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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-2 of the Exchange Act.

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

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

The number of shares outstanding of the registrant’s common stock, no par value per share, as of ~~May 3,~~October 28, 2019, was ~~14,729,001.~~14,716,669.

This Quarterly Report on Form 10-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 Form 10-Q, and we undertake no obligation to update such statements after this 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 Form 10-K for the year ended December 31, 2018.

	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from financial institutions	$	300,113		$	280,212		$	178,747		$	280,212
Certificates of deposit at other financial institutions		3,595			3,594			3,590			3,594
Securities available for sale		799,301			1,030,668			612,371			1,030,668
Securities held to maturity (fair value 2019—$118,866 and 2018—$118,955)		118,831			121,617
Securities held to maturity (fair value 2019—$0 and 2018—$118,955)								—			121,617
Loans held for sale, at fair value		21,730			11,103			56,570			11,103
Loans held for investment		2,807,377			2,665,399			2,796,233			2,665,399
Allowance for loan losses		(27,857	)		(23,451	)		(26,474	)		(23,451	)
Net loans		2,779,520			2,641,948			2,769,759			2,641,948
Restricted equity securities, at cost		22,803			21,831			24,764			21,831
Premises and equipment, net		12,682			12,371			12,449			12,371
Accrued interest receivable		14,232			13,337			12,077			13,337
Bank owned life insurance		55,614			55,239			56,366			55,239
Deferred tax asset		12,208			13,189			10,297			13,189
Servicing rights, net		3,366			3,403			3,128			3,403
Goodwill		18,176			18,176			18,176			18,176
Core deposit intangible, net		807			952			556			952
Other assets		75,458			21,799			59,474			21,799
Total assets	$	4,238,436		$	4,249,439		$	3,818,324		$	4,249,439
LIABILITIES AND EQUITY
Deposits
Non-interest bearing	$	304,937		$	290,580		$	346,441		$	290,580
Interest bearing		3,010,906			3,141,227			2,715,509			3,141,227
Total deposits		3,315,843			3,431,807			3,061,950			3,431,807
Federal Home Loan Bank advances		416,500			368,500			220,000			368,500
Subordinated notes, net		58,738			58,693			58,827			58,693
Accrued interest payable		5,041			4,700			3,932			4,700
Other liabilities		58,800			12,906			65,354			12,906
Total liabilities		3,854,922			3,876,606			3,410,063			3,876,606
Commitments and Contingencies (Note 9)
Equity
Preferred stock, no par value: 1,000,000 shares authorized; no shares outstanding at March 31, 2019 and December 31, 2018		—			—
Common stock, no par value: 30,000,000 authorized; 14,574,339 and 14,538,085 issued and outstanding at March 31, 2019, and December 31, 2018, respectively		266,758			264,905
Preferred stock, no par value: 1.0 million shares authorized; no shares outstanding at September 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 September 30, 2019 and December 31, 2018, respectively								269,842			264,905
Retained earnings		123,250			123,176			138,579			123,176
Accumulated other comprehensive loss		(6,587	)		(15,341	)		(253	)		(15,341	)
Total shareholders’ equity		383,421			372,740			408,168			372,740
Non-controlling interest in consolidated subsidiary		93			93			93			93
Total equity		383,514			372,833			408,261			372,833
Total liabilities and equity	$	4,238,436		$	4,249,439		$	3,818,324		$	4,249,439

	Three Months Ended March 31,					Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018		2019			2018			2019			2018
Interest income and dividends
Loans, including fees	$	38,338		$	28,793	$	40,118		$	34,435		$	118,658		$	95,541
Securities:
Taxable		6,394			6,111		3,815			6,460			14,823			19,476
Tax-Exempt		1,470			1,915		1,471			1,926			4,351			5,770
Dividends on restricted equity securities		334			274		291			313			971			916
Federal funds sold and other		987			954		836			583			2,704			2,197
Total interest income		47,523			38,047		46,531			43,717			141,507			123,900
Interest expense
Deposits		16,990			10,643		15,020			14,137			48,689			37,385
Federal funds purchased and repurchase agreements		72			96		49			69			211			296
Federal Home Loan Bank advances		1,959			1,110
Subordinated notes and other borrowings		1,082			1,082
Federal Home Loan Bank advances and other borrowings							2,118			1,867			6,314			4,390
Subordinated notes							1,082			1,082			3,246			3,246
Total interest expense		20,103			12,931		18,269			17,155			58,460			45,317
Net interest income		27,420			25,116		28,262			26,562			83,047			78,583
Provision for loan losses		5,055			573		1,000			136			13,086			1,279
Net interest income after provision for loan losses		22,365			24,543		27,262			26,426			69,961			77,304
Noninterest income
Service charges on deposit accounts		74			42		83			58			234			151
Other service charges and fees		757			751		1,069			747			2,729			2,321
Mortgage banking revenue		1,672			1,549		2,702			1,490			6,847			5,092
Wealth management		627			704		767			705			2,067			2,198
Gain on sale or call of securities		149			—
Net (loss) gain on sale of loans		(217	)		9
Gain (loss) on sale or call of securities							1,493			(1	)		2,009			—
Net loss on sale of loans							(1,758	)		—			(1,972	)		—
Net gain on sale of foreclosed assets		4			3		2			3			9			9
Other		420			398		435			440			1,279			1,274
Total noninterest income		3,486			3,456		4,793			3,442			13,202			11,045
Noninterest expense
Salaries and employee benefits		14,743			9,188		11,632			10,723			37,740			30,179
Occupancy and equipment		3,113			2,594		3,360			2,933			9,756			8,412
FDIC assessment expense		990			660
FDIC assessment (income) expense							(357	)		1,020			1,293			2,458
Marketing		319			280		315			306			935			855
Professional fees		923			869		1,118			1,023			3,114			3,254
Amortization of core deposit intangible		145			104		120			169			396			455
Other		2,383			1,793		2,426			2,077			7,366			6,176
Total noninterest expense		22,616			15,488		18,614			18,251			60,600			51,789
Income before income tax expense		3,235			12,511		13,441			11,617			22,563			36,560
Income tax expense		334			2,459		2,117			1,068			3,157			5,790
Net income		2,901			10,052		11,324			10,549			19,406			30,770
Earnings attributable to noncontrolling interest		—			—		—			—			(8	)		(8	)
Net income available to common shareholders	$	2,901		$	10,052	$	11,324		$	10,549		$	19,398		$	30,762
Earnings per share:
Basic	$	0.20		$	0.76	$	0.77		$	0.73		$	1.33		$	2.19
Diluted		0.19			0.73		0.75			0.70			1.29			2.10
Dividend per share	$	0.04		$	—

Three Months Ended ~~March 31,~~September 30, 2019 and ~~March 31,~~September 30, 2018

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

—

21,348

220

—

—

—

220

Stock based compensation expense, net of restricted
   share forfeitures

—

(334
)

759

—

—

—

759

Stock issued in conjunction with 401(k) employer
   match, net of distributions

—

—

(50
)

—

—

—

(50
)
Net income

—

—

—

10,052

—

—

10,052

Other comprehensive loss

—

—

—

—

(10,769
)

—

(10,769
)
Balance at March 31, 2018

$
—

13,258,142

$
223,594

$
98,723

$
(17,555
)

$
103

$
304,865

Balance at January 1, 2019

$
—

14,538,085

$
264,905

$
123,176

$
(15,341
)

