		$	3,403		$	3,620
Additions		196			161			383			357
Amortized to expense		(263	)		(227	)		(487	)		(441	)
Decrease in impairment		—			—			—			—
End of period	$	3,299		$	3,536		$	3,299		$	3,536

The components of net loan servicing fees for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Loan servicing fees, net:
Loan servicing fees	$	312		$	309		$	951		$	903		$	312		$	330		$	618		$	663
Amortization of loan servicing fees		(242	)		(349	)		(721	)		(905	)		(263	)		(227	)		(487	)		(441	)
Change in impairment		—			—			—			—

Total	$	70		$	(40	)	$	230		$	(2	)	$	49		$	103		$	131		$	222

The fair value of servicing rights was estimated by management to be approximately ~~$4,916~~$3,905 at ~~September~~June 30, ~~2017.~~2019. Fair value for ~~September~~June 30, ~~2017~~2019 was determined using a weighted average discount rate of ~~10.5%~~9.5% and a weighted average prepayment speed of ~~10.2%~~16.4%. At December 31, ~~2016,~~2018, the fair value of servicing rights was estimated by management to be approximately ~~$5,015.~~$4,836. Fair value for December 31, ~~2016~~2018 was determined using a weighted average discount rate of ~~10.5%~~9.5% and a weighted average prepayment speed of ~~9.9%~~11.9%.

NOTE 5—~~SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE~~LEASES

~~Our subsidiary bank enters into borrowing arrangements with our retail business customers~~

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and ~~correspondent banks through~~all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements ~~to repurchase (“securities sold under agreements to repurchase”) under~~in which the ~~bank pledges investment securities owned~~Company is the lessee. The leases are presented as of part of other assets and ~~under its control as collateral against these short-term borrowing arrangements. At maturity~~other liabilities on the securities underlying the agreements are returned to the Company. At September 30, 2017 and December 31, 2016, these short-term borrowings totaled $32,862 and $36,496, respectively, and were secured by securities with carrying amounts of $41,279 and $41,136, respectively. At September 30, 2017,consolidated balance sheet.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2033. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s ~~repurchase agreements had~~consolidated statements of condition. Upon adoption of FASB ASU 2016-02 ~~one-day~~Leases ~~maturities.~~on January 1, 2019, the Company began recognizing right-of-use assets and lease liabilities related to its operating leases. Prior to ASU 2016-02, such assets and liabilities were recognized only for capital leases (referred to as finance leases under the amendments of ASU 2016-02). In accordance with the optional transition method allowed by ASU 2016-11, comparative prior period information included within this note is presented in accordance with guidance in effect during those periods. The Company has one existing finance lease for additional office space with a lease term through 2033. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, and was recorded in other assets and other liabilities, Topic 842 did not materially impact the accounting for this lease. During the six months ended June 30, 2019, one additional lease agreement has been executed and is scheduled to commence in 2020 relocating one branch in Williamson County, Tennessee.

The following table ~~provides additional details~~represents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition.

Lease right-of-use assets	Classification	June 30, 2019
Operating lease right-of-use assets	Other Assets	$	40,967
Finance lease right-of-use assets	Other Assets		2,919
Total lease right-of-use assets		$	43,886

Lease liabilities	Classification	June 30, 2019
Operating lease right-of-use assets	Other Liabilities	$	42,556
Finance lease right-of-use assets	Other Liabilities		2,996
Total lease liabilities		$	45,552

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion, which will be determined within the timeframe of the lease agreement, and not included within the calculated ROU. The Company utilizes the discount rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company calculated a blended rate consisting of the Federal Home Loan Bank’s rate matching to the duration of the lease (over-collateralized borrowing rate) and the offering rate of the Company’s most recent subordinated debt offering in June of 2016. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of ~~September 30, 2017:~~January 1, 2019, was used. For the Company’s only finance lease that commenced December 2018, the Company utilized its blended rate calculation based on the term of the lease.

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 %

Weighted-average remaining lease term (in years)	June 30, 2019
Operating leases		12.1
Finance lease		14.9

Weighted-average discount rate
Operating leases	5.48%
Finance lease	5.49%

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

Lease costs
Operating lease costs	$	2,527
Variable lease costs		181
Short-term lease costs		94
Finance lease costs
Interest on lease liabilities⁽¹⁾		82
Amortization of right-of-use asset		101
Total lease costs	$	2,985

⁽¹⁾

Included in interest expense on Federal Home Loan Advances and other borrowings in the Company's consolidated statement of income. All other lease costs in this table are included in occupancy and equipment expense.

Rent expense related to leases during the three and six months ended June 30, 2018, was $1,319 and $2,547, respectively.

Other supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,342
Operating cash flows from finance leases		82
Financing cash flows from finance leases		54

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of June 30, 2019 are as follows:

Twelve Months Ended:	Finance			Operating
2020	$	274		$	4,812
2021		278			4,869
2022		282			4,876
2023		286			4,850
2024		291			4,921
Thereafter		2,986			33,713
Total future minimum lease payments	$	4,397		$	58,041
Less: Imputed interest		(1,401	)		(15,485	)
Total lease liabilities	$	2,996		$	42,556

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of December 31, ~~2016:~~2018 are as follows:

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 %

Twelve Months Ended:	Finance		Operating
2019	$	272	$	4,841
2020		276		4,849
2021		280		4,871
2022		284		4,856
2023		288		4,885
Thereafter		3,133		36,178
Total future minimum lease payments	$	4,533	$	60,480

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 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 were exercisable in whole or in part up to seven years following the date of issuance, and they expired on March 30, 2017. The warrants were detachable from the common stock. There were 12,461 and 6,575 warrants exercised during the nine months ended September 30, 2017 and 2016, respectively. A summary of the stock warrant activity for the nine months ended September 30, 2017 and 2016 follows:

   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, 2017, there were no outstanding warrants associated with the 2010 offering.~~

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~~$1,513 and ~~$406~~$1,318, and ~~$1,970~~$2,842 and ~~$1,201~~$2,078 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was ~~$261~~$92 and ~~$711~~$205 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017. The total income tax benefit~~2019 and was $220 and $283 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016 was $107 and $616,~~2018, respectively.

Stock Options: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, ~~provides~~provided for authorized shares up to 4,000,000. ~~At September 30, 2017, there were 1,960,041 authorized shares available for issuance under the 2007 Plan, although the Company has ceased issuing awards under the 2007 Plan.~~

The 2007 Plan ~~provides~~provided 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~~an equity incentive plan, the 2017 Omnibus Equity Incentive ~~Plan. The~~Plan which the Company’s shareholders approved ~~the 2017 Omnibus Equity Incentive Plan~~ at the 2017 annual meeting of shareholders. On April 12, 2018, the Company’s Board of Directors approved the Amended and Restated 2017 Omnibus Equity Incentive Plan (“Amended and Restated 2017 Plan”) to make certain changes in response to feedback received from our shareholders. The terms of the Amended and Restated 2017 ~~Omnibus Equity Incentive~~ Plan are substantially similar to the terms of the 2007 ~~Omnibus Equity Incentive~~ Plan it was intended to replace. The Amended and Restated 2017 ~~Omnibus Equity Incentive~~ Plan provides for authorized shares up to ~~5,000,000.~~3,500,000. At ~~September~~June 30, ~~2017,~~2019, there were ~~4,762,750~~2,421,000 authorized shares available for issuance under the Amended and Restated 2017 ~~Omnibus Equity Incentive~~ Plan.

Employee, organizer and director stock option 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 ten-year contractual term with varying vesting ~~period of three to five years and have aten-year~~ ~~contractual term.~~requirements. The Company assigns discretion to its ~~Board of Directors~~Compensation Committee 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 ~~a peer group.~~the Company. 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, 2017			September 30, 2016			June 30, 2019			June 30, 2018
Risk-free interest rate		2.16	%		1.60	%		2.47	%		2.96	%
Expected term		6.8 years			7.5 years		7 years			7.5 years
Expected stock price volatility		32.32	%		30.09	%		30.64	%		32.09	%
Dividend yield		0.03	%		0.24	%		0.57	%		0.00	%

The weighted average fair value of options granted for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 were ~~$14.51~~$9.78 and ~~$9.78,~~$12.03, respectively.

A summary of the activity in the plans for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 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		1,395,016		$	16.70		6.39	$	35,090
Outstanding at December 31, 2018											1,807,922		$	24.68		6.41	$	9,581
Granted		267,195			38.04						91,823			27.83
Exercised		(146,944	)		11.73						(128,125	)		14.14
Forfeited, expired, or cancelled		(3,113	)		25.37						(18,883	)		32.74

Outstanding at period end		1,512,154		$	20.93		6.65	$	22,256		1,752,737		$	18.47		6.87	$	4,113

Vested or expected to vest		1,436,546		$	20.93		6.65	$	21,143		1,666,525		$	25.52		6.13	$	3,908
Exercisable at period end		787,451		$	13.43		4.96	$	17,498		839,675		$	17.32		6.13	$	8,847


	For the nine months ended September 30,				For the Six Months Ended June 30,
	2017		2016		2019		2018
Stock options exercised:
Intrinsic value of options exercised	$	4,141	$	3,463	$	1,869	$	3,745
Cash received from options exercised		1,361		1,357		1,277		1,937
Tax benefit realized from option exercises		406		522		205		283

As of ~~September~~June 30, ~~2017,~~2019, there was ~~$6,054~~$4,786 of total unrecognized compensation cost related tonon-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of ~~1.8~~1.97 years.

Restricted Stock and Restricted Stock Units: Additionally, the 2007 ~~Omnibus Equity Incentive~~ Plan and the Amended and Restated 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. In April 2019, the Company began awarding restricted share units which participants do not have voting rights or dividend rights until the restrictions have lapsed. These awards typically 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~~six months ended ~~September~~June 30, ~~2017~~2019 is as follows:


Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value		Shares			Weighted- Average Grant- Date Fair Value
Non-vested at December 31, 2016		106,458		$	19.81
Non-vested at December 31, 2018							176,516		$	31.07
Granted		27,282			37.35		1,255			31.87
Vested		(36,767	)		18.22		(70,069	)		30.33
Forfeited		(564	)		28.66		(1,035	)		32.95

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

Non-vested at June 30, 2019							106,667

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~~June 30, ~~2017,~~2019, there was ~~$2,080~~$1,713 of total unrecognized compensation cost related tonon-vested shares granted under the 2007 Plan and Amended and Restated 2017 Plan. The cost is expected to be recognized over a weighted-average period of ~~3.6~~1.30 years.

The ~~total fair value of shares vested~~Company began granting restricted stock units in 2019. The following table outlines restricted stock units that were granted, grouped by similar vesting criteria, during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016 was $1,457 and $974, respectively.~~2019.

~~The total income tax benefit realized from~~

Grant year	Units Awarded		Service period		Period in which units to be settled into shares of common stock
2019		124,661		3.00		2022

Stock compensation expense related with the ~~vesting of~~ restricted ~~stock was $215 and $4 and $305 and $170~~share units for the three and ~~nine~~six months ended ~~September~~June 30, 2019 was $483 and $579, respectively. There was no expense related to restricted share units in 2018. This stock compensation 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 June 30, 2019, there was $3,814 of total unrecognized compensation cost related to non-vested shares granted under the 2007 Plan and Amended and Restated 2017 ~~and 2016, respectively.~~Plan. The cost is expected to be recognized over a weighted-average period of 2.75 years.

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, 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~~increased 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~~June 30, ~~2017,~~2019, 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~~June 30, ~~2017,~~2019, 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~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 for the Company and Bank:

   Actual Required
For Capital
Adequacy Purposes To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
   Amount    Ratio Amount    Ratio Amount    Ratio
September 30, 2017

Company common equity Tier 1 capital to risk-weighted assets
   $ 293,004    11.58 % $ 113,908    4.50 % N/A    N/A
Company Total Capital to risk weighted assets
   $ 371,510    14.68 % $ 202,502    8.00 % N/A    N/A
Company Tier 1 (Core) Capital to risk weighted assets
   $ 293,004    11.58 % $ 151,877    6.00 % N/A    N/A
Company Tier 1 (Core) Capital to average assets
   $ 293,004    8.58 % $ 136,609    4.00 % N/A    N/A
Bank common equity Tier 1 capital to risk-weighted assets
   $ 347,043    13.71 % $ 113,901    �� 4.50 % $ 164,523    6.50 %
Bank Total Capital to risk weighted assets
   $ 367,079    14.50 % $ 202,490    8.00 % $ 253,112    10.00 %
Bank Tier 1 (Core) Capital to risk weighted assets
   $ 347,043    13.71 % $ 151,867    6.00 % $ 202,490    8.00 %
Bank Tier 1 (Core) Capital to average assets
   $ 347,043    10.17 % $ 136,511    4.00 % $ 170,639    5.00 %
December 31, 2016

Company common equity Tier 1 capital to risk-weighted assets
   $ 263,693    11.75 % $ 101,022    4.50 % N/A    N/A
Company Total Capital to risk weighted assets
   $ 338,675    15.09 % $ 179,595    8.00 % N/A    N/A
Company Tier 1 (Core) Capital to risk weighted assets
   $ 263,693    11.75 % $ 134,696    6.00 % N/A    N/A
Company Tier 1 (Core) Capital to average assets
   $ 263,693    9.28 % $ 113,697    4.00 % N/A    N/A
Bank common equity Tier 1 capital to risk-weighted assets
   $ 319,005    14.18 % $ 101,216    4.50 % $ 146,201    6.50 %
Bank Total Capital to risk weighted assets
   $ 335,650    14.92 % $ 179,939    8.00 % $ 224,924    10.00 %
Bank Tier 1 (Core) Capital to risk weighted assets
   $ 319,005    14.18 % $ 134,954    6.00 % $ 179,939    8.00 %
Bank Tier 1 (Core) Capital to average assets
   $ 319,005    11.22 % $ 113,697    4.00 % $ 142,122    5.00 %

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019
Company-Level
Company common equity Tier 1 capital to RWA	$	375,710		11.2	%	$	151,266		4.5	%	N/A		N/A
Company Total Capital to RWA	$	462,020		13.7	%	$	268,918		8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	375,710		11.2	%	$	201,689		6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	375,710		9.2	%	$	134,459		4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	433,574		12.9	%	$	151,253		4.5	%	$	218,476		6.5	%
Bank Total Capital to RWA	$	461,102		13.7	%	$	268,894		8.0	%	$	336,117		10.0	%
Bank Tier 1 (Core) Capital to RWA	$	433,574		12.9	%	$	201,670		6.0	%	$	268,894		8.0	%
Bank Tier 1 (Core) Capital to average assets	$	433,574		10.6	%	$	163,420		4.0	%	$	204,274		5.0	%
December 31, 2018
Company-Level
Company common equity Tier 1 capital to RWA	$	367,096		12.2	%	$	135,598		4.5	%	N/A		N/A
Company Total Capital to RWA	$	449,325		14.9	%	$	241,064		8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	367,096		12.2	%	$	180,798		6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	367,096		8.8	%	$	167,553		4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	421,335		14.0	%	$	135,613		4.5	%	$	195,886		6.5	%
Bank Total Capital to RWA	$	444,871		14.8	%	$	241,090		8.0	%	$	301,363		10.0	%
Bank Tier 1 (Core) Capital to RWA	$	421,335		14.0	%	$	180,818		6.0	%	$	241,090		8.0	%
Bank Tier 1 (Core) Capital to average assets	$	421,335		10.1	%	$	167,420		4.0	%	$	209,275		5.0	%

Note: Minimum ratios presented exclude the capital conservation buffer

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. ~~Neither~~

NOTE 8—DERIVATIVE INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities.

During 2019, the Company ~~nor~~entered into sixteen swap transactions with a notional amount of $101,205 designated as fair value hedges. These derivatives are intended to protect against the ~~Bank~~effects of changing interest rates on the fair values of fixed rate securities.

A summary of the Company's fair value hedge relationships as of June 30, 2019 are as follows (in thousands):

June 30, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Liability derivative

Interest rate swap agreements - securities

Other liabilities

7.23

2.527%

3 month LIBOR

101,205

4,733

There were no fair value hedge relationships as of December 31, 2018.

The effects of fair value hedge relationships reported in interest income on securities on the consolidated statements of income for the three and six months ended June 30, 2019 and 2018 were as follows (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
Gain (loss) on fair value hedging relationship	2019			2018		2019			2018
Interest rate swap agreements - securities:
Hedged items	$	3,615		$	—	$	4,733		$	—
Derivative designated as hedging instruments		(3,615	)		—		(4,733	)		—

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 2019:

	Carrying Amount of the Hedged Assets (in thousands)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Line item on the balance sheet	June 30, 2019		June 30, 2019
Securities available-for-sale	$	101,205	$	4,733

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company uses cash flow hedge relationships in an effort to manage future interest rate exposure. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability. A summary of the Company's cash flow hedge relationships as of June 30, 2019 are as follows (in thousands):

June 30, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

Liability derivatives

Interest rate swap agreements

Other liabilities

2.232%

3 month LIBOR

100,000

1,667

There were no cash flow hedge relationships as of December 31, 2018.

The effects of the Company's cash flow hedge relationships on the statement of comprehensive income (loss) during the three and six months ended June 30, 2019 and 2018 were as follows:

	Amount of Gain Recognized in Other Comprehensive Income (Loss)					Amount of Gain Recognized in Other Comprehensive Income (Loss)
	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
Liability derivatives
Interest rate swap agreements	$	(1,231	)	$	—	$	(1,231	)	$	—

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. The Company expects the hedges to continue to be highly effective and qualify for hedge accounting during the remaining terms of the swaps.

NOTE 9—COMMITMENTS AND CONTINGENCIES

We enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. Those agreements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. These off-balance sheet arrangements include commitments to make loans, credit lines and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept or use these commitments. A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our customers under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Actual borrowing needs of our customers may ~~currently pay dividends without prior written approval~~exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from ~~its primary regulatory agencies.~~

other sources. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our customers may have a material adverse effect on our business, financial condition, results of operations or reputation.

Commitments to make loans, credit lines and standby letters of credit involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

The contractual amounts of financial instruments with off-balance sheet risk were as follows:

	June 30, 2019		December 31, 2018
Unused lines of credit	$	801,049	$	654,584
Standby letters of credit		52,064		40,024
Unfunded loan commitments		63,707		28,731

NOTE 8—10—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 and 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). Included in securities is interest rate swap agreements. The carrying amount of the interest rate swap agreements is based on pricing models that utilize observable market inputs (Level 2). 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~~Other Assets: Included in other assets are certain assets carried at fair value and interest rate locks associated with the mortgage loan pipeline. The fair ~~values~~value of ~~derivatives are~~the mortgage loan pipeline rate locks is based ~~on valuation models using observable~~upon the projected sales price of the underlying loans, taking into account market ~~data as of~~interest rates and other market factors at the measurement date, net of the projected fallout rate. These assets are valued using similar observable data that occurs in the market. (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: 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).

Other Liabilities: The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions, and the cash flow hedge and interest rate locks associated with the funding for its mortgage loan originations. The fair value of these liabilities is based on pricing models that utilize observable market inputs (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 June 30, 2019 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	$	—		1,688	$	—
Mortgage-backed securities-residential		—		474,051		—
Mortgage-backed securities-commercial		—		18,699		—
Asset-backed securities		—		25,208		—
Corporate notes		—		22,716		—
State and political subdivisions		—		172,770		—
Total securities available for sale	$	—	$	715,132	$	—
Loans held for sale	$	—	$	27,093	$	—
Other assets	$	—	$	278	$	—
Financial Liabilities
Other liabilities	$	—	$	6,580	$	—

   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 )    $ —

	Fair Value Measurements at December 31, 2018 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. Treasury securities	$	253,014	$	—	$	—
U.S. government sponsored entities and agencies		—		21,888		—
Mortgage-backed securities-residential		—		580,699		—
Asset-backed securities		—		24,844		—
Corporate notes				12,424
State and political subdivisions		—		137,799		—
Total securities available for sale	$	253,014	$	777,654	$	—
Loans held for sale	$	—	$	11,103	$	—
Other assets	$	—	$	206	$	—
Financial Liabilities
Other liabilities	$	—	$	129	$	—

As of ~~September~~June 30, ~~2017,~~2019, the unpaid principal balance of loans held for sale was ~~$11,524~~$26,118 resulting in an unrealized gain of ~~$299~~$975 included in ~~gains on sale of loans.~~mortgage banking revenue. As of December 31, ~~2016,~~2018, the unpaid principal balance of loans held for sale was ~~$23,457,~~$10,722, resulting in an unrealized gain of ~~$242~~$381 included in ~~gains on sale of loans.~~mortgage banking revenue. For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the change in fair value related to loans held for sale, which is included in ~~gain on sale of loans,~~mortgage banking revenue, was ~~$(48)~~$324 and ~~$326,~~$220, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the change in fair value related to loans held for sale, which is included in ~~gain on sale of loans,~~mortgage banking revenue, was ~~$57~~$594 and ~~$558,~~$194, respectively. None of these loans were 90 days or more past due or on nonaccrual as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

There were no transfers between ~~level~~Level 1 and 2 during ~~2017~~2019 or ~~2016.~~2018.

Assets measured at fair value on anon-recurring basis are summarized below:

There ~~were two collateral-dependent commercial and industrial impaired loans carried at fair value of $1,987 as of September 30, 2017 and~~was one collateral-dependent ~~commercial and industrial~~ impaired loan carried at fair value of ~~$1,650~~$0 as of ~~December 31, 2016.~~June 30, 2019. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, there was no~~2019, an additional provision for loan losses of $6,304 and $9,759 was recorded related to impaired loans recorded at fair value of collateral. There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, $115~~2018, an additional provision for loan losses of $16 was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of ~~$1,503 as of September 30, 2017 and~~ $0 as of June 30, 2019 and December 31, ~~2016. The foreclosed property was previously collateral for a commercial real estate loan.~~2018. There were no properties at ~~September~~June 30, ~~2017~~2019 or ~~2016~~2018 that had required write-downs to fair ~~value resulting in no write downs for the three and nine months ended September 30, 2017 and 2016, respectively.~~value.

The carrying amounts and estimated fair values of financial instruments at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows:


	Carrying Amount			Fair Value Measurements at September 30, 2017 Using:												Fair Value Measurements at June 30, 2019 Using:
	Carrying Amount			Level 1			Level 2			Level 3		Total		Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	155,842		$	155,842		$	—		$	—	$	155,842	$	150,721	$	150,721	$	—	$	—	$	150,721
Certificates of deposit held at other financial institutions		2,365			—			2,365			—		2,365		3,840		—		3,840		—		3,840
Securities available for sale		980,737			—			980,737			—		980,737		715,132		—		715,132		—		715,132
Securities held to maturity		217,312			—			220,089			—		220,089		118,963		—		120,809		—		120,809
Loans held for sale		11,823			—			11,823			—		11,823		27,093		—		27,093		—		27,093
Net loans		2,115,930			—			—			2,074,102		2,074,102		2,852,990		—		—		2,886,557		2,886,557
Restricted equity securities		18,472			n/a			n/a			n/a		n/a
Servicing rights, net		3,639			—			—			4,916		4,916		3,299		—		—		3,905		3,905
Mortgage banking derivative assets		501			—			501			—		—
Other assets															278		—		278		—		278
Accrued interest receivable		11,156			(13	)		5,603			5,566		11,156		14,281		136		5,196		8,950		14,282
Financial liabilities
Deposits	$	2,824,825		$	1,438,459		$	1,352,945		$	—	$	2,791,404	$	3,146,645	$	2,182,888	$	965,228	$	—	$	3,148,116
Repurchase agreements		32,862			—			32,862			—		32,862
Federal Home Loan Bank advances		337,000			—			355,910			—		355,910		396,500		—		396,624		—		396,624
Subordinated notes, net		58,470			—			—			61,576		61,576		58,782		—		—		61,438		61,438
Mortgage banking derivative liabilities		(88	)		—			(88	)		—		—
Other liabilities															6,580		—		6,580		—		6,580
Accrued interest payable		2,597			35			2,212			350		2,597		4,312		179		687		3,446		4,312

	Carrying Amount			Fair Value Measurements at December 31, 2016 Using:
	Carrying Amount			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		9,931			—			5,172			4,759		9,931
Financial liabilities
Deposits	$	2,391,818		$	1,551,461		$	836,444		$	—	$	2,387,905
Federal funds purchased and repurchase agreements		83,301			—			83,301			—		83,301
Federal Home Loan Bank advances		132,000			—			131,098			—		131,098
Subordinated notes, net		58,337			—			—			61,762		61,762
Mortgage banking derivative liabilities		(66	)		—			(66	)		—		—
Accrued interest payable		1,924			154			1,075			695		1,924

			Fair Value Measurements at December 31, 2018 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	280,212	$	280,212	$	—	$	—	$	280,212
Certificates of deposit held at other financial institutions		3,594		—		3,594		—		3,594
Securities available for sale		1,030,668		253,014		777,654		—		1,030,668
Securities held to maturity		121,617		—		118,955		—		118,955
Loans held for sale		11,103		—		11,103		—		11,103
Net loans		2,641,948		—		—		2,622,386		2,622,386
Servicing rights, net		3,403		—		—		4,836		4,836
Other assets		206		—		206		—		206
Accrued interest receivable		13,337		71		5,539		7,727		13,337
Financial liabilities
Deposits	$	3,431,807	$	2,105,951	$	1,319,326	$	—	$	3,425,277
Federal Home Loan Bank advances		368,500		—		366,786		—		366,786
Subordinated notes, net		58,693		—		—		59,852		59,852
Other liabilities		129		—		129		—		129
Accrued interest payable		4,700		146		3,866		688		4,700

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~~In accordance 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 estimateASU 2016-01, the fair value of loans ~~do not necessarily represent an exit price.~~

~~(c) Restricted Equity Securities:~~ ~~It is not practical to determine the~~held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using a cash flow projection methodology that relies on three primary assumptions: (1) the expected prepayment rate of ~~Federal Home Loan Bank or Federal Reserve Bank stock due~~loans; (2) the magnitude of future net losses based on expected default rate and severity of loss; and (3) the discount rate applicable to ~~restrictions placed on its transferability.~~the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

~~(d)~~(c) 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 3 classification.