$
93

$
372,833

Exercise of common stock options, includes net settlement of shares

—

35,046

524

—

—

—

524

Issuance of restricted stock, net of forfeitures

—

1,208

—

—

—

—

—

Stock based compensation expense, net of
   share forfeitures

—

—

1,329

—

—

—

1,329

Cash dividends - common stock ($0.04 per share)

—

—

—

(583
)

—

—

(583
)
Adjustment for adoption of ASU 2017-08
   amortization of premiums

—

—

—

(2,244
)

—

—

(2,244
)
Net income

—

—

—

2,901

—

—

2,901

Other comprehensive income

—

—

—

—

8,754

—

8,754

Balance at March 31, 2019

$
—

14,574,339

$
266,758

$
123,250

$
(6,587
)

$
93

$
383,514

	Shareholders’ Equity
	Preferred		Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock		Shares			Amount			Earnings			Loss			Interest		Equity
Balance at July 1, 2018	$	—		14,480,240		$	259,517		$	108,884		$	(20,343	)	$	103	$	348,161
Exercise of common stock options, includes net settlement of shares		—		50,241			908			—			—			—		908
Stock based compensation expense, net of restricted share forfeitures		—		—			1,376			—			—			—		1,376
Stock issued in conjunction with 401(k) employer match, net of distributions		—		(4,456	)		(178	)		—			—			—		(178	)
Issuance of restricted stock awards, net of forfeitures		—		(674	)		—			—			—			—		—
Net income		—		—			—			10,549			—			—		10,549
Other comprehensive loss		—		—			—			—			(4,639	)		—		(4,639	)
Balance at September 30, 2018	$	—		14,525,351		$	261,623		$	119,433		$	(24,982	)	$	103	$	356,177


Balance at July 1, 2019	$	—		14,628,287		$	268,505		$	127,840		$	(2,829	)	$	93	$	393,609
Exercise of common stock options, includes net settlement of shares		—		12,340			216			—			—			—		216
Stock based compensation expense, net of restricted share forfeitures		—		—			1,313			—			—			—		1,313
Issuance of restricted stock awards, net of forfeitures, and vesting of restricted stock units		—		2,900			—			—			—			—		—
Purchase of treasury stock		—		(7,043	)		(192	)		—			—			—		(192	)
Cash dividends - common stock ($0.04 per share)		—		—			—			(585	)		—			—		(585	)
Net income		—		—			—			11,324			—			—		11,324
Other comprehensive income		—		—			—			—			2,576			—		2,576
Balance at September 30, 2019	$	—		14,636,484		$	269,842		$	138,579		$	(253	)	$	93	$	408,261

	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		—		207,472			2,845			—			—			—		2,845
Stock based compensation expense, net of restricted share forfeitures		—		—			3,454			—			—			—		3,454
Stock issued in conjunction with 401(k) employer match, net of distributions		—		(7,271	)		(273	)		—			—			—		(273	)
Issuance of restricted stock awards, net of forfeitures		—		117,632			—			—			—			—		—
Stock issued for acquisition (net of issuance costs)		—		970,390			32,932			—			—			—		32,932
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			30,770			—			—		30,770
Other comprehensive loss		—		—			—			—			(18,196	)		—		(18,196	)
Balance at September 30, 2018	$	—		14,525,351		$	261,623		$	119,433		$	(24,982	)	$	103	$	356,177


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		—		121,502			1,493			—			—			—		1,493
Stock based compensation expense, net of restricted share forfeitures		—		—			4,155			—			—			—		4,155
Issuance of restricted stock awards, net of forfeitures, and vesting of restricted stock units		—		3,120			—			—			—			—		—
Purchase of treasury stock		—		(26,223	)		(711	)		—			—			—		(711	)
Cash dividends - common stock ($0.12 per share)		—		—			—			(1,751	)		—			—		(1,751	)
Noncontrolling interest distributions		—		—			—			(8	)		—			—		(8	)
Net income		—		—			—			19,406			—			—		19,406
Other comprehensive income		—		—			—			—			15,088			—		15,088
Balance at September 30, 2019	$	—		14,636,484		$	269,842		$	138,579		$	(253	)	$	93	$	408,261

	Three Months Ended March 31,						Nine Months Ended September 30,
	2019			2018			2019			2018
Cash flows from operating activities
Net income	$	2,901		$	10,052		$	19,406		$	30,770
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		410			403			1,324			1,279
Accretion of purchase accounting adjustments		(172	)		(252	)		(471	)		(1,122	)
Net amortization of securities		1,212			1,904			4,576			6,323
Amortization of loan servicing right asset		225			214			901			643
Amortization of core deposit intangible		145			104			396			455
Amortization of debt issuance costs		45			44			134			134
Provision for loan losses		5,055			573			13,086			1,279
Deferred income tax (benefit) expense		(2,115	)		10
Deferred income tax benefit								(2,920	)		(853	)
Excess tax benefit related to stock compensation		(130	)		—			(177	)		—
Origination of loans held for sale		(85,008	)		(83,226	)		(437,386	)		(267,862	)
Proceeds from sale of loans held for sale		75,791			83,622			398,134			269,594
Net gain on sale of loans held for sale		(1,598	)		(1,439	)		(6,841	)		(4,759	)
Loss on sale of loans held for investment								1,972			—
Gain on sale of available for sale securities		(149	)		—			(2,009	)		—
Income from bank owned life insurance		(375	)		(365	)		(1,127	)		(1,155	)
Stock-based compensation		1,329			759			4,155			3,454
Deferred gain on sale of loans		(4	)		(4	)		(11	)		(11	)
Deferred gain on sale of foreclosed assets		(4	)		(3	)		(10	)		(9	)
Net change in:
Accrued interest receivable and other assets		(12,900	)		(1,871	)		7,672			(4,002	)
Accrued interest payable and other liabilities		3,080			1,896			(660	)		(1,984	)
Net cash from operating activities		(12,262	)		12,421		$	144			32,174
Cash flows from investing activities
Securities available for sale :
Sales		259,613			—
Sales and calls								562,784			—
Purchases		(80,360	)		(224,712	)		(106,761	)		(235,319	)
Maturities, prepayments and calls		62,050			22,129
Maturities and prepayments								105,247			122,172
Securities held to maturity :
Purchases		—			(1,676	)		(4,909	)		(1,676	)
Maturities, prepayments and calls		2,448			2,714			8,116			10,571
Net change in loans		(142,455	)		(53,240	)		(219,270	)		(196,053	)
Proceeds from sale of loans held for investment								76,849			—
Purchase of restricted equity securities		(972	)		(1,114	)		(2,933	)		(2,425	)
Purchases of premises and equipment, net		(721	)		(63	)		(1,402	)		(1,597	)
Decrease in certificates of deposits at other financial institutions								4			251
Purchase of bank owned life insurance								—			(119	)
Net cash acquired from acquisition								—			24,660
Net cash from investing activities		99,603			(255,962	)	$	417,725			(279,535	)
Cash flows from financing activities
(Decrease) increase in deposits		(115,964	)		187,925			(369,857	)		81,160
Increase in federal funds purchased and repurchase agreements		—			5,067
Decrease in federal funds purchased and repurchase agreements								—			(31,004	)
Proceeds from Federal Home Loan Bank advances		190,000			95,000			390,000			270,000
Repayment of Federal Home Loan Bank advances		(142,000	)		(50,000	)		(538,500	)		(182,000	)
Proceeds from issuance of common stock, net of offering costs								—			(242	)
Proceeds from exercise of common stock options		524			220			1,493			2,845
Divestment of common stock issued to 401(k) plan		—			(50	)		—			(273	)
Purchase of treasury stock								(711	)		—
Dividends paid on common stock								(1,751	)		—
Noncontrolling interest distributions								(8	)		(8	)
Net cash from financing activities		(67,440	)		238,162			(519,334	)		140,478
Net change in cash and cash equivalents		19,901			(5,379	)		(101,465	)		(106,883	)
Cash and cash equivalents at beginning of period		280,212			251,543			280,212			251,543
Cash and cash equivalents at end of period	$	300,113		$	246,164		$	178,747		$	144,660
Supplemental information:
Interest paid	$	19,762		$	12,925		$	59,228		$	44,159
Income taxes paid		1,428			525			7,774			6,632
Non-cash supplemental information:
Establishment of lease liability and right-of-use asset		43,723			—
Transfers from securities available for sale to securities held to maturity		1,206			—
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 held to maturity to securities available for sale							$	116,203		$	—