~~(e)~~(d) 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)~~(e) 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)~~(f) 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)~~(g) 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)~~(h) 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)~~(i) 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—11—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,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Basic
Net income available to common shareholders	$	8,889		$	7,137		$	25,689		$	20,855		$	5,173		$	10,161		$	8,075		$	20,213
Less: earnings allocated to participating securities		(66	)		(70	)		(206	)		(219	)		(41	)		(118	)		(79	)		(192	)

Net income allocated to common shareholders	$	8,823		$	7,067		$	25,483		$	20,636		$	5,132		$	10,043		$	7,996		$	20,021

Weighted average common shares outstanding including participating securities		13,188,761			10,721,253			13,119,170			10,652,223			14,599,407			14,383,493			14,580,370			13,819,742
Less: Participating securities		(97,842	)		(105,343	)		(105,350	)		(111,937	)		(117,063	)		(167,381	)		(143,043	)		(130,898	)

Average shares		13,090,919			10,615,910			13,013,820			10,540,286			14,482,344			14,216,112			14,437,327			13,688,844

Basic earnings per common share	$	0.67		$	0.67		$	1.96		$	1.96		$	0.35		$	0.71		$	0.55		$	1.46

Diluted
Net income allocated to common shareholders	$	8,823		$	7,067		$	25,483		$	20,636
Weighted average common shares outstanding for basic earnings per common share		13,090,919			10,615,910			13,013,820			10,540,286
Add: Dilutive effects of assumed exercises of stock options		584,778			668,674			662,890			652,272
Add: Dilutive effects of assumed exercises of stock warrants		—			13,370			2,104			12,937

Average shares and dilutive potential common shares		13,675,697			11,297,954			13,678,814			11,205,495

Diluted earnings per common share	$	0.65		$	0.63		$	1.86		$	1.84

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Diluted
Net income allocated to common shareholders	$	5,132	$	10,043	$	7,996	$	20,021
Weighted average common shares outstanding for basic earnings per common share		14,482,344		14,216,112		14,437,327		13,688,844
Add: Dilutive effects of assumed exercises of stock options		341,777		597,947		376,762		557,307
Add: Dilutive effects of assumed restricted stock units		70,019		—		35,203		—
Average shares and dilutive potential common shares		14,894,140		14,814,059		14,849,292		14,246,151
Dilutive earnings per common share	$	0.34	$	0.68	$	0.54	$	1.41

For ~~the~~ three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, stock options for ~~352,042~~980,099 and ~~272,087~~659,291 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for ~~254,204~~874,279 and ~~151,544~~535,285 shares of common stock were not considered in computing diluted earnings per common share for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, respectively, because they were antidilutive.

NOTE ~~10—~~12—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled ~~$58,470~~$58,782 and ~~$58,337~~$58,693 at ~~September~~June 30, ~~2017~~2019 and at December 31, ~~2016,~~2018, 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 $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875%fixed-to-floating rate subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional investors, and in 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 a private offering. The 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 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 Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the 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 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 Subordinated Notes. 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 the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, amortization of issuance costs ~~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.~~remained consistent at $89.

The following table summarizes the terms of each subordinated note offering:


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

The following discussion ~~is intended to assist~~and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the ~~understanding and assessment of significant changes and trends related to the Company’s results of operations and~~accompanying financial ~~condition.~~statements. 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 Annual Report on Form10-K filed with the ~~SEC~~Securities and Exchange Commission (“SEC”) on March ~~16, 2017,~~19, 2019, which includes additional information about critical accounting policies and practices and 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 1215 branches and ~~one~~a loan production office in the ~~demographically attractive and~~ growing Williamson, Rutherford and Davidson Counties within the Nashville metropolitan 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)~~Synergy Bank), 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.

As of June 30, 2019, we had consolidated total assets of $4,071,971, total loans, including loans held for sale, of $2,907,526, total deposits of $3,146,645 and total equity of $393,609.

Our principal executive office is located at 722 Columbia Avenue, Franklin, Tennessee 37064-2828, and our telephone number is (615) 236-2265. Our website is www.franklinsynergybank.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein.

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 Annual Report on Form10-K that was filed with the SEC on March ~~16, 2017.~~19, 2019. 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.

Allowance for Loan Losses (ALLL)

The ~~allowance for loan losses~~ALLL 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.~~has become uncollectible. 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 (“TDR” or “TDRs”) 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~~TDRs 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~~TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For ~~troubled debt restructurings~~TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ~~allowance for loan losses.~~ALLL.

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~~qualitative 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.

~~Recently Adopted Accounting Pronouncements~~

~~In March 2016, the FASB issued~~~~ASU2016-09,~~ ~~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 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 additional~~paid-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 excludes the amount of excess tax benefits that would have previously been recognized in additional~~paid-in~~ ~~capital. Additionally, excess tax benefits 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~~ 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. The Company elected to adopt this ASU in the fourth quarter of 2016, effective as of January 1, 2016. The adoption of this ASU decreased income tax expense for the nine months ended September 30, 2016 by $616 and increased diluted earnings per share by $0.04. The adoption of 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 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, ASU~~2014-09~~ ~~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, and~~non-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 ASU~~2014-09,~~ 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 ASU~~2014-09~~ 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 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 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 creates~~~~Topic 842, Leases~~ ~~and supersedes~~~~Topic 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 on their balance sheet as lease liabilities with a corresponding~~right-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 a~~right-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 ASU~~2016-02~~ ~~will have on the Company’s consolidated financial statements.~~

~~In June 2016, the FASB issued ASU2016-13,~~~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The 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 on~~available-for-sale~~ debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 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, beginning after December 15, 2018. The Company is currently 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 of adopting ASU~~2016-13~~ ~~is not currently known.~~

~~In August 2016, the FASB issued ASU2016-15,~~~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~~~. This Accounting Standards Update addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement ofzero-coupon~~ debt 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; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and 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. 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 of~~ASU 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 of~~ASU 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 will not apply modification accounting to a share-based payment award if all of the following are the same 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. ASU~~2017-09~~ 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. ASU~~2017-09~~ ~~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 make certain targeted improvements to simplify the application 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 this Update; however, management may consider hedging activities in the future. Adoption of this Update is not expected to have a material impact on the Company’s consolidated financial statements.

COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017 AND 2016~~2019 and 2018

(Dollar Amounts in ~~Thousands)~~Thousands)

Overview

The Company reported net income of ~~$8,889~~$5,181 and ~~$25,697~~$8,083 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared to ~~$7,137~~$10,169 and ~~$20,878~~$20,221 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively. After earnings attributable to noncontrolling interest, ~~and 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~~six months ended ~~September~~June 30, ~~2017~~2019, was ~~$8,889~~$5,173 and ~~$25,689,~~$8,075, respectively, compared to ~~$7,137~~$10,161 and ~~$20,855~~$20,213 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, respectively. ~~The primary reason for the increase in net earnings~~Net income available to common shareholders decreased by $4,988 and $12,138 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 was increased interest income~~2019, compared to June 30, 2018, primarily related to a specific loan loss provision on ~~loans~~a shared national credit relationship (“SNC”) of $6,304 and ~~investment securities compared with~~$9,759 for the ~~same periods in 2016. The increase in loans was due~~three and six months ended June 30, 2019, respectively, and $4,143 related to ~~significant organic growth. The growth~~post-employment and retirement expense recorded in the ~~securities portfolio is primarily attributable to the Company’s leverage program to utilize proceeds received from capital raised during the fourth~~first quarter of ~~2016.~~2019.

Net Interest Income/Margin

Net interest income consists of interest income generated by ~~earning assets~~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~~six months ended ~~September~~June 30, ~~2017,~~2019, totaled ~~$24,326~~$27,365 and ~~$72,438,~~$54,785, respectively, compared to ~~$20,675~~$26,905 and ~~$59,885~~$52,021 for the same periods in ~~2016,~~2018, an increase of ~~$3,651~~$460 and ~~$12,553,~~$2,764, or ~~17.7%~~1.7% and ~~21.0%~~5.3%, between the respective periods. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, interest income increased ~~$8,056~~$5,317 and ~~$24,761,~~$14,793, or ~~31.3%~~12.6% and ~~34.1%~~18.4%, respectively, compared with the same periods in ~~2016,~~2018, due to growth in both the loan and investment securities portfolios. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, interest expense increased ~~$4,405~~$4,857 and ~~$12,208,~~

$12,029, or ~~87.2%~~31.9% and ~~96.2%~~42.7%, respectively, ~~compared with the same periods in 2016, as a result of~~primarily due to increases in interest-bearing deposits combined with an increase in interest rates for deposits and Federal Home Loan Bank (“FHLB”) ~~advances and subordinated notes.~~advances.

Interest-earning assets averaged ~~$3,351,421~~$3,940,266 and ~~$2,576,294~~$4,046,709 during the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, ~~an increase~~a decrease of ~~$775,127,~~$106,443, or ~~30.1%~~2.6%. This ~~increase~~decrease was due to ~~growth~~the strategically planned asset rotation and decrease in ~~all types of interest-earning assets, but~~ the ~~largest growth occurred in loans and~~total investment securities. Average total loans increased ~~26.5%~~$420,711, or 17.1%, and investment securities ~~increased 31.8%~~decreased $528,315, or 37.5%, when comparing the three months ended ~~September~~June 30, ~~2017~~2019, with the same period in ~~2016.~~ 2018.

When comparing the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the yield on average interest earning assets, adjusted for tax equivalent yield, increased ~~five~~64 basis points in ~~2017~~2019, to ~~4.17%~~4.89% compared to ~~4.12%~~4.25% for the same period during ~~2016.~~2018. For the three months ended ~~September~~June 30, ~~2017,~~2019, the tax equivalent yield on ~~available~~loans held for ~~sale securities~~investment was ~~2.61%~~5.61%, and for the three months ended ~~September~~June 30, ~~2016,~~2018, the tax equivalent yield on ~~available~~loans held for ~~sale securities~~investment 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%5.27%. The primary driver for the increase in yields on ~~securities for the three-month period ended September 30, 2017~~loans was the ~~volume oftax-exempt~~ ~~municipal securities purchased during the past 12 months, which increased tax equivalent yields~~increase in market interest rates when ~~comparing the three-month period in 2017 with~~compared to the same ~~period~~quarter in ~~2016.~~the previous year.

Interest-bearing liabilities averaged ~~$2,856,337~~$3,340,033 during the three months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$2,201,206~~$3,518,299 for the same period in ~~2016, an increase~~2018, a decrease of ~~$655,131,~~$178,266, or ~~29.8%~~5.1%. Total average interest-bearing deposits ~~grew $460,127,~~decreased $179,800, or ~~22.9%~~5.8%, including ~~increases~~a decline in average interest checking of ~~$291,152~~$44,806 and average time deposits of ~~$178,786~~$380,237 for the ~~three-month period~~three months ended ~~September~~June 30, ~~2017,~~2019, as compared to the same period during ~~2016. Rapid~~2018. Total average money market deposits increased $254,168, or 32.9% for the three months ended June 30, 2019. Total non-interest deposits averaged $313,104, an increase of $14,979, or 5.0%, during the three months ended June 30, 2019, compared to the same period during 2018. The growth in the loan portfolio ~~also resulted in~~contributed to an increase in average FHLB advances of ~~$202,445 when~~$18,857 for the three months ended June 30, 2019.

When comparing the three months ended ~~September~~June 30, ~~2017 with the same period in 2016.~~

~~For the three-month periods ended September 30, 2017~~2019 and ~~2016,~~2018, the cost of average interest-bearing liabilities increased 4067 basis points to ~~1.31%~~2.41% from ~~0.91%~~1.74%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and ~~Federal~~federal funds purchased.

Interest-earning assets averaged ~~$3,304,558~~$3,991,962 and ~~$2,427,824~~$3,958,127 during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, an increase of ~~$876,734,~~$33,835, or ~~36.1%~~0.9%. This increase was due to growth in ~~both~~ the loan ~~portfolio and the securities~~ portfolio over the past year. Average loans held for investment increased ~~28.6%~~$437,608, or 18.4%, ~~and investment~~for the six months ended June 30, 2019, as compared to the same period for 2018. Investment securities ~~increased 46.8%~~decreased $359,071, or 26.6%, when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, with the same period in ~~2016.~~2018. When comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the yield on average ~~interest earning~~interest-earning assets, adjusted for tax equivalent yield, ~~decreased 2~~increased approximately 69 basis points to ~~4.11%~~4.85% in ~~2017~~2019 compared to ~~4.13%~~4.16% for the same period during ~~2016.~~2018.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the tax equivalent yield on loans held for investment was ~~4.96%~~5.61% 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%,~~5.17% respectively. The primary driver for the increase in ~~yields~~yield on loans held for investment for the ~~three- and nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2019 was anthe increase in ~~loan~~market interest rates ~~when compared with~~during the ~~same periods in 2016.~~past year.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the tax equivalent yield on ~~available for sale~~taxable securities was ~~2.66%~~2.79%, and for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, the tax equivalent yield on ~~available for sale~~taxable securities was ~~2.48%~~2.34%. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the tax equivalent yield on ~~held to maturity~~tax-exempt securities was ~~4.18%~~4.03%, and for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2018, the tax equivalent yield on ~~held to maturity~~tax-exempt securities was ~~3.92%~~4.56%. The primary driver for the ~~increase~~yield decreases in ~~yields on~~both taxable and tax-exempt securities ~~for the nine-month period ended September 30, 2017~~ was the decrease in volume of~~tax-exempt~~ ~~municipal securities purchased during~~due to the ~~past 12 months, which increased tax equivalent yields when comparing the nine-month period in 2017 with the same period in 2016.~~strategically-planned balance sheet rotation focused on core loan growth.

Interest-bearing liabilities averaged ~~$2,839,188~~$3,416,223 during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared to ~~$2,044,661~~$3,444,835 for the same period in ~~2016, an increase~~2018, a decrease of ~~$794,527,~~$28,612, or ~~38.9%~~0.8%. Total average interest-bearing deposits ~~grew $606,229,~~decreased $54,259, including ~~increases~~decreases in interest-bearing checking of ~~$339,569~~$52,975 and average time deposits of ~~$259,409~~$243,823 for the ~~nine-month period~~six months ended ~~September~~June 30, ~~2017,~~2019, as compared to the same period during ~~2016. Rapid~~2018. Total non-interest deposits averaged $302,200, an increase of $9,647, or 3.3%, during the six months ended June 30, 2019, compared to the same period in 2018. The growth in the loan portfolio also ~~resulted in~~contributed to an increase in average FHLB advances of ~~$167,137, and subordinated notes and other borrowings increased $25,516, when~~$44,824 during the six months ended June 30, 2019.

When comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017 with the same period in 2016.~~

~~For the nine-month periods ended September 30, 2017~~2019 and ~~2016,~~2018, the cost of average interest-bearing liabilities increased 3472 basis points from ~~0.83%~~1.65% to ~~1.17%~~2.37%. The increase was due to rate increases ~~in the cost of funds from~~for interest-bearing deposits, FHLB advances ~~Federal~~and federal funds ~~purchased and repurchase agreements.~~purchased.

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~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

Average Balances—Yields & Rates⁽⁷⁾

(Dollars are in thousands)

   Three 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⁾
   $ 2,049,575 $ 26,006    5.03 % $ 1,620,347 $ 20,219    4.96 %
Securities available for sale⁽⁶⁾
   972,988 6,405    2.61 % 671,725 4,084    2.42 %
Securities held to maturity⁽⁶⁾
   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
   2,412 9    1.48 % 941 4    1.69 %
Federal funds sold and other⁽²⁾
   88,737 271    1.21 % 38,923 49    0.50 %






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





TOTAL ASSETS
   $ 3,426,864    $ 2,648,252
LIABILITIES & EQUITY

Deposits:

Interest checking
   $ 552,502 $ 1,285    0.92 % $ 261,350 $ 256    0.39 %
Money market
   604,416 1,703    1.12 % 617,913 957    0.62 %
Savings
   54,921 42    0.30 % 51,235 40    0.31 %
Time deposits
   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⁾
   37,374 92    0.98 % 44,974 69    0.61 %
Subordinated notes and other borrowings
   58,444 1,083    7.35 % 58,285 1,082    7.39 %






TOTAL INTEREST BEARING LIABILITIES
   $ 2,856,337 $ 9,454    1.31 % $ 2,201,206 $ 5,049    0.91 %
Demand deposits
   261,127    224,387
Other liabilities
   11,312    16,650
Total equity
   298,088    206,009





TOTAL LIABILITIES AND EQUITY
   $ 3,426,864    $ 2,648,252
NET INTEREST SPREAD⁽⁴⁾
      2.86 %    3.21 %
NET INTEREST INCOME
   $ 25,789    $ 21,643
NET INTEREST MARGIN⁽⁵⁾
      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 %

	Three Months Ended June 30,
	2019								2018
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	2,858,713		$	40,003		5.61	%	$	2,448,646		$	32,187		5.27	%
Loans held for sale		24,118			256		4.26			13,474		$	152		4.52
Securities:
Taxable		673,386			4,614		2.75			1,179,000			6,905		2.35
Tax-exempt⁽⁶⁾		208,417			1,909		3.67			231,118			2,613		4.53
Restricted equity securities		24,641			350		5.70			20,619			329		6.40
Certificates of deposit at other financial institutions		3,759			22		2.35			3,459			19		2.20
Federal funds sold and other⁽²⁾		147,232			855		2.33			150,393			642		1.71
TOTAL INTEREST EARNING ASSETS	$	3,940,266		$	48,009		4.89	%	$	4,046,709		$	42,847		4.25	%
Allowance for loan and lease losses		(28,007	)							(21,994	)
All other assets		192,843								144,738
TOTAL ASSETS	$	4,105,102							$	4,169,453
LIABILITIES & EQUITY
Deposits:
Interest checking	$	816,429		$	4,357		2.14	%	$	861,235		$	3,329		1.55	%
Money market		1,026,200			6,103		2.39			772,032			3,048		1.58
Savings		38,882			27		0.28			47,807			38		0.32
Time deposits		1,036,904			6,192		2.40			1,417,141			6,189		1.75
Federal Home Loan Bank advances and other ⁽⁸⁾		349,615			2,237		2.57			330,758			1,414		1.71
Federal funds purchased and other⁽³⁾		13,249			90		2.72			30,750			131		1.71
Subordinated notes		58,754			1,082		7.39			58,576			1,082		7.41
TOTAL INTEREST BEARING LIABILITIES	$	3,340,033		$	20,088		2.41	%	$	3,518,299		$	15,231		1.74	%
Demand deposits		313,104								298,125
Other liabilities		63,505								12,854
Total equity		388,460								340,175
TOTAL LIABILITIES AND EQUITY	$	4,105,102							$	4,169,453
NET INTEREST SPREAD⁽⁴⁾							2.48	%							2.51	%
NET INTEREST INCOME				$	27,921							$	27,616
NET INTEREST MARGIN⁽⁵⁾							2.84	%							2.74	%

⁽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 and interest-bearing deposits at the Federal Reserve Bank, ~~and~~ the Federal Home Loan ~~Bank.~~Bank and other financial institutions.

⁽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 oftax-equivalent adjustments to adjusttax-exempt interest income ontax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾	Average balances are average daily balances.

⁽⁸⁾	Includes finance lease.

	Six Months Ended June 30,
	2019								2018
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	2,811,954		$	78,241		5.61	%	$	2,374,346		$	60,911		5.17	%
Loans held for sale		16,818			371		4.45			11,090		$	233		4.24
Securities:
Taxable		795,788			11,008		2.79			1,119,823			13,017		2.34
Tax-exempt⁽⁶⁾		195,132			3,899		4.03			230,168			5,205		4.56
Restricted equity securities		23,514			684		5.87			19,644			603		6.19
Certificates of deposit at other financial institutions		3,676			42		2.30			3,138			31		1.99
Federal funds sold and other⁽²⁾		145,080			1,822		2.53			199,918			1,584		1.60
TOTAL INTEREST EARNING ASSETS	$	3,991,962		$	96,067		4.85	%	$	3,958,127		$	81,584		4.16	%
Allowance for loan and lease losses		(26,041	)							(21,840	)
All other assets		196,446								134,877
TOTAL ASSETS	$	4,162,367							$	4,071,164
LIABILITIES & EQUITY
Deposits:
Interest checking	$	836,650		$	8,777		2.12	%	$	889,625		$	6,495		1.47	%
Money market		1,009,613			12,082		2.41			757,698			5,648		1.50
Savings		39,741			55		0.28			49,117			76		0.31
Time deposits		1,100,929			12,755		2.34			1,344,752			11,028		1.65
Federal Home Loan Bank advances and other ⁽⁸⁾		358,630			4,196		2.36			313,806			2,524		1.62
Federal funds purchased and other⁽³⁾		11,929			162		2.74			31,283			227		1.46
Subordinated notes		58,731			2,164		7.43			58,554			2,164		7.45
TOTAL INTEREST BEARING LIABILITIES	$	3,416,223		$	40,191		2.37	%	$	3,444,835		$	28,162		1.65	%
Demand deposits		302,200								292,553
Other liabilities		61,133								13,657
Total equity		382,811								320,119
TOTAL LIABILITIES AND EQUITY	$	4,162,367							$	4,071,164
NET INTEREST SPREAD⁽⁴⁾							2.48	%							2.51	%
NET INTEREST INCOME				$	55,876							$	53,422
NET INTEREST MARGIN⁽⁵⁾							2.82	%							2.72	%

⁽¹⁾	Loan balances include loans held in the Bank’s portfolio and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.

⁽²⁾	Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial institutions.

⁽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 tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾	Average balances are average daily balances.

⁽⁸⁾	Includes finance lease.

Analysis of Changes in Interest Income and Expenses

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

Loans
   $ 5,425    $ 362    $ 5,787
Securities available for sale
   1,855    466    2,321
Securities held to maturity
   (120 )    200    80
Restricted equity securities
   91    45    136
Certificates of deposit at other financial institutions
   6    (1 )    5
Federal funds sold and other
   63    159    222






TOTAL INTEREST INCOME
   $ 7,320    $ 1,231    $ 8,551






INTEREST EXPENSE

Deposits

Interest checking
   $ 291    $ 738    $ 1,029
Money market accounts
   (16 )    762    746
Savings
   3    (1 )    2
Time deposits
   391    1,460    1,851
Federal Home Loan Bank advances
   505    248    753
Fed funds purchased and other borrowed funds
   (12 )    35    23
Subordinated Notes and other borrowings
   7    (6 )    1






TOTAL INTEREST EXPENSE
   $ 1,169    $ 3,236    $ 4,405






NET INTEREST INCOME
   $ 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 three months ended June 30, 2019 versus June 30, 2018
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	5,390		$	2,426		$	7,816
Loans held for sale		120			(16	)		104
Securities
Taxable		(2,961	)		670			(2,291	)
Tax-exempt		(257	)		(447	)		(704	)
Restricted equity securities		64			(43	)		21
Certificates of deposit at other financial institutions		2			1			3
Federal funds sold and other		(13	)		226			213
TOTAL INTEREST INCOME	$	2,345		$	2,817		$	5,162
INTEREST EXPENSE
Deposits
Interest checking	$	(173	)	$	1,201		$	1,028
Money market accounts		1,003		$	2,052			3,055
Savings		(7	)	$	(4	)		(11	)
Time deposits		(1,661	)	$	1,664			3
Federal Home Loan Bank advances and other⁽¹⁾		81		$	742			823
Federal funds purchased and other⁽²⁾		(75	)	$	34			(41	)
Subordinated notes		3		$	(3	)		-
TOTAL INTEREST EXPENSE	$	(829	)	$	5,686		$	4,857
NET INTEREST INCOME	$	3,174		$	(2,869	)	$	305

	Net change six months ended June 30, 2019 versus June 30, 2018
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	11,226		$	6,104		$	17,330
Loans held for sale		120			18			138
Securities	$	-		$	-
Taxable		(3,767	)		1,758			(2,009	)
Tax-exempt		(792	)		(514	)		(1,306	)
Restricted equity securities		119			(38	)		81
Certificates of deposit at other financial institutions		5			6			11
Federal funds sold and other		(434	)		672			238
TOTAL INTEREST INCOME	$	6,477		$	8,006		$	14,483
INTEREST EXPENSE
Deposits
Interest checking	$	(387	)	$	2,669		$	2,282
Money market accounts		1,878			4,556			6,434
Savings		(15	)		(6	)		(21	)
Time deposits		(2,000	)		3,727			1,727
Federal Home Loan Bank advances and other⁽¹⁾		361			1,311			1,672
Fed funds purchased and other⁽²⁾		(140	)		75			(65	)
Subordinated Notes		7			(7	)		-
TOTAL INTEREST EXPENSE	$	(296	)	$	12,325		$	12,029
NET INTEREST INCOME	$	6,773		$	(4,319	)	$	2,454

⁽¹⁾Includes finance lease.