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-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 Regulation S-X, Rule 10-01. 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 on Form 10-K filed with the SEC on March 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.

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 ~~as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized~~ for operating leases. ~~The guidance became effective for the Company on January 1, 2019.~~ 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, ~~on January 1, 2019, which will result in presentation~~and subsequently adopted ASU 2019-01. The Company recorded a right of ~~periods prior to adoption under the prior~~use asset and lease ~~guidance~~liability of ~~ASC Topic 840. In December 2018, the FASB issued~~ ~~Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors~~. ASU 2018-20 permits lessors to account for certain taxes as lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to allocate certain variable payments to lease and non-lease components. $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 ~~retain~~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.” ~~The amendments~~This update expands the list of U.S. benchmark interest rates permitted in ~~this update permit use~~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 ~~hedge accounting purposes under Topic 815 in addition~~entities to prepare for changes to interest rate risk hedging strategies. The Company adopted the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate.provisions of ASU No. 2018-16 ~~became effective for us~~ on January 1, 2019, and ~~did not have a significant impact on our financial statements.~~

~~In March 2019, the FASB issued ASU No. 2019-01,~~ ~~“Leases: Codification Improvements.”~~ This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASUit did not have a material impact on ~~the Company’s~~our consolidated financial statements.

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 ~~Company is currently gathering information~~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 ~~working to determine the methodology to be used.~~Hedging, and Topic 825, Financial Instruments, and ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. The Company ~~is gathering as much data as possible~~continues to ~~enable review scenarios and to determine which calculations will produce~~make progress in accordance with the ~~most reliable results.~~Company’s implementation plan for adoption. The Company ~~is still evaluating~~has developed new expected credit loss estimation models. Depending on the ~~impact~~nature of ~~this new guidance~~each identified pool of financial assets with similar risk characteristics, the Company currently plans on ~~our financial statements; however an increase in~~implementing a DCF method or a loss-rate method to estimate expected credit losses. Incorporating reasonable and supportable forecasts of economic conditions into the ~~overall ALLL is likely upon adoption to provide for~~estimate of expected credit losses will require significant judgment, such as selecting economic variables and forecast scenarios as well as determining the appropriate length of the forecast horizon. Management will estimate credit losses over a forecast horizon and revert to long term historical loss experience on a straight-line basis. Management will select economic variables it believes to be most relevant based on the ~~life~~composition of the loan ~~portfolio.~~portfolio, likely to include forecasted levels of employment, non-performing and delinquent loan third party industry data, and real estate and construction metrics. Management currently intends to leverage economic projections from a reputable and independent third party to inform its reasonable and supportable forecasts over the one-year forecast period. Management, when developing the forecast metrics, will also consider other internal and external indicators of economic forecasts.

The ultimate impact of ASU 2016-13 will depend on the composition of the portfolio and economic conditions and forecasts at the time of adoption. It could also be subject to further regulatory or accounting guidance and other management validation and judgments. More specifically, the current estimated change in reserve is influenced by the longer contractual maturities of the real estate lending portfolios being offset by the shorter contractual maturities of the construction and commercial loan portfolios. This estimated impact at adoption also includes certain qualitative adjustments to the allowance for credit losses.

Management is currently assessing the impact on available-for-sale securities to the Company’s consolidated financial statements upon adoption of ASU 2016-13. The ultimate impact will depend upon the nature and characteristics of our securities portfolios (including issuer specific matters) at the adoption date, the macroeconomic conditions and forecasts at that date, and other management judgments.

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.

~~ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies~~

In August 2018, the ~~disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments~~FASB issued in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

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 usthe Company on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

The following table summarizes the amortized cost and fair value of the securities ~~available for sale~~available-for-sale portfolio at ~~March 31,~~September 30, 2019 and December 31, 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
March 31, 2019
U.S. Treasury securities	$	69,548	$	70	$	—		$	69,618
U.S. government sponsored entities and agencies		1,829		1		(10	)		1,820
September 30, 2019

Mortgage-backed securities: residential		531,551		387		(8,480	)		523,458	$	393,990	$	1,259	$	(1,487	)	$	393,762
Asset-backed securities		25,745		—		(695	)		25,050
Mortgage-backed securities: commercial											18,229		191		(109	)		18,311
Corporate notes		17,878		123		(62	)		17,939		25,343		564					25,907
State and political subdivisions		160,556		2,087		(1,227	)		161,416		173,336		1,067		(12	)		174,391
Total	$	807,107	$	2,668	$	(10,474	)	$	799,301	$	610,898	$	3,081	$	(1,608	)	$	612,371

During the third quarter of 2019, the Company elected to transfer its held-to-maturity securities portfolio to the available-for-sale portfolio. At the time of transfer, the securities had an amortized cost of $117,409 and a fair value of $121,964. Due to the continued decline in interest rates, the Company elected to move the securities into available-for-sale to provide more opportunities to reposition the portfolio.

There were no securities held-to-maturity at September 30, 2019. The amortized cost and fair value of the securities ~~held to maturity portfolio~~held-to-maturity at ~~March 31, 2019 and~~ December 31, 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
March 31, 2019
Mortgage backed securities: residential	$	73,865	$	85	$	(1,968	)	$	71,982
State and political subdivisions		44,966		1,918		—			46,884
Total	$	118,831	$	2,003	$	(1,968	)	$	118,866
December 31, 2018
Mortgage backed securities: residential	$	75,944	$	34	$	(3,072	)	$	72,906	$	75,944	$	34	$	(3,072	)	$	72,906
State and political subdivisions		45,673		466		(90	)		46,049		45,673		466		(90	)		46,049
Total	$	121,617	$	500	$	(3,162	)	$	118,955	$	121,617	$	500	$	(3,162	)	$	118,955

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

	Three Months Ended March 31,					Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018		2019			2018			2019			2018
Proceeds	$	259,613		$	—	$	215,747		$	—		$	562,784		$	—
Gross gains		1,801			—		3,842			—			6,010			—
Gross losses		(1,652	)		—		(2,349	)		(1	)		(4,001	)		—

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.

	March 31, 2019				September 30, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Available-for-sale
One year or less	$	70,053	$	70,122	$	10,000	$	9,999
Over one year through five years		1,080		1,078		1,612		1,645
Over five years through ten years		21,576		21,663		27,830		28,489
Over ten years		157,102		157,930		159,237		160,165
Asset-backed securities		25,745		25,050
Mortgage-backed securities: residential		531,551		523,458		393,990		393,762
Mortgage-backed securities: commercial						18,229		18,311
Total	$	807,107	$	799,301	$	610,898	$	612,371
Held to maturity
Over one year through five years		1,106		1,128
Over five years through ten years		1,039		1,073
Over ten years		42,821		44,683
Mortgage-backed securities: residential		73,865		71,982
Total	$	118,831	$	118,866

Securities pledged at ~~March 31,~~September 30, 2019 and December 31, 2018 had a carrying amount of ~~$711,826~~$342,286 and $939,440, respectively, and were pledged to secure public deposits.

At ~~March 31,~~September 30, 2019 and December 31, 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 ~~March 31,~~September 30, 2019 and December 31, 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

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

March 31, 2019

Available for sale

U.S. government sponsored entities and agencies

$
344

$
(1
)

$
1,021

$
(9
)

$
1,365

$
(10
)
Mortgage-backed securities: residential

—

—

444,647

(8,480
)

444,647

(8,480
)
Asset-backed securities

25,050

(695
)

—

—

25,050

(695
)
Corporate

6,329

(62
)

—

—

6,329

(62
)
State and political subdivisions

509

(1
)

60,318

(1,226
)

60,827

(1,227
)
Total available for sale

$
32,232

$
(759
)

$
505,986

$
(9,715
)

$
538,218

$
(10,474
)

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2019
Available-for-sale

Mortgage-backed securities: residential	$	28,345	$	(38	)	$	227,215	$	(1,449	)	$	255,560	$	(1,487	)
Mortgage-backed securities: commercial		—		—			7,413		(109	)		7,413		(109	)
State and political subdivisions		13,357		(12	)		—		—			13,357		(12	)
Total available-for-sale	$	41,702	$	(50	)	$	234,628	$	(1,558	)	$	276,330	$	(1,608	)

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).~~quality. As of ~~March 31,~~September 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.

	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Loans that are not PCI loans
Loans
Construction and land development	$	581,340		$	584,440		$	598,211		$	584,440
Commercial real estate:
Nonfarm, nonresidential		852,838			754,243			912,920			754,243
Other		40,652			48,017			32,515			48,017
Residential real estate:
Closed-end 1-4 family		497,160			492,989			476,703			493,065
Other		197,030			189,817			195,823			189,817
Commercial and industrial		635,417			590,854			578,056			592,793
Consumer and other		4,448			5,568			5,955			5,568
Loans before net deferred loan fees		2,808,885			2,665,928			2,800,183			2,667,943
Deferred loan fees, net		(3,528	)		(2,544	)		(3,950	)		(2,544	)
Total loans that are not PCI loans		2,805,357			2,663,384
Total PCI loans		2,020			2,015
Total loans								2,796,233			2,665,399
Allowance for loan losses		(27,857	)		(23,451	)		(26,474	)		(23,451	)
Total loans, net of allowance for loan losses	$	2,779,520		$	2,641,948		$	2,769,759		$	2,641,948

The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month periods ended ~~March 31,~~September 30, 2019 and 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 March 31, 2019
Three Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	4,743		$	6,725		$	4,743		$	7,166		$	74		$	23,451		$	4,784		$	7,641		$	4,844		$	10,118		$	56		$	27,443
Provision for loan losses		(1	)		302			80			4,631			43			5,055			171			(36	)		(200	)		1,055			10			1,000
Loans charged-off		—			—			(15	)		(568	)		(70	)		(653	)		(59	)		—			—			(1,935	)		(27	)		(2,021	)
Recoveries		—			—			2			—			2			4			—			—			—			30			22			52
Total ending allowance balance	$	4,742		$	7,027		$	4,810		$	11,229		$	49		$	27,857		$	4,896		$	7,605		$	4,644		$	9,268		$	61		$	26,474
Three Months Ended March 31, 2018
Three Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	3,802		$	5,981		$	3,834		$	7,587		$	43		$	21,247		$	4,613		$	6,163		$	4,533		$	6,976		$	56		$	22,341
Provision for loan losses		582			(106	)		(241	)		328			10			573			172			(18	)		(30	)		13			(1	)		136
Loans charged-off		(39	)		—			(7	)		(49	)		(11	)		(106	)		—			—			—			—			(5	)		(5	)
Recoveries		—			—			19			—			5			24			—			—			5			—			2			7
Total ending allowance balance	$	4,345		$	5,875		$	3,605		$	7,866		$	47		$	21,738		$	4,785		$	6,145		$	4,508		$	6,989		$	52		$	22,479

The following table presents the activity in the allowance for loan losses by portfolio segment for ~~PCI loans.~~the nine-month periods ended September 30, 2019 and 2018.

	Construction and Land Development			Commercial Real Estate		Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Nine Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	4,743		$	6,725	$	4,743		$	7,166		$	74		$	23,451
Provision for loan losses		212			880		(101	)		12,067			28			13,086
Loans charged-off		(59	)		—		(15	)		(10,066	)		(126	)		(10,266	)
Recoveries		—			—		17			101			85			203
Total ending allowance balance	$	4,896		$	7,605	$	4,644		$	9,268		$	61		$	26,474
Nine Months Ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	3,802		$	5,981	$	3,834		$	7,587		$	43		$	21,247
Provision for loan losses		1,021			164		638			(559)			15			1,279
Loans charged-off		(39)			—		(7	)		(49	)		(22	)		(117	)
Recoveries		1			—		43			10			16			70
Total ending allowance balance	$	4,785		$	6,145	$	4,508		$	6,989		$	52		$	22,479

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 ~~March 31,~~September 30, 2019 and December 31, 2018. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and net deferred loan fees 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
March 31, 2019
September 30, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	3,455	$	—	$	3,455	$	6	$	—	$	—	$	77	$	—	$	83
Collectively evaluated for impairment		4,742		7,027		4,810		7,774		49		24,402		4,890		7,605		4,644		9,191		61		26,391
Purchased credit-impaired loans		—		—		—		—		—		—
Total ending allowance balance	$	4,742	$	7,027	$	4,810	$	11,229	$	49	$	27,857	$	4,896	$	7,605	$	4,644	$	9,268	$	61	$	26,474
Loans:
Individually evaluated for impairment	$	583	$	—	$	1,811	$	9,177	$	—	$	11,571	$	429	$	—	$	2,359	$	240	$	—	$	3,028
Collectively evaluated for impairment		580,757		893,490		692,379		626,240		4,448		2,797,314		597,782		945,435		670,167		577,816		5,955		2,797,155
Purchased credit-impaired loans		—		—		74		1,946		—		2,020
Total ending loans balance	$	581,340	$	893,490	$	694,264	$	637,363	$	4,448	$	2,810,905	$	598,211	$	945,435	$	672,526	$	578,056	$	5,955	$	2,800,183
December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	17	$	—	$	17	$	—	$	—	$	—	$	17	$	—	$	17
Collectively evaluated for impairment		4,743		6,725		4,743		7,149		74		23,434		4,743		6,725		4,743		7,149		74		23,434
Total ending allowance balance	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451	$	4,743	$	6,725	$	4,743	$	7,166	$	74	$	23,451
Loans:
Individually evaluated for impairment	$	2,298	$	—	$	3,189	$	167	$	—	$	5,654	$	2,298	$	—	$	3,189	$	167	$	—	$	5,654
Collectively evaluated for impairment		582,142		802,260		679,617		590,687		5,568		2,660,274		582,142		802,260		679,693		592,626		5,568		2,662,289
Purchased credit-impaired loans		—		—		76		1,939		—		2,015
Total ending loans balance	$	584,440	$	802,260	$	682,882	$	592,793	$	5,568	$	2,667,943	$	584,440	$	802,260	$	682,882	$	592,793	$	5,568	$	2,667,943