⁽²⁾Includes repurchase agreements.

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an ~~allowance for loan losses~~ALLL that, in management’s evaluation, should be adequate to provide coverage for the 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 ~~$590~~$7,031 and ~~$1,392~~$570 for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$3,018~~$12,086 and ~~$4,095~~$1,143 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The ~~lower~~higher provision for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 compared to the same periods in ~~2016~~2018 is based on the Company’s analysis of its ~~allowance for loan losses~~ALLL which is based on the loan portfolio’s risk profile and was primarily driven by a specific reserve of $6,304 and $9,759 for the three and six months ended June 30, 2019, related to a SNC relationship. The Company allocated the specific reserve for this credit relationship (and estimated the amount of the relationship to be charged-off) based on information currently available to the Company. The circumstances related to the SNC defaults are fluid, and the Company intends to address events related to the SNC as they develop. In addition, comparatively ~~less~~higher loan growth ~~required less~~resulted in more provision bebeing recorded. Nonperforming loans at ~~September~~June 30, ~~2017~~2019 totaled ~~$2,860~~$4,705 compared to ~~$6,182~~$5,696 at December 31, ~~2016,~~2018, representing ~~0.1%~~0.16% and ~~0.3%~~0.21% of total loans ~~respectively.~~for the respective periods.

Non-Interest Income

Non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$3,569~~$4,923 and ~~$11,457, respectively,~~$8,410, compared to ~~$4,876~~$4,147 and ~~$12,587~~$7,603 for the same ~~periods~~period in ~~2016,~~2018, respectively. The following is a summary of the components ofnon-interest income (in thousands):

   Three Months Ended
September 30,    $
Increase
(Decrease)    %
Increase
(Decrease)
   2017    2016
Service charges on deposit accounts
   $ 39    $ 44    $ (5 )    (11.4 %)
Other service charges and fees
   787    845    (58 )    (6.9 %)
Net gains on sale of loans
   1,517    2,942    (1,425 )    (48.4 %)
Wealth management
   643    446    197    44.2 %
Loan servicing fees, net
   70    (40 )    110    275.0 %
Gain on sales of investment securities, net
   350    430    (80 )    (18.6 %)
Net gain on foreclosed assets
   (16 )    30    (46 )    (153.3 %)
Other
   179    179    —      —   %








Totalnon-interest income
   $ 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 %)

	Three Months Ended June 30,				$ Increase			% Increase
	2019		2018		(Decrease)			(Decrease)
Service charges on deposit accounts	$	77	$	51	$	26			51.0		%
Other service charges and fees		903		823		80			9.7
Mortgage banking revenue		2,473		2,044		429			21.0
Wealth management		673		789		(116	)		(14.7	)
Gain on sale or call of securities		367		1		366		NM
Net (loss) gain on sale of loans		3		—		3		NM
Net gain on sale of foreclosed assets		3		3		—			—
Other		424		436		(12	)		(2.8	)
Total non-interest income	$	4,923	$	4,147	$	776			18.7		%

~~Service charges on deposit accounts~~

	Six Months Ended June 30,					$ Increase			% Increase
	2019			2018		(Decrease)			(Decrease)
Service charges on deposit accounts	$	151		$	93	$	58			62.4		%
Other service charges and fees		1,660			1,574		86			5.5
Mortgage banking revenue		4,145			3,602		543			15.1
Wealth management		1,300			1,493		(193	)		(12.9	)
Gain on sale or call of securities		517			1		516		NM
Net (loss) gain on sale of loans		(214	)		—		(214	)	NM
Net gain on sale of foreclosed assets		7			6		1			16.7
Other		844			834		10			1.2
Total noninterest income	$	8,410		$	7,603	$	807			10.6		%

Mortgage banking revenue increased $429 and $543 for the three and ~~nine~~six months ended ~~September~~June 30, 2017 decreased $5 and $25, or 11.4% and 18.0%, respectively, from the same periods in 2016. The decrease for the nine months ended September 30, 2017 was due to the Company’s waiving service charges on deposit accounts during March 2017 while the Company was going through a core system conversion.

Other service charges and fees for the three and nine months ended September 30, 2017 decreased $58 and increased $52, or 6.9% and 2.3%, respectively, from the same periods in 2016. The fluctuation for the nine months ended September 30, 2017 was due to a combination of increases and decreases, with the following types of fees having the largest fluctuation in the comparative periods: unused commitment fees ($108), ATM foreign surcharge fees ($42), and underwriting fees ($32).

~~Net gain on sale of loans decreased $1,425, or 48.4% and $941, or 13.7%, when comparing the three and nine months ended September 30, 2017 to the same period in 2016,~~2019, respectively. The ~~changes in both periods were~~increase was due to the volume of mortgage loans ~~sold and~~originated, the ~~margins~~sales related to ~~the~~those loans, ~~sold.~~

and more favorable market rates in 2019, which resulted in favorable fair value adjustments on mortgage derivatives.

Wealth management income for the three and nine months ended September 30, 2017 increased $197 and $541, or 44.2% and 40.3%, respectively, in comparison with the same periods in 2016. The increase was attributed to the growth in the client base and assets under management in the wealth management division, as well as 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.

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.

Non-Interest Expense

Net gain on sale of investment securities decreased $80 and $1,065, or 18.6% and 69.4%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The decreases were primarily due to the gains on securities that were recognized in the third 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 selling securities of two municipalities whose credit rating had fallen below management’s credit score limit.

~~Othernon-interest~~ income remained consistent when comparing the three months ended September 30, 2017 with the same period in 2016 and increased by $122, or 28.2%, when comparing the nine months ended September 30, 2017 with the same period in 2016. The increase for the nine months ended September 30, 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.

~~Non-Interest~~ ~~Expense~~

Non-interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 was ~~$15,278~~$19,370 and ~~$44,837, respectively, compared to $13,708~~$18,050 and ~~$38,452~~$41,986 and $33,538 for the same ~~periods~~period in ~~2016,~~2018, 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)				Three Months Ended June 30,								$ Increase				% Increase
	2017		2016					% Increase (Decrease)			2019				2018				(Decrease)				(Decrease)
Salaries and employee benefits	$	9,011	$	7,979	$ Increase (Decrease)	$	1,032			12.9	%		$	11,365			$	10,268			$	1,097				10.7		%
Occupancy and equipment		2,399		2,001		398			19.9	%			3,283				2,885				398				13.8
FDIC assessment expense		900		570		330			57.9	%			660				778				(118	)			(15.2	)
Marketing		192		206		(14	)		(6.8	%)			301				269				32				11.9
Professional fees		821		935		(114	)		(12.2	%)			1,073				1,362				(289	)			(21.2	)
Amortization of core deposit intangible		115		138		(23	)		(16.7	%)			132				182				(50	)			(27.5	)
Other		1,840		1,879		(39	)		(2.1	%)			2,556				2,306				250				10.8

Totalnon-interest expense	$	15,278	$	13,708	$	1,570			11.5	%		$	19,370			$	18,050			$	1,320				7.3		%


	Nine Months Ended September 30,				$ Increase (Decrease)			% Increase (Decrease)
	2017		2016
Salaries and employee benefits	$	26,172	$	22,099	$ Increase (Decrease)	$	4,073	% Increase (Decrease)					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	%

	Six Months Ended June 30,				$ Increase			% Increase
	2019		2018		(Decrease)			(Decrease)
Salaries and employee benefits	$	26,108	$	19,456	$	6,652			34.2		%
Occupancy and equipment		6,396		5,479		917			16.7
FDIC assessment expense		1,650		1,438		212			14.7
Marketing		620		549		71			12.9
Professional fees		1,996		2,231		(235	)		(10.5	)
Amortization of core deposit intangible		277		286		(9	)		(3.1	)
Other		4,939		4,099		840			20.5
Total non-interest expense	$	41,986	$	33,538	$	8,448			25.2		%

The increase innon-interest expense noted in the table above is related to the Company’s overall growth. The Company’s largest increases for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, in comparison with the same periods of ~~2016,~~2018, were in salaries and employee benefits, occupancy and equipment, ~~FDIC assessment expense,~~ and othernon-interest expense.

Salaries and employee benefits increased ~~$1,032~~$1,097 and ~~$4,073,~~$6,652, or ~~12.9%~~10.7% and ~~18.4%~~34.2%, respectively, when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 with the same periods in ~~2016.~~2018. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from ~~261~~326 full-time equivalent employees as of ~~September~~June 30, ~~2016,~~2018, to ~~279~~343 as of ~~September~~June 30, ~~2017,~~2019, 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 to grow its team of lenders to further grow the loan portfolio. In addition to salaries, incentive expenses increased $405 and $309, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods of 2016 due to the Company’s financial performance during the three and nine months ended September 30, 2017.growth. Stock-based compensation expense also increased ~~$266~~$195 and ~~$657,~~$764, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 in comparison with the same periods in ~~2016.~~2018.

Occupancy and equipment expense increased $398 and ~~$1,126,~~$917, or ~~19.9%~~13.8% and ~~20.2%~~16.7%, respectively, when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 with the same periods in ~~2016.~~2018. The variance for the three months ended ~~September~~June 30, ~~2017~~2019 versus the three months ended ~~September~~June 30, ~~2016~~2018 is primarily attributable to increases in building rent expense ~~($222),~~of $202 and software maintenance fees ~~($114), and software depreciation ($21).~~of $113. The variance when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 with the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 is attributable to increases in building rent expense ~~($634),~~of $360, software maintenance fees ~~($281)~~of $357 and ~~leasehold improvement depreciation ($69).~~other furniture, fixture & equipment expense of $57.

The Company’s FDIC assessment expense decreased $118, or 15.2%, and increased ~~$330 and $1,287,~~$212, or ~~57.9% and 92.7%~~14.7%, respectively, when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, with the same periods in ~~2016.~~2018. The ~~increases are~~increase in comparing the six months ended June 30, 2019 to June 30, 2018 is due to ~~the year-over-year asset~~loan growth ~~of the Company, on which FDIC assessments are calculated,~~ and ~~are also related to the~~ change in ~~the FDIC insurance assessment calculation in the third quarter of 2016, which caused an increase in the Company’s insurance assessments based on the calculation’s components.~~loan mix.

Professional fees decreased ~~$114~~$289 and ~~$448,~~$235, or ~~12.2%~~21.2% and ~~14.9%~~10.5%, respectively, when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 with the same periods in ~~2016.~~2018. The decrease when comparing the three months ended ~~September~~June 30, ~~2017~~2019 with the same period in ~~2016~~2018 is due to ~~decreases~~changes in other professional fees ~~($85)~~of $140, legal fees of $154, and ~~compliance fees ($152).~~merger-related expense of $356. The decrease, when comparing the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, is due to ~~decreases~~changes in merger-related expenses ~~($316), legal fees ($79) and SEC filing expense ($67). The decreases in~~of $377, other professional fees ~~are related to the following 2016 expenses: (1) the design~~of $132, and ~~implementation~~legal fees 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; and (3) professional placement service fees for the hiring of several key lending and management professionals.$240.

For the three and six months ended ~~September~~June 30, ~~2017,~~2019, other non-interest expense increased ~~non-interest~~ ~~expenses decreased $39,~~$250 and $840, or ~~2.1%~~10.8% and 20.5%, respectively, when compared to the three and ~~for the nine~~six months ended ~~September~~June 30, ~~2017, other noninterest expenses increased $282, or 5.3%, from the same comparative periods during 2016.~~2018. The increase in othernon-interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 versus ~~September~~June 30, ~~2016~~2018 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: ~~insurance~~ATM network expense ~~($78); franchise taxes ($162); travel expenses ($74); management fees ($200);~~of $121 and ~~loan servicing~~CDARS fee expense ~~($219). These variances were offset by decreases in various expense types, with the following account having the largest decrease: loan-related expenses ($283).~~of $194.

Income Tax Expense

The Company recognized income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 of ~~$3,138~~$706 and ~~$10,343, respectively,~~$1,040 compared to ~~$3,314~~$2,263 and ~~$9,047, respectively,~~$4,722 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2018. The Company’s~~year-to-date~~ quarter-to-date income tax expense for the period ended ~~September~~June 30, ~~2017~~2019 reflects an effective income tax rate of ~~28.7%,~~12.0%. The Company’s year-to-date income tax expense for the period ended June 30, 2019 reflects an effective income tax rate of 11.4% which is a significant decrease compared to ~~30.2%~~18.9% for the same period in ~~2016.~~2018 resulting from the Company’s participation in Tennessee’s Community Investment Tax Credit (CITC) program and due to the first quarter’s $4,143 related to post-employment and retirement expenses, along with $9,759 related to a specific loan loss provision on a SNC relationship during the first six months of 2019.