Loans collectively evaluated for impairment reported at ~~March 31,~~September 30, 2019 include certain acquired loans. At ~~March 31,~~September 30, 2019, these non-PCI loans had a carrying value of ~~$92,050,~~$62,989, comprised of contractually unpaid principal totaling ~~$93,133~~$63,855 and discounts totaling ~~$1,083.~~$866. Management evaluated these loans for credit deterioration since acquisition and determined that an allowance for loan losses of ~~$169~~$83 was necessary at ~~March 31,~~September 30, 2019.

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
March 31, 2019
September 30, 2019
With no allowance recorded:
Construction and land development	$	599	$	583	$	—
Residential real estate:
Closed-end 1-4 family		884		849		—	$	982	$	975	$	—
Other		996		962		—		1,384		1,384		—
Commercial and industrial								13		13		—
Subtotal		2,479		2,394		—		2,379		2,372		—
With an allowance recorded:
Construction and land development								429		429		6
Commercial and industrial		9,177		9,177		3,455		227		227		77
Subtotal		9,177		9,177		3,455		656		656		83
Total	$	11,656	$	11,571	$	3,455	$	3,035	$	3,028	$	83
December 31, 2018
With no allowance recorded:
Construction and land development	$	2,298	$	2,298	$	—	$	2,298	$	2,298	$	—
Residential real estate:
Closed-end 1-4 family		1,272		1,272		—		1,280		1,272		—
Other		1,917		1,917		—		1,917		1,917		—
Subtotal		5,487		5,487		—		5,495		5,487		—
With an allowance recorded:
Construction and land development
Commercial and industrial		167		167		17		167		167		17
Subtotal		167		167		17		167		167		17
Total	$	5,654	$	5,654	$	17	$	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 months ended ~~March 31,~~September 30, 2019 and 2018:

	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
Average Recorded Investment	2019		2018		2019		2018		2019		2018
With no allowance recorded:
Construction and land development	$	768	$	367	$	284	$	548	$	351	$	649
Commercial real estate:
Nonfarm, nonresidential		51		—		—		—		17		—
Residential real estate:
Closed-end 1-4 family		806		420		537		1,465		675		1,991
Other		1,264		372		1,369		1,025		1,239		1,025
Commercial and industrial		—		626		4		2,466		881		1,099
Subtotal		2,889		1,785	$	2,194	$	5,504	$	3,163	$	4,764
With an allowance recorded:
Construction and land development		183		—	$	404	$	—	$	196	$	—
Residential real estate:
Closed-end 1-4 family						3				1
Commercial and industrial		3,170		1,785		1,721		177		3,098		2,017
Subtotal		3,353		1,785		2,128		177		3,295		2,017
Total average recorded investment	$	6,242	$	3,570	$	4,322	$	5,681	$	6,458	$	6,781

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended ~~March 31,~~September 30, 2019 and 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 ~~March 31,~~September 30, 2019 and December 31, 2018:

	Nonaccrual		Loans Past Due Over 90 Days		Nonaccrual		Loans Past Due Over 90 Days And Still Accruing Interest
March 31, 2019
September 30, 2019
Construction and land development	$	583	$	—	$	429	$	79
Commercial real estate:
Non-farm non-residential		153		—
Residential real estate:
Closed-end 1-4 family		849		—		975		—
Other		962		—		1,384		—
Commercial and industrial		9,177		180		240		—
Total	$	11,724	$	180	$	3,028	$	79

December 31, 2018
Construction and land development	$	2,298	$	—	$	2,298	$	—
Residential real estate:
Closed-end 1-4 family		1,273		—		1,273		—
Other		1,917		—		1,917		—
Commercial and industrial		—		208		—		208
Total	$	5,488	$	208	$	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 ~~March 31,~~September 30, 2019 and December 31, 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		PCI Loans		Total		30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
March 31, 2019
September 30, 2019
Construction and land development	$	139	$	—	$	—	$	139	$	581,201	$	—	$	581,340	$	—	$	—	$	509	$	509	$	597,702	$	598,211
Commercial real estate:
Nonfarm, nonresidential		—		—		—		—		852,838		—		852,838		—		—		—		—		912,920		912,920
Other		—		—		—		—		40,652		—		40,652		—		—		—		—		32,515		32,515
Residential real estate:
Closed-end 1-4 family		1,135		11		—		1,146		496,014		74		497,234		53		—		662		715		475,988		476,703
Other		88		—		—		88		196,942		—		197,030		391		35		360		786		195,037		195,823
Commercial and industrial		522		622		180		1,324		634,093		1,946		637,363		839		701		13		1,553		576,503		578,056
Consumer and other		—		—		—		—		4,448		—		4,448		—		—		—		—		5,955		5,955
	$	1,884	$	633	$	180	$	2,697	$	2,806,188	$	2,020	$	2,810,905	$	1,283	$	736	$	1,544	$	3,563	$	2,796,620	$	2,800,183
December 31, 2018
Construction and land development	$	294	$	1,986	$	548	$	2,828	$	581,612	$	—	$	584,440	$	294	$	1,986	$	548	$	2,828	$	581,612	$	584,440
Commercial real estate:
Nonfarm, nonresidential		515		—		—		515		753,728		—		754,243		515		—		—		515		753,728		754,243
Other		—		—		—		—		48,017		—		48,017		—		—		—		—		48,017		48,017
Residential real estate:
Closed-end 1-4 family		2,390		404		228		3,022		489,967		76		493,065		2,390		404		228		3,022		490,043		493,065
Other		142		—		1,810		1,952		187,865		—		189,817		142		—		1,810		1,952		187,865		189,817
Commercial and industrial		241		252		208		701		590,153		1,939		592,793		241		252		208		701		592,092		592,793
Consumer and other		—		—		—		—		5,568		—		5,568		—		—		—		—		5,568		5,568
	$	3,582	$	2,642	$	2,794	$	9,018	$	2,656,910	$	2,015	$	2,667,943	$	3,582	$	2,642	$	2,794	$	9,018	$	2,658,925	$	2,667,943

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 includes non-homogeneous loans, such as commercial and commercial real estate loans as well as non-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 ~~March 31,~~September 30, 2019 and December 31, 2018:

	Pass		Special Mention		Substandard		Total		Pass		Special Mention		Substandard		Total
March 31, 2019
September 30, 2019
Construction and land development	$	580,325	$	432	$	583	$	581,340	$	592,180		5,370		661	$	598,211
Commercial real estate:
Nonfarm, nonresidential		848,221		4,464		153		852,838		886,455		25,165		1,300		912,920
Other		40,033		619		—		40,652		32,515		—		—		32,515
Residential real estate:
Closed-end 1-4 family		492,921		1,567		2,746		497,234		473,878		60		2,765		476,703
Other		194,675		404		1,951		197,030		193,450		706		1,667		195,823
Commercial and industrial		596,529		8,519		32,315		637,363		532,499		1,860		43,697		578,056
Consumer and other		4,448		—		—		4,448		5,955		—		—		5,955
	$	2,757,152	$	16,005	$	37,748	$	2,810,905	$	2,716,932	$	33,161	$	50,090	$	2,800,183

As of ~~March 31,~~September 30, 2019, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of ~~$319.~~$313. As of December 31, 2018, the Company’s loan portfolio contained ~~two loans~~one loan that had been modified in a troubled debt restructuring with a balance of $490. During the three months ended March 31, 2019, one of the loans that was a troubled debt restructuring at December 31, 2018 was fully charged off with $159 of the loan balance being recognized as a charge-off.$167.