COMPARISON OF BALANCE SHEETS AT ~~SEPTEMBER~~June 30, ~~2017 AND DECEMBER~~2019 and December 31, ~~2016~~2018

Overview

The Company’s total assets ~~increased~~decreased by ~~$622,089,~~$177,468, or ~~21.1%~~4.2%, from December 31, ~~2016~~2018 to ~~September~~June 30, ~~2017.~~2019. The ~~increase~~decrease in total assets has primarily been the result of the continued balance sheet rotation and optimization strategies and the planned sales of investment securities during the six months ended June 30, 2019, offset by organic growth in the loan ~~portfolio and from purchases of additional investment securities.~~portfolio.

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~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~$2,115,930~~$2,880,433 and ~~$1,773,592,~~$2,665,399, respectively, an increase of ~~$342,338,~~$215,034 or ~~19.3%~~8.1%. As a percentage of total assets, total loans, net of deferred fees, at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were ~~59.3%~~70.7% and ~~60.3%~~62.7%, 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 to ~~help increase penetration~~develop new relationships and broaden its presence in its primary markets in Middle Tennessee which include, Williamson County, ~~Rutherford~~Davidson County and ~~Davidson~~Rutherford County.

The table below provides a summary of the loan portfolio composition for the periods noted.

	June 30, 2019						December 31, 2018
Types of Loans	Amount			% of Total Loans			Amount			% of Total Loans
Total loans
Real estate:
Construction and land development	$	584,599			20.3	%	$	584,440			21.9	%
Commercial		932,755			32.3			802,260			30.1
Residential		694,146			24.1			682,882			25.6
Commercial and industrial		668,065			23.1			592,793			22.2
Consumer and other		4,945			0.2			5,568			0.2
Total gross loans		2,884,510			100.0	%		2,667,943			100.0	%
Less: deferred loan fees, net		(4,077	)					(2,544	)
allowance for loan losses		(27,443	)					(23,451	)
Total loans, net allowance for loan losses	$	2,852,990					$	2,641,948

   September 30, 2017 December 31, 2016
Types of Loans
   Amount    % of Total
Loans Amount    % of Total
Loans
Total loans, excluding purchased credit impaired (“PCI”) loans

Real estate:

Construction and land development
   $ 514,934    24.3 % $ 489,562    27.6 %
Commercial
   598,846    28.3 % 497,140    28.0 %
Residential
   532,113    25.1 % 404,989    22.8 %
Commercial and industrial
   464,747    22.0 % 376,476    21.2 %
Consumer and other
   3,933    0.2 % 3,359    0.2 %






Total loans—gross, excluding PCI loans
   2,114,573    99.9 % 1,771,526    99.8 %






Total PCI loans
   2,558    0.1 % 2,859    0.2 %






Total gross loans
   2,117,131    100.0 % 1,774,385    100.0 %




Less: deferred loan fees, net
   (1,201 )    (793 )
Allowance for loan losses
   (19,944 )    (16,553 )





Total loans, net allowance for loan losses
   $ 2,095,986    $ 1,757,039

~~The discussion in the following paragraphs includes the PCI loans in the breakdown of the various categories of loans.~~

Total gross loans increased ~~19.3%~~8.1% during the first ~~nine~~six months ~~of 2017,~~ended June 30, 2019, due to organic growth as a result of continued market penetration and the strength of the local ~~economy.~~economies. During this period, the Company experienced growth in real estate loans

of ~~18.2%~~6.9% with growth occurring in the residential real estate, ~~(31.3%)~~1.6%, and commercial real estate, ~~(20.4%) and construction and land development (5.2%)~~ 16.3%,segments. The Company also experienced ~~growth~~an increase of ~~23.3%~~12.7% in the commercial and industrial segment during the ~~first nine~~six months ~~of 2017.~~ended June 30, 2019.

Real estate loans comprised ~~77.7%~~76.7% of the loan portfolio at ~~September~~June 30, ~~2017.~~2019. The largest portion of the real estate segments as of ~~September~~June 30, ~~2017,~~2019, was commercial real estate loans, which totaled ~~36.4%~~42.2% of real estate loans. Commercial real estate loans totaled ~~$599,233~~$932,755 at ~~September~~June 30, ~~2017,~~2019, and comprised ~~28.3%~~32.3% 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~~other properties.

Construction and land development loans totaled ~~$514,934~~$584,599 at ~~September~~June 30, ~~2017,~~2019, and comprised ~~31.3%~~26.4% of total real estate loans and ~~24.3%~~20.3% 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. This portfolio has remained steady in absolute dollar terms since 2017, representing a lower corresponding portion of the loan portfolio.

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 ~~$532,295~~$694,146 and comprised ~~32.3%~~31.4% of real estate loans and ~~25.1%~~24.1% of total loans at ~~September~~June 30, ~~2017.~~2019.

Commercial and industrial loans totaled ~~$466,736~~$668,065 at ~~September~~June 30, ~~2017 and grew 23.3% during the first nine months of 2017.~~2019. Loans in this classification comprised ~~22.0%~~23.1% of total loans at ~~September~~June 30, ~~2017.~~2019. The commercial and industrial classification consists of commercial loans tosmall-to-medium sized businesses, shared national credits, and commercial healthcare loans.

The banking agencies define a “Shared National Credit” (“SNC”) as any loan extended to a borrower which aggregates $100 million or more and is shared by three or more banks. The SNC portfolio totaled $231,216 at June 30, 2019, increasing 4.7% annualized, from $228,538 at March 31, 2019, driven by funding of previously originated loans. All of the outstanding balance of SNCs was included in the commercial and industrial portfolio. SNC participations are originated in the normal course of business to meet the needs of our customers and are reviewed at least quarterly for credit quality.

The table below provides a summary of the SNC and Healthcare portfolio for the periods noted:

SNC and Healthcare Portfolios	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018			QoQ Growth*			YoY Growth
Total SNCs	$	231,216		$	228,538		$	249,033		$	162,588		$	155,798			4.7	%		48.4	%

% of Total loans held for investment		8.0	%		8.1	%		9.3	%		6.4	%		6.3	%

Healthcare	$	329,818		$	320,611		$	290,464		$	285,284		$	257,225			11.5	%		28.2	%
SNC		118,460			107,156			123,097			103,772			107,894			42.3	%		9.8	%
Non-SNC		211,358			213,455			167,367			181,512			149,331			(3.9	%)		41.5	%

*Annualized

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~~June 30, ~~2017,~~2019, excluding unearned net fees and costs.

Loan Maturity Schedule


	September 30, 2017								June 30, 2019
	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	$	276,021	$	165,429	$	73,484	$	514,934	$	277,743	$	169,809	$	137,047	$	584,599
Commercial		28,239		154,309		416,685		599,233		57,818		267,808		607,129		932,755
Residential		37,849		116,899		377,547		532,295		38,820		168,920		486,406		694,146
Commercial and industrial		75,035		308,537		83,164		466,736		95,734		427,062		145,269		668,065
Consumer and other		2,249		1,281		403		3,933		2,714		1,926		305		4,945

Total	$	419,393	$	746,455	$	951,283	$	2,117,131	$	472,829	$	1,035,525	$	1,376,156	$	2,884,510

Fixed interest rate	$	205,808	$	306,701	$	433,595	$	946,104	$	136,666	$	442,992	$	417,713	$	997,371
Variable interest rate		213,585		439,754		517,688		1,171,027		336,163		592,533		958,443		1,887,139

Total	$	419,393	$	746,455	$	951,283	$	2,117,131	$	472,829	$	1,035,525	$	1,376,156	$	2,884,510

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 (ALLL)

The Company maintains an ~~allowance for loan losses~~ALLL 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~~ALLL consists of two primary components: (1) a specific component which relates to loans that are individually classified as ~~impaired~~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,~~loans; (2) Commercial real estate ~~loans,~~loans; (3) Residential real estate ~~loans,~~loans; (4) Commercial and industrial ~~loans,~~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~~ALLL are shown ~~as of September~~at June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

	June 30, 2019							December 31, 2018							Increase (Decrease)
	Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance			ALLL Balance
Non impaired loans	$	2,807,728	$	25,135		0.87	%	$	2,568,930	$	23,249		0.87	%	$	238,798		$	1,886		0 bps
Acquired loans ⁽¹⁾		72,752		115		0.00			91,344		185		0.01			(18,592	)		(70	)	-1 bps
Impaired loans		4,030		2,193		0.08			7,669		17		0.00			(3,639	)		2,176		8 bps
Total loans	$	2,884,510	$	27,443		0.95	%	$	2,667,943	$	23,451		0.88	%	$	216,567		$	3,992		0 bps

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~~⁽¹⁾ Acquired loans 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~~June 30, ~~2017, $11~~2019, $115 in ~~allowance for loan loss~~ALLL was recorded at ~~September~~June 30, ~~2017~~2019 related to the loans ~~acquired from MidSouth.~~acquired.

At ~~September~~June 30, ~~2017,~~2019, the ~~allowance for loan losses~~ALLL was ~~$19,944,~~$27,443, compared to ~~$16,553~~$23,451 at December 31, ~~2016.~~2018. The ~~allowance for loan losses~~ALLL as a percentage of total loans was ~~0.94%~~0.95% at ~~September~~June 30, ~~2017 compared to 0.94%~~2019 and 0.88% at December 31, ~~2016. Loan~~2018. The Company’s loan growth and management’s evaluation of the risk profile, combined with developments during the first ~~nine months~~and second quarters of ~~2017 is~~2019 in one SNC relationship, are the primary ~~reason~~reasons for the increase in the allowance amount.

The table below sets forth the activity in the ~~allowance for loan losses~~ALLL for the periods presented.


	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016			Six Months Ended June 30, 2019			Six Months Ended June 30, 2018
Beginning balance	$	16,553		$	11,587		$	23,451		$	21,247
Loanscharged-off:
Construction & land development		—			11			—			38
Commercial real estate		—			—
Residential real estate		1			39			15			7
Commercial & industrial		309			65			8,131			49
Consumer & other		36			35			99			17

Total loanscharged-off		346			150			8,245			111
Recoveries on loans previouslycharged-off:
Construction & land development		668			—			—			1
Commercial real estate		—			—
Residential real estate		38			53			15			38
Commercial & industrial		—			—			71			10
Consumer & other		13			5			65			13

Total loan recoveries		719			58			151			62
Net recoveries (charge-offs)		373			(92	)
Net charge-offs								(8,094	)		(49	)
Provision for loan losses charged to expense		3,018			4,095			12,086			1,143

Total allowance at end of period	$	19,944		$	15,590		$	27,443		$	22,341

Total loans, gross, at end of period⁽¹⁾	$	2,117,131		$	1,654,878		$	2,884,510		$	2,474,302

Average gross loans⁽¹⁾	$	1,966,635		$	1,525,359		$	2,811,954		$	2,376,613

Allowance to total loans		0.94	%		0.94	%		0.95	%		0.90	%

Net charge-offs (recoveries) to average loans, annualized		(0.03	%)		0.01	%		0.58	%		0.00	%

⁽¹⁾ Loan balances exclude loans held for sale

⁽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~~ALLL by loan category and loans in each category as a percentage of total loans, for the periods presented.


	September 30, 2017					December 31, 2016					June 30, 2019					December 31, 2018
	Amount		% of Loans to Total			Amount		% of Loans to Total			Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans
Real estate loans:
Construction and land development	$	3,957		24.3	%	$	3,776		27.6	%	$	4,784		20.3	%	$	4,743		21.9	%
Commercial		5,223		28.3	%		4,266		28.0	%		7,641		32.3			6,725		30.1
Residential		3,122		25.1	%		2,398		22.9	%		4,844		24.1			4,743		25.6

Total real estate		12,302		77.7	%		10,440		78.5	%		17,269		76.7			16,211		77.6

Commercial and industrial		7,592		22.1	%		6,068		21.3	%		10,118		23.1			7,166		22.2
Consumer and other		50		0.2	%		45		0.2	%		56		0.2			74		0.2
											$	27,443		100.0	%	$	23,451		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 ~~that become~~are placed on non-accrual status when they are past due 90 days ~~are reviewed to determine if they should be placed onnon-accrual~~ ~~status. Loans where,~~and / or management believes the borrower’s financial condition, after giving consideration to economic conditions ~~collateral value,~~ and collection efforts, ~~the full~~is such that collection of ~~principal and~~ interest is ~~in doubt, or a portion of principal has been charged off, will be placed onnon-accrual.~~doubtful. 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~~June 30, ~~2017~~2019 totaled ~~$2,582.~~$4,030. The other component ofnon-performing loans are loans past due greater than 90 days and still accruing ~~interest.~~interest which totaled $676 at June 30, 2019. 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 $278 that were past due 90 days or more and still accruing interest at September 30, 2017.~~

The table below summarizesnon-performing loans and assets for the periods presented.

   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 %

	June 30, 2019			December 31, 2018
Non-accrual loans	$	4,030		$	5,488
Past due loans 90 days or more and still accruing interest		676			208
Total non-performing loans		4,706			5,696
Foreclosed real estate and repossessed assets		-			-
Total non-performing assets		4,706			5,696
Total non-performing loans as a percentage of total loans		0.16	%		0.21	%
Total non-performing assets as a percentage of total assets		0.12	%		0.13	%
Allowance for loan losses as a percentage of non-performing loans		583	%		412	%

As of ~~September~~June 30, ~~2017,~~2019, there were ~~three~~nine loans onnon-accrual status. The amount and number are further delineated by collateral ~~category~~segment and number of loans in the table below.

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




Totalnon-accrual loans
   $ 2,582    100.0 % 3

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
Residential real estate	$	1,837		45.6	%		8
Commercial & industrial		2,193		54.4			1
Total non-accrual loans	$	4,030		54.9	%		9

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 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. Securitiesavailable-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, ~~were $980,737~~totaled $715,132 at ~~September~~June 30, ~~2017,~~2019, compared to ~~$754,755~~$1,030,668 at December 31, ~~2016, an increase~~2018, a decrease of ~~$225,982,~~$315,536, or ~~29.9%~~30.6%. The ~~increase~~decrease inavailable-for-sale securities was primarily attributed to ~~the volume of securities purchased~~security sales during the first ~~nine~~six months of ~~2017.~~2019.

~~Theheld-to-maturity~~Held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled ~~$217,312~~$118,963 at ~~September~~June 30, ~~2017,~~2019, compared to ~~$228,894~~$121,617 at December 31, ~~2016,~~2018, a decrease of ~~$11,582,~~$2,654, or ~~5.1%~~2.2%. The decrease is attributable to securities that matured or had principal pay downs during the first ~~nine~~six months of ~~2017.~~2019.

The combined securities portfolios represented ~~33.6%~~20.5% and ~~33.4%~~27.1% of total assets at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. At ~~September~~June 30, ~~2017,~~2019, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of ~~$18,472~~$24,842 and ~~$11,843~~$21,831 at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, primarily consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank ~~(required~~required as members of the Federal Reserve Bank System (“FRB”) and the Federal Home Loan Bank ~~System)~~System (“FHLB”). The ~~Federal Home Loan Bank~~FHLB and ~~Federal Reserve~~FRB 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 ~~$11,217~~$12,948 at ~~September~~June 30, ~~2017~~2019 compared to ~~$9,551~~$12,371 at December 31, ~~2016,~~2018, an increase of ~~$1,666,~~$577, or ~~17.4%~~4.7%. ~~This~~The increase ~~was the result~~is primarily attributed to an increase of ~~adding~~$1,182 in leasehold improvements, ~~and furniture and equipment as needed in the normal course~~net of ~~business and~~depreciation, related to ~~thebuild-out~~several of ~~a new leased bank office building in Murfreesboro, Tennessee, a new leased office space in Franklin, Tennessee, and a new leased bank building located in Spring Hill, Tennessee.~~the Company’s locations.

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 or~~non-deposit~~ ~~investment alternatives.~~

At ~~September~~June 30, ~~2017,~~2019, total deposits were ~~$2,824,825, an increase~~$3,146,645, a decrease of ~~$433,007,~~$285,162, or ~~18.1%~~8.3%, compared to ~~$2,391,818~~$3,431,807 at December 31, ~~2016. The growth in deposits is attributable to growth in time deposits and noninterest-bearing deposits.~~

2018. Included in the Company’s funding strategy are brokered deposits, public funds deposits and reciprocal deposits. Total brokered deposits ~~increased from $472,515~~decreased $98,600, or 12.4%, to $699,195 at June 30, 2019, when compared with $797,795 at December 31, ~~2016~~2018, which reflects the Company’s strategy to ~~$878,565~~reduce its dependence on non-core funding. Public funds deposits decreased $302,683, or 38.7%, to $480,206 at ~~September~~June 30, ~~2017,~~2019 when compared with $782,889 at December 31, 2018 due to the ~~increased need for funding for the Bank’s loan growth and due~~Company’s strategy to ~~the fluctuation in certain 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~~redirect some of the Company’s ~~funding strategy and are cyclical in nature, with~~local government customers into the ~~peak of~~reciprocal account relationships, thereby decreasing the Company’s requirements to collateralize those ~~deposit balances occurring during the middle of the first quarter of each calendar year. Public~~public funds ~~declined $214,866,~~deposits. As a result, reciprocal deposits increased $123,840, or ~~32.9%~~39.6%, ~~from $653,572~~to $436,522 at June 30, 2019, compared to $312,682 at December 31, ~~2016 to $438,706 at September 30, 2017.~~2018.

Time deposits, excluding brokered deposits and public funds, as of ~~September~~June 30, ~~2017,~~2019, amounted to ~~$736,067,~~$432,156, compared to ~~$555,732~~$532,445 as of December 31, ~~2016, an increase~~2018, a decrease of ~~$180,335,~~$100,289, or ~~32.4%, primarily due to an increase in Local Government Investment Pool (LGIP) deposits of $185,030 during the first nine months of 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 $23,396, or 10.0%, andnon-public~~ ~~funds interest checking accounts, excluding brokered deposits, grew $12,560, or 11.0%, respectively, when comparing deposit balances from September 30, 2017 with balances at December 31, 2016.~~18.8%.

The following table shows time deposits in denominations of $100 or more based on time remaining until maturity:


	September 30, 2017		June 30, 2019
Three months or less	$	448,951	$	141,700
Three through six months		92,911		96,030
Six through twelve months		76,147		87,272
Over twelve months		151,497		152,032

Total	$	769,506	$	477,034

Federal Funds Purchased and Repurchase Agreements

~~As of September 30, 2017, the~~The Company had ~~$0 in~~no federal funds purchased from correspondent banks ~~compared to $46,805 outstanding~~or repurchase agreements as of June 30, 2019 and December 31, 2016. Securities sold under agreements to repurchase had an outstanding balance of $32,862 as of September 30, 2017, compared to $36,496 as of December 31, 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.2018.

Federal Home Loan Bank Advances

The Company has established a line of credit with the ~~Federal Home Bank~~FHLB of Cincinnati which is secured by a blanket pledge of1-4 family residential mortgages and home equity lines of credit. At ~~September~~June 30, ~~2017~~2019 and at December 31, ~~2016,~~2018, advances totaled ~~$337,000~~$396,500 and ~~$132,000, respectively.~~

~~At September 30, 2017,~~$368,500, respectively, and the scheduled maturities and interest rates of these advances were as follows:


Scheduled Maturities	Amount		Weighted Average Rates			Amount		Weighted Average Rates
2017	$	75,000		1.17	%
2018		157,000		1.19	%
2019		50,000		1.41	%	$	241,500		2.42	%
2020		55,000		1.72	%		155,000		2.41

Total	$	337,000		1.31	%	$	396,500		2.41	%

Subordinated Notes

At ~~September~~June 30, ~~2017,~~2019, the Company’s subordinated notes, net of issuance costs, totaled ~~$58,470,~~$58,782 compared with ~~$58,337~~$58,693 at December 31, ~~2016.~~2018. For more information related to the subordinated notes and the related issuance costs, please see Note 1012 of the consolidated financial statements.

Liquidity

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely 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. Our source of funds to pay interest on our ~~subordinated notes~~March 2016 Subordinated Notes and June 2016 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” below, the Bank is required to receive prior written approval from its regulatory agenciesThe Bank’s ability to pay ~~dividends~~a dividend may be restricted due to regulatory requirements as well as the ~~Company.~~Bank’s future earnings and capital needs.

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~~June 30, ~~2017, $980,737~~2019, $715,132 of the investment securities portfolio was classified asavailable-for-sale and is reported at fair value on the consolidated balance sheet. Another ~~$217,312~~$118,963 of the portfolio was classified asheld-to-maturity and is reported at amortized cost. Approximately ~~$944,463~~$468,429 of the total ~~$1,198,049~~$834,095 investment securities portfolio on hand at ~~September~~June 30, ~~2017,~~2019, 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.

Equity

As of ~~September~~June 30, ~~2017,~~2019, the Company’s equity was ~~$303,697,~~$393,609, as compared with ~~$270,361~~$372,833 as of December 31, ~~2016.~~2018. The increase in equity was ~~primarily~~ due to the Company’s earnings of ~~$25,697~~$8,075 in the ~~first nine~~six months ~~of 2017,~~ended June 30, 2019, the ~~increase in~~ common stock increase of ~~$3,288 during the first nine months~~$3,600, less dividends paid of ~~2017,~~$1,167 and the ~~$4,359 increase in other comprehensive income from~~$2,244 decrease for the amortization of security premiums with the adoption of ASU 2017-08, plus the $12,512 increase in the valuation of ~~available~~available-for-sale securities.

On January 23, 2019, we announced that our board of directors had authorized a share repurchase program for ~~sale securities.~~up to $30,000 of our outstanding common stock. The repurchase program is scheduled to expire upon the earlier of our repurchase of shares of our common stock having an aggregate purchase price of $30,000, or January 23, 2020. For the three and six months ended June 30, 2019, we repurchased 19,180 shares of our common stock at a weighted average price of $27.07 and an aggregate cost of $519.

Effects ofon 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~~June 30, ~~2017,~~2019, the Company had unfunded loan commitments outstanding of ~~$43,611,~~$63,707, unused lines of credit of ~~$563,178,~~$801,049, and outstanding standby letters of credit of ~~$41,523.~~$52,064.

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 from~~period-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.

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:

(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 %

	As of or for the Three Months Ended
(Amounts in thousands, except share/per share data and percentages)	June 30, 2019			March 31 2019			December 31, 2018			Sept 30, 2018			June 30, 2018
Total shareholders’ equity	$	393,516		$	383,421		$	372,740		$	356,074		$	348,059
Less: Preferred stock		—			—			—			—			—
Total common equity		393,516			383,421			372,740			356,074			348,059
Common shares outstanding		14,628,287			14,574,339			14,538,085			14,525,351			14,480,240
Book value per share	$	26.90		$	26.31		$	25.64		$	24.51		$	24.04
Total common equity		393,516			383,421			372,740			356,074			348,059
Less: Goodwill and other intangible assets		18,885			19,020			19,128			19,327			19,499
Tangible common equity	$	374,631		$	364,401		$	353,612		$	336,747		$	328,560
Common shares outstanding		14,628,287			14,574,339			14,538,085			14,525,351			14,480,240
Tangible book value per share	$	25.61		$	25.00		$	24.32		$	23.18		$	22.69
Average total common equity		388,460			377,116			299,840			351,293			340,175
Less: Average Preferred stock		—			—			—			—			—
Less: Average Goodwill and other intangible assets		18,971			19,109			19,268			19,433			19,860
Average tangible common shareholders’ equity	$	369,489		$	358,007		$	280,572		$	331,860		$	320,315
Net income available to common shareholders		5,173			2,901			3,743			10,549			10,161
Average tangible common equity		369,489			358,007			325,012			331,860			320,315
Return on average tangible common equity⁽¹⁾		5.6	%		3.3	%		4.6	%		12.6	%		12.7	%
Efficiency Ratio:
Net interest income	$	27,365		$	27,420		$	26,920		$	26,562		$	26,905
Noninterest income		4,923			3,486			(383	)		3,442			4,147
Operating revenue		32,288			30,906			26,537			30,004			31,052
Expense
Total noninterest expense		19,370			22,616			21,689			18,251			18,050
Efficiency ratio(2)		60.0	%		73.2	%		81.7	%		60.8	%		58.1	%

⁽¹⁾

Annualized

⁽²⁾

Efficiency ratio (GAAP) is calculated by dividing reported noninterest expense by reported total revenue