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

	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	494,025	$	492,761	$	478,383	$	492,761
Federal National Mortgage Association						2,129		—
Other		3,651		3,689		3,561		3,689

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

The components of net loan servicing fees for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 were as follows:

	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018
Loan servicing fees, net:
Loan servicing fees	$	306		$	333		$	325		$	314		$	943		$	976
Amortization of loan servicing fees		(225	)		(214	)		(414	)		(203	)		(901	)		(643	)
Change in impairment		—			—
Total	$	81		$	119		$	(89	)	$	111		$	42		$	333

The fair value of servicing rights was estimated by management to be approximately ~~$4,329~~$3,310 at ~~March 31,~~September 30, 2019. Fair value for ~~March 31,~~September 30, 2019 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of ~~13.9%~~20.4%. At December 31, 2018, the fair value of servicing rights was estimated by management to be approximately $4,836. Fair value for December 31, 2018 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 11.9%.

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 all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The leases are presented as of part of other assets and other liabilities on the consolidated balance sheet.

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.~~2034. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of condition. Upon adoption of FASB ASU 2016-02 Leases 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 nine months ended September 30, 2019~~Subsequent to March 31, 2019,~~ one additional lease agreement has been executed ~~with the plan~~and is scheduled to ~~relocate~~commence in 2020 relocating one branch in Williamson County, Tennessee.

The following table 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	March 31, 2019		Classification	September 30, 2019
Operating lease right-of-use assets	Other Assets	$	41,652	Other Assets	$	40,285
Finance lease right-of-use assets	Other Assets		2,970	Other Assets		2,869
Total lease right-of-use assets		$	44,622		$	43,154

Lease liabilities	Classification	March 31, 2019		Classification	September 30, 2019
Operating lease right-of-use assets	Other Liabilities	$	43,163	Other Liabilities	$	41,938
Finance lease right-of-use assets	Other Liabilities		3,023	Other Liabilities		2,969
Total lease liabilities		$	46,186		$	44,907

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 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.

The following table represents lease costs and other lease ~~information.~~information for the nine months ended September 30, 2019. 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.

Rent expense related to leases during the three and nine months ended ~~March 31,~~September 30, 2018, was ~~$1,228.~~$1,373 and $3,921, respectively.

Other supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,138	$	3,544
Operating cash flows from finance leases		41		123
Financing cash flows from finance leases		27		81

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of ~~March 31, 2019.~~September 30, 2019 are as follows:

Twelve Months Ended:	Finance			Operating			Finance			Operating
2020	$	273		$	4,794		$	275		$	4,835
2021		277			4,868			279			4,875
2022		281			4,865			283			4,871
2023		285			4,853			287			4,873
2024		289			4,903			292			4,922
Thereafter		3,059			34,946			2,913			32,512
Total future minimum lease payments	$	4,464		$	59,229		$	4,329		$	56,888
Less: Imputed interest		(1,441	)		(16,066	)		(1,360	)		(14,950	)
Total lease liabilities	$	3,023		$	43,163		$	2,969		$	41,938

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

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was ~~$1,329~~$1,313 and ~~$759~~$4,155, for the three and nine months ended ~~March 31,~~September 30, 2019 and ~~2018, respectively.~~$1,376 and $3,454 for the three and nine months ended September 30, 2018. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was ~~$113~~($9) and ~~$63~~$177 for the three and nine months ended ~~March 31,~~September 30, 2019 and was $285 and $568 for the three and nine months ended September 30, 2018, respectively.

Stock Options: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, provided for authorized shares up to 4,000,000. The 2007 Plan 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, an equity incentive plan, the 2017 Omnibus Equity Incentive Plan which the Company’s shareholders approved at the 2017 annual meeting of shareholders. On April 12, 2018, the ~~Compensation Committee of 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 Plan are substantially similar to the terms of the 2007 Plan it was intended to replace. The Amended and Restated 2017 Plan provides for authorized shares up to 3,500,000. At ~~March 31,~~September 30, 2019, there were ~~2,481,835~~2,411,440 authorized shares available for issuance under the Amended and Restated 2017 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 havea ten-year contractual term with varying vesting requirements. The Company assigns discretion to its ~~Board of Directors~~Compensation Committee to make grants either as qualified incentive stock options or as non-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 as non-qualified.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of the Company. 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.

	March 31, 2019			March 31, 2018			September 30, 2019			September 30, 2018
Risk-free interest rate		2.31	%		2.49	%		1.42	%		2.83	%
Expected term	7 years			7.5 years			7 years			7.5 years
Expected stock price volatility		30.44	%		32.48	%		29.54	%		31.42	%
Dividend yield		0.50	%		0.00	%		0.57	%		0.00	%

The weighted average fair value of options granted for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018 were ~~$10.01~~$9.68 and ~~$14.77,~~$11.31, respectively.

A summary of the activity in the plans for the ~~three~~nine months ended ~~March 31,~~September 30, 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 December 31, 2018		1,807,922		$	24.68		6.41	$	9,581		1,807,922		$	24.68		6.41	$	9,581
Granted		30,000			27.72						101,930			27.84
Exercised		(35,046	)		14.93						(140,465	)		14.43
Forfeited, expired, or cancelled		—									(68,058	)		33.37
Outstanding at period end		1,802,876		$	24.92		8.11	$	7,375		1,701,329		$	19.09		6.63	$	8,920
Vested or expected to vest		1,712,732		$	24.92		8.11	$	7,006		1,616,263		$	25.37		5.87	$	8,474
Exercisable at period end		843,174		$	14.02		7.96	$	10,567		837,911		$	17.30		5.87	$	11,151

	For the Three Months Ended March 31,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Stock options exercised:
Intrinsic value of options exercised	$	623	$	511	$	2,012	$	4,828
Cash received from options exercised		524		220		1,493		2,845
Tax benefit realized from option exercises		113		63		202		568

As of ~~March 31,~~September 30, 2019, ~~and 2018,~~ there was ~~$5,306 and $5,708, respectively,~~$4,121 of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of ~~1.1~~1.77 years.

Restricted Stock and Restricted Stock Units: Additionally, the 2007 Plan and the Amended and Restated 2017 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 for non-vested restricted share awards for the ~~three~~nine months ended ~~March 31,~~September 30, 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, 2018		176,516		$	31.07		176,516		$	31.07
Granted		1,255			31.87		1,255			31.87
Vested		(10,421	)		31.09		(82,828	)		29.41
Forfeited		(47	)		32.95		(1,582	)		31.39
Non-vested at March 31, 2019		167,303
Non-vested at September 30, 2019							93,361

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 ~~March 31,~~September 30, 2019, ~~and 2018,~~ there was ~~$2,028 and $1,580, respectively,~~$1,399 of total unrecognized compensation cost related to non-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 ~~1.5~~1.07 years.