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, 2017			Jun 30, 2017		Mar 31, 2017		Dec 31, 2016		Sept 30, 2016		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018			Sep 30, 2018		Jun 30, 2018
Income Statement Data ($):	Income Statement Data ($):
Interest income			33,780			33,011		30,541		27,336		25,724		47,453		47,523		46,046			43,717		42,136
Interest expense			9,454			8,542		6,898		5,637		5,049		20,088		20,103		19,125			17,155		15,231
Net interest income			24,326			24,469		23,643		21,699		20,675		27,365		27,420		26,921			26,562		26,905
Provision for loan losses			590			573		1,855		1,145		1,392		7,031		5,055		975			136		570
Noninterest income			3,569			3,880		4,008		2,553		4,876
Noninterest income (expense)														4,923		3,486		(384	)		3,442		4,147
Noninterest expense			15,278			15,283		14,276		13,229		13,708		19,370		22,616		21,689			18,251		18,050
Net income before taxes			12,027			12,493		11,520		9,878		10,451		5,887		3,235		3,873			11,617		12,432
Income tax expense⁽¹⁾			3,138			3,619		3,586		2,699		3,314
Net income⁽¹⁾			8,889			8,874		7,934		7,179		7,137
Income tax expense														706		334		122			1,068		2,263
Net income														5,181		2,901		3,751			10,549		10,169
Pre-tax pre-provision profit														12,918		8,290		4,848			11,753		13,002
Earnings before interest and taxes			21,481			21,035		18,418		15,515		15,500		25,975		23,338		23,048			28,722		27,663
Net income available to common shareholders			8,889			8,866		7,934		7,179		7,137		5,173		2,901		3,743			10,549		10,161
Weighted average diluted common shares			13,773,539			13,701,762		13,657,357		12,473,725		11,415,422		14,894,140		14,804,830		14,821,540			14,903,751		14,814,059
Earnings per share, basic			0.67			0.68		0.61		0.61		0.67		0.35		0.20		0.26			0.73		0.71
Earnings per share, diluted			0.65			0.64		0.58		0.58		0.63		0.34		0.19		0.25			0.70		0.68
Dividend per share														0.04		0.04		—			—		—
Profitability (%)
Return on average assets			1.03			1.03		0.99		1.00		1.07		0.51		0.28		0.35			1.01		0.98
Return on average equity			11.83			12.46		11.80		12.10		13.78		5.3		3.1		4.1			11.9		12.0
Return on average tangible common equity⁽³⁾			12.26			12.92		12.27		12.68		14.55		5.6		3.3		4.3			12.6		12.7
Efficiency ratio⁽³⁾			54.77			53.91		51.63		54.55		53.65		60.0		73.2		81.7			60.8		58.1
Net interest margin⁽⁴⁾			3.05			3.08		3.18		3.27		3.34
Net interest margin⁽¹⁾														2.84		2.80		2.69			2.70		2.74
Balance Sheet Data ($):
Loans (including HFS)			2,127,753			2,023,679		1,962,397		1,797,291		1,680,877		2,907,526		2,829,107		2,676,502			2,564,684		2,488,862
Loan loss reserve			19,944			18,689		18,105		16,553		15,590		27,443		27,857		23,451			22,479		22,341
Cash			155,842			96,741		114,664		90,927		56,804		150,721		300,113		280,212			144,660		176,870
Securities			1,198,049			1,243,406		1,299,349		983,649		905,806		834,095		918,132		1,152,285			1,319,774		1,357,918
Goodwill			9,124			9,124		9,124		9,124		9,124		18,176		18,176		18,176			18,176		18,176
Intangible assets (Sum of core deposit intangible and SBA servicing rights)			1,170			1,232		1,353		1,509		1,650		709		844		952			1,151		1,323
Assets			3,565,278			3,443,593		3,454,788		2,943,189		2,703,195		4,071,971		4,238,436		4,249,439			4,167,813		4,165,238
Deposits			2,824,825			2,754,425		2,817,212		2,391,818		2,217,954		3,146,645		3,315,843		3,431,807			3,371,550		3,398,025
Liabilities			3,261,581			3,150,572		3,176,278		2,672,828		2,493,551		3,678,362		3,854,922		3,876,606			3,811,636		3,817,076
Total shareholders' equity														393,516		383,421		372,740			356,074		348,059
Total equity			303,697			293,021		278,510		270,361		209,644		393,609		383,514		372,833			356,177		348,162
Common equity			303,594			292,918		278,407		270,258		209,644
Tangible common equity⁽³⁾			293,300			282,562		267,930		259,625		198,870		374,631		364,401		353,612			336,747		328,560
Asset Quality (%)
Nonperforming loans/ total loans⁽²⁾			0.14			0.19		0.21		0.35		0.10		0.16		0.42		0.21			0.16		0.14
Nonperforming assets / (total loans⁽²⁾ + foreclosed assets)			0.21			0.26		0.27		0.35		0.10		0.16		0.42		0.21			0.23		0.21
Loan loss reserve / total loans⁽²⁾			0.94			0.93		0.93		0.93		0.94		0.95		0.99		0.88			0.88		0.90
Net charge-offs / average loans			(0.13	)		0.00		0.07		0.04		0.01
Net charge-offs (recoveries) / average loans HFI⁽⁴⁾														1.04		0.10		0.00			0.00		0.00
Capital (%)
Tangible common equity to tangible assets⁽³⁾			8.25			8.23		7.78		8.85		7.39		9.2		8.6		8.4			8.1		7.9
Leverage ratio			8.58			8.21		8.36		9.28		7.15		9.2		8.8		8.8			8.7		8.3
Common Equity Tier 1 ratio			11.58			11.54		11.32		11.75		9.09		11.2		11.3		12.2			12.2		12.1
Tier 1 risk-based capital ratio			11.58			11.54		11.32		11.75		9.09		11.2		11.3		12.2			12.2		12.1
Total risk-based capital ratio			14.68			14.69		14.51		15.09		12.66		13.7		14.0		14.9			15.0		15.0

⁽¹⁾

~~This item reflects~~

Net interest margins shown in 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 2016, as follows: third quarter 2016 – decreased~~table above include tax-equivalent adjustments to adjust interest income ~~tax expense by $107~~on tax-exempt loans and ~~increased diluted EPS by $0.01.~~tax-exempt investment securities to a fully taxable basis.

⁽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.~~ Annualized.

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~~date of the first sale of common equity securities under 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~~ $1.07 billion or more in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange ~~Act;~~Act of 1934, as amended (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. The Company will cease to be an emerging growth company as of December 31, 2019.

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~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 Reserve Bank and the 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 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 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.

~~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~~June 30, ~~2017,~~2019, net interest income was estimated to ~~decrease 3.02%~~increase 1.18% and ~~7.13%~~1.12% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to ~~increase 1.26%~~decrease 1.38% and ~~decrease 5.25%~~0.99% 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~~June 30, ~~2017.~~2019.


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		90,629		(5,024	)		(5.25	%)		115,409		(1,149	)		(0.99	)%
-100		96,857		1,205			1.26	%		114,948		(1,610	)		(1.38	)%
Base		95,652		—			0.00	%		116,558		—			—
+100		92,762		(2,890	)		(3.02	%)		117,932		1,374			1.18	%
+200		88,832		(6,820	)		(7.13	%)		117,859		1,301			1.12	%
+300		84,852		(10,800	)		(11.29	%)		117,107		549			0.47	%
+400		81,364		(14,288	)		(14.94	%)		116,697		139			0.12	%

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 management, with the participation of 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~~June 30, ~~2017,~~2019, 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 ~~16, 2017.~~

19, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~

(a)

Unregistered Sales of Equity Securities.N/A

(b)

Use of Proceeds. Not applicable.

(c)

Repurchase of Equity Securities

The following table discloses shares of our common stock repurchased during the three months ended June 30, 2019:

Period	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs ⁽¹⁾		Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands)
April 1, 2019 to April 30, 2019		—		—		—	$	30,000
May 1, 2019 to May 31, 2019		—		—		—		30,000
June 1, 2019 to June 30, 2019		19,180	$	27.07		19,180		29,481

⁽¹⁾On January 23, 2019, we announced that our board of directors had authorized a share repurchase program for up to $30 million of our outstanding common stock. The repurchase program is scheduled to expire upon the earlier of our repurchase of shares of our common stock having an aggregate purchase price of $30 million or on January 23, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

~~ITEM 3.~~

~~DEFAULTS UPON SENIOR SECURITIES.~~

~~None.~~

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES.~~

Not applicable.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS

~~ITEM 5.~~

Exhibit No.

~~OTHER INFORMATION.~~

~~None.~~

Description

~~ITEM 6.~~ ~~EXHIBITS~~


~~Exhibit~~ ~~No.~~		~~Description~~

~~2.1~~ 10.1		~~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~~		Triple Net Office Lease Agreement, by and between ~~Petra~~Nolensville Real Estate Partners, ~~II,~~ LLC and Franklin Synergy Bank, ~~(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~~ ~~27, 2017)~~

~~10.2~~		~~Lease Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank~~May 6, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s ~~Current~~Quarterly Report on Form~~8-K~~ 10-Q filed with the Securities and Exchange Commission on ~~July~~ ~~27, 2017)~~May 9, 2019).

31.1* 10.2	Severance Agreement and General Release, by and between Franklin Synergy Bank and Sally Bowers, dated May 7, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 9, 2019).

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

**	Furnished herewith

*	~~Filed herewith~~

SIGNATURES

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

			Franklin Financial Network, INC.
	~~FRANKLIN FINANCIAL NETWORK, INC.~~
August 6, 2019
~~November 9, 2017~~	By:	/s/ ~~Sarah Meyerrose~~Christopher J. Black
		~~Sarah Meyerrose~~ Christopher J. Black Executive Vice President and Chief Financial Officer
		On behalf of the registrant and as Chief Financial Officer (Principal Financial Officer)


													Accumulated Other
	Preferred			Common Stock						Retained			Comprehensive			Noncontrolling		Total
	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
Exercise of common stock options, net		—			152,003			1,357									—		1,357
Exercise of common stock warrants		—			6,575			79									—		79
Redemption of Series A preferred stock		(10,000	)		—			—			—			—			—		(10,000	)
Dividends paid on Series A preferred stock		—			—			—			(23	)		—			—		(23	)
Stock based compensation expense, net of restricted share forfeitures		—			34,480			1,201			—			—			—		1,201
Stock issued (divestment) in conjunction with 401(k) employer match, net of distributions		—			(6,952	)		(185	)		—			—			—		(185	)
Net income		—			—			—			20,878			—			—		20,878
Other comprehensive income		—			—			—			—			7,521			—		7,521

Balance at September 30, 2016	$	—			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


	Gross Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
December 31, 2016
U.S. government sponsored entities and agencies	$	203	$	6	$	—		$	209
Mortgage backed securities: residential		106,169		328		(2,343	)		104,154
State and political subdivisions		122,522		1,214		(207	)		123,529

Total	$	228,894	$	1,548	$	(2,550	)	$	227,892


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 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, 2017		September 30, 2016
Stock warrants exercised:
Intrinsic value of warrants exercised	$	329	$	136
Cash received from warrants exercised		150		79


	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2017
Company common equity Tier 1 capital to risk-weighted assets	$	293,004		11.58	%	$	113,908		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	371,510		14.68	%	$	202,502		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	293,004		11.58	%	$	151,877		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	293,004		8.58	%	$	136,609		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	347,043		13.71	%	$	113,901	��	4.50	%	$	164,523		6.50	%
Bank Total Capital to risk weighted assets	$	367,079		14.50	%	$	202,490		8.00	%	$	253,112		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	347,043		13.71	%	$	151,867		6.00	%	$	202,490		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	347,043		10.17	%	$	136,511		4.00	%	$	170,639		5.00	%
December 31, 2016
Company common equity Tier 1 capital to risk-weighted assets	$	263,693		11.75	%	$	101,022		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	338,675		15.09	%	$	179,595		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	263,693		11.75	%	$	134,696		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	263,693		9.28	%	$	113,697		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	319,005		14.18	%	$	101,216		4.50	%	$	146,201		6.50	%
Bank Total Capital to risk weighted assets	$	335,650		14.92	%	$	179,939		8.00	%	$	224,924		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	319,005		14.18	%	$	134,954		6.00	%	$	179,939		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	319,005		11.22	%	$	113,697		4.00	%	$	142,122		5.00	%


	Three 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⁾	$	2,049,575		$	26,006		5.03	%	$	1,620,347		$	20,219		4.96	%
Securities available for sale⁽⁶⁾		972,988			6,405		2.61	%		671,725			4,084		2.42	%
Securities held to maturity⁽⁶⁾		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		2,412			9		1.48	%		941			4		1.69	%
Federal funds sold and other⁽²⁾		88,737			271		1.21	%		38,923			49		0.50	%

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

TOTAL ASSETS	$	3,426,864							$	2,648,252
LIABILITIES & EQUITY
Deposits:
Interest checking	$	552,502		$	1,285		0.92	%	$	261,350		$	256		0.39	%
Money market		604,416			1,703		1.12	%		617,913			957		0.62	%
Savings		54,921			42		0.30	%		51,235			40		0.31	%
Time deposits		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⁾		37,374			92		0.98	%		44,974			69		0.61	%
Subordinated notes and other borrowings		58,444			1,083		7.35	%		58,285			1,082		7.39	%

TOTAL INTEREST BEARING LIABILITIES	$	2,856,337		$	9,454		1.31	%	$	2,201,206		$	5,049		0.91	%
Demand deposits		261,127								224,387
Other liabilities		11,312								16,650
Total equity		298,088								206,009

TOTAL LIABILITIES AND EQUITY	$	3,426,864							$	2,648,252
NET INTEREST SPREAD⁽⁴⁾							2.86	%							3.21	%
NET INTEREST INCOME				$	25,789							$	21,643
NET INTEREST MARGIN⁽⁵⁾							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	%


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

Totalnon-accrual loans	$	2,582		100.0	%		3


(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	%