The 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 months ended September 30, 2019:

Stock compensation expense related with the restricted share units for the three and nine months ended September 30, 2019 was $330 and $909, 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 September 30, 2019, there was $3,344 of total unrecognized compensation cost related to non-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 2.5 years.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. 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 increased each year until fully implemented at 2.5% in January 2019.

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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2019 and December 31, 2018 for the Company and Bank:

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations					Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2019
September 30, 2019
Company-Level
Company common equity Tier 1 capital to RWA	$	369,202		11.3	%	$	146,855		4.5	%	N/A		N/A			$	387,876		12.0	%	$	145,386		4.5	%	N/A		N/A
Company Total Capital to RWA	$	455,881		14.0	%	$	261,076		8.0	%	N/A		N/A			$	473,261		14.6	%	$	258,465		8.0	%	N/A		N/A
Company Tier 1 (Core) Capital to RWA	$	369,202		11.3	%	$	195,807		6.0	%	N/A		N/A			$	387,876		12.0	%	$	193,849		6.0	%	N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	369,202		8.8	%	$	168,498		4.0	%	N/A		N/A			$	387,876		9.7	%	$	159,166		4.0	%	N/A		N/A
Bank-Level
Bank common equity Tier 1 capital to RWA	$	425,528		13.0	%	$	146,869		4.5	%	$	212,144		6.5	%	$	444,892		13.8	%	$	145,569		4.5	%	$	210,266		6.5	%
Bank Total Capital to RWA	$	453,469		13.9	%	$	261,101		8.0	%	$	326,376		10.0	%	$	471,450		14.6	%	$	258,789		8.0	%	$	323,486		10.0	%
Bank Tier 1 (Core) Capital to RWA	$	425,528		13.0	%	$	195,825		6.0	%	$	261,101		8.0	%	$	444,892		13.8	%	$	194,092		6.0	%	$	258,789		8.0	%
Bank Tier 1 (Core) Capital to average assets	$	425,528		10.1	%	$	168,318		4.0	%	$	210,397		5.0	%	$	444,892		11.2	%	$	158,979		4.0	%	$	198,724		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			$	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			$	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			$	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			$	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	%	$	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	%	$	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	%	$	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	%	$	421,335		10.1	%	$	167,420		4.0	%	$	209,275		5.0	%

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.

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.

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.

During2019, the Company entered into ~~sixteen~~16 swap transactions with a notional amount of ~~$101.2 million~~$101,205 designated as fair value hedges. These derivatives are intended to protect against the 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 ~~March 31,~~September 30, 2019 are as follows (in thousands):

March 31, 2019

September 30, 2019

Balance Sheet Location

Weighted Average Remaining Maturity (In Years)

Weighted Average Pay Rate

Receive Rate

Notional Amount

Estimated Fair Value

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

7.59

2.528%

3 month LIBOR

101,205

(1,118

)

Other liabilities

7.10

2.527%

3 month LIBOR

101,205

7,133

The effects of fair value hedge relationships reported in interest income on securities on the consolidated statements of income for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 were as follows (in thousands):

	Three Months Ended March 31,					Three Months Ended September 30,					Nine Months Ended September 30,
Gain (loss) on fair value hedging relationship	2019			2018		2019			2018		2019			2018
Interest rate swap agreements - securities:
Hedged items	$	1,118		$	-	$	2,400		$	—	$	7,133		$	—
Derivative designated as hedging instruments		(1,118	)		-		(2,400	)		—		(7,133	)		—

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at ~~March 31,~~September 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		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	March 31, 2019		March 31, 2019		September 30, 2019		September 30, 2019
Securities available-for-sale	$	116,634	$	1,118	$	101,205	$	7,133

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 September 30, 2019 are as follows (in thousands):

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

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.

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 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 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:

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).

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 value of the mortgage loan pipeline rate locks is based upon the projected sales price of the underlying loans, taking into account market 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.~~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: At September 30, 2019, the Company has a transaction that had not settled and is classified as loans held for sale and, therefore, is reported as the quoted price in the active market as of the measurement date (Level 1).

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 March 31, 2019 Using:						Fair Value Measurements at September 30, 2019 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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	$	69,618	$	—	$	—
U.S. government sponsored entities and agencies		—		1,820		—
Securities available-for-sale
Mortgage-backed securities-residential		—		523,458		—		—		393,762		—
Asset-backed securities		—		25,050		—
Mortgage-backed securities-commercial								—		18,311		—
Corporate notes		—		17,939		—		—		25,907		—
State and political subdivisions		—		161,416		—		—		174,391		—
Total securities available for sale	$	69,618	$	729,683	$	—
Total securities available-for-sale							$	—	$	612,371	$	—
Loans held for sale	$	—	$	21,730	$	—	$	—	$	56,570	$	—
Other assets	$	—	$	190	$	—	$	—	$	175	$	—
Financial Liabilities
Other liabilities	$	—	$	1,331	$	—	$	—	$	8,687	$	—

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

As of ~~March 31,~~September 30, 2019, the unpaid principal balance of loans held for sale was ~~$21,079~~$55,506 resulting in an unrealized gain of ~~$651~~$1,064 included in mortgage banking revenue. As of December 31, 2018, the unpaid principal balance of loans held for sale was $10,722, resulting in an unrealized gain of $381 included in mortgage banking revenue. For the three months ended ~~March 31,~~September 30, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was ~~$270~~$89 and ~~($26),~~$160, respectively. For the nine months ended September 30, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $683 and $34, respectively. None of these loans were 90 days or more past due or on nonaccrual as of ~~March 31,~~September 30, 2019 and December 31, 2018.

There were ~~six~~three collateral-dependent impaired loans carried at fair value of ~~$5,722~~$574 as of ~~March 31,~~September 30, 2019. ~~The level 3 fair value measurement~~For the three and nine months ended September 30, 2019, an additional provision for ~~these assets measured~~loan losses of $92 and $9,851 was recorded related to impaired loans recorded at fair value ~~on a non-recurring basis used the income approach with an adjustment for differences in net operating income expectations based on an unobservable input~~ of ~~earnings before interest, tax, depreciation and amortization (EBITDA).~~collateral. There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three and nine months ended ~~March 31, 2019, $3,455 in~~September 30, 2018, an additional provision for loan losses of $16 was recorded related to impaired loans recorded at fair value of collateral. ~~For the three months ended March 31, 2018, $0 in additional provision for loan losses 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 $0 as of ~~March 31,~~September 30, 2019 and December 31, ~~2018, respectively.~~2018. There were no properties at ~~March 31,~~September 30, 2019 or 2018 that had required write-downs to fair value.

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

			Fair Value Measurements at March 31, 2019 Using:										Fair Value Measurements at September 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	$	300,113	$	300,113	$	—	$	—	$	300,113	$	178,747	$	178,747	$	—	$	—	$	178,747
Certificates of deposit held at other financial institutions		3,595		—		3,601		—		3,601		3,590		—		3,590		—		3,590
Securities available for sale		799,301		69,618		729,683		—		799,301		612,371		—		612,371		—		612,371
Securities held to maturity		118,831		—		118,866		—		118,866
Loans held for sale		21,730		—		21,730		—		21,730		56,570		12,145		44,425		—		56,570
Net loans		2,779,520		—		—		2,781,888		2,781,888		2,769,759		—		—		2,798,697		2,798,697
Servicing rights, net		3,366		—		—		4,329		4,329		3,128		—		—		3,310		3,310
Other assets		190		—		190		—		190		175		—		175		—		175
Accrued interest receivable		14,232		140		5,151		8,941		14,232		12,077		69		3,607		8,401		12,077
Financial liabilities
Deposits	$	3,315,843	$	2,201,698	$	1,112,151	$	—	$	3,313,849	$	3,061,950	$	2,248,744	$	812,970	$	—	$	3,061,714
Federal Home Loan Bank advances		416,500		—		415,845		—		415,845		220,000		—		220,163		—		220,163
Subordinated notes, net		58,738		—		—		60,426		60,426		58,827		—		—		61,077		61,077
Other liabilities		1,331		—		1,331		—		1,331		8,998		—		8,998		—		8,998
Accrued interest payable		5,041		205		350		4,486		5,041		3,932		161		3,421		350		3,932

			Fair Value Measurements at December 31, 2018 Using:										Fair Value Measurements at December 31, 2018 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	$	280,212	$	280,212	$	—	$	—	$	280,212	$	280,212	$	280,212	$	—	$	—	$	280,212
Certificates of deposit held at other financial institutions		3,594		—		3,594		—		3,594		3,594		—		3,594		—		3,594
Securities available for sale		1,030,668		253,014		777,654		—		1,030,668
Securities available-for-sale												1,030,668		253,014		777,654		—		1,030,668
Securities held to maturity		121,617		—		118,955		—		118,955		121,617		—		118,955		—		118,955
Loans held for sale		11,103		—		11,103		—		11,103		11,103		—		11,103		—		11,103
Net loans		2,641,948		—		—		2,622,386		2,622,386		2,641,948		—		—		2,622,386		2,622,386
Servicing rights, net		3,403		—		—		4,836		4,836		3,403		—		—		4,836		4,836
Other assets		206		—		206		—		206		206		—		206		—		206
Accrued interest receivable		13,337		71		5,539		7,727		13,337		13,337		71		5,539		7,727		13,337
Financial liabilities
Deposits	$	3,431,807	$	2,105,951	$	1,319,326	$	—	$	3,425,277	$	3,431,807	$	2,105,951	$	1,319,326	$	—	$	3,425,277
Federal Home Loan Bank advances		368,500		—		366,786		—		366,786		368,500		—		366,786		—		366,786
Subordinated notes, net		58,693		—		—		59,852		59,852		58,693		—		—		59,852		59,852
Other liabilities		129		—		129		—		129		129		—		129		—		129
Accrued interest payable		4,700		146		3,866		688		4,700		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: In accordance with ASU 2016-01, the fair value of loans 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 loans; (2) the magnitude of future net losses based on expected default rate and severity of loss; and (3) the discount rate applicable to the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

(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.

(d) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-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.

(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~~90 days, approximate their fair values resulting in a Level 2 classification.

(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.

(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.

(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.

(i) Off-balance Sheet Instruments: Fair values for off-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.

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-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 March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018
Basic
Net income available to common shareholders	$	2,901		$	10,052		$	11,324		$	10,549		$	19,398		$	30,762
Less: earnings allocated to participating securities		(34	)		(71	)		(82	)		(126	)		(177	)		(318	)
Net income allocated to common shareholders	$	2,867		$	9,981		$	11,242		$	10,423		$	19,221		$	30,444
Weighted average common shares outstanding including participating securities		14,561,721			13,249,728			14,629,132			14,497,840			14,596,798			14,048,270
Less: Participating securities		(168,638	)		(94,010	)		(98,546	)		(173,541	)		(127,765	)		(145,432	)
Average shares		14,393,083			13,155,718			14,530,586			14,324,299			14,469,033			13,902,838
Basic earnings per common share	$	0.20		$	0.76		$	0.77		$	0.73		$	1.33		$	2.19

	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018
Diluted
Net income allocated to common shareholders	$	2,867	$	9,981	$	11,242	$	10,423	$	19,221	$	30,444
Weighted average common shares outstanding for basic earnings per common share		14,393,083		13,155,718		14,530,586		14,324,299		14,469,033		13,902,838
Add: Dilutive effects of assumed exercises of stock options		411,747		516,666		333,798		579,452		362,440		564,688
Add: Dilutive effects of assumed exercises of stock warrants		—		—
Add: Dilutive effects of assumed restricted stock units						126,979		—		74,571		—
Average shares and dilutive potential common shares		14,804,830		13,672,384		14,991,363		14,903,751		14,906,044		14,467,526
Dilutive earnings per common share	$	0.19	$	0.73	$	0.75	$	0.70	$	1.29	$	2.10

For the three months ended ~~March 31,~~September 30, 2019 and 2018, stock options for ~~768,458~~894,710 and ~~411,279~~397,974 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 881,089 and 489,515 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2019 and 2018, respectively, because they were antidilutive.

The Company’s subordinated notes, net of issuance costs, totaled ~~$58,738~~$58,827 and $58,693 at ~~March 31,~~September 30, 2019 and at December 31, 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 the ten-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 the ten-year term of the June 2016 Subordinated Notes. For the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, amortization of issuance costs ~~has amounted to $45 and $45, respectively.~~remained consistent at $134.

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

First interest rate change date

March 30, 2021

July 1, 2021

March 30, 2021

July 1, 2021

Interest payment frequency through year five*

Semiannually

Interest payment frequency after five years*

Quarterly

Interest payment frequency through year five

Semiannually

Interest payment frequency after five years

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

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 and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial 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 Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 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.

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 15 branches ~~and a loan production office~~ in the 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 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 ~~March 31,~~September 30, 2019, we had consolidated total assets of ~~$4,238,436,~~$3,818,324, total loans, including loans held for sale, of ~~$2,801,250,~~$2,852,803, total deposits of ~~$3,315,843~~$3,061,950 and total equity of ~~$383,514.~~$408,261.

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.

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 Form 10-K that was filed with the SEC on March 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.

The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan balance 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’s)~~(“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 a case-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.

~~TDR’s~~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 TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For ~~TDR’s~~TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ALLL.

The general component covers non-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 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.

The Company reported net income of $11,324 and $19,406 for the three and nine months ended September 30, 2019, respectively, compared to $10,549 and $30,770 for the three and nine months ended September 30, 2018, respectively. After earnings attributable to noncontrolling interest, the Company’s net ~~income~~earnings available to common shareholders ~~of $2,901 and $10,052~~ for the three and nine months ended ~~March 31,~~September 30, 2019, was $11,324 and $19,398, respectively, compared to $10,549 and $30,762 for the three and nine months ended September 30, 2018, respectively. Net income available to common shareholders increased by $775 and decreased by ~~$7,151 when comparing~~$11,364 for the three and nine months ended September 30, 2019, ~~with~~respectively, compared to the three and nine months ended September 30, 2018, primarily ~~due to $4,143 related to post employment and retirement expense, along with $3,486~~ related to a specific loan loss provision on a shared national credit ~~(SNC).~~relationship (“SNC”) of $9,759 during the first two quarters of 2019, $1,000 provision in the third quarter of 2019 resulting from an uptick in, and developments relating to, our classified assets and $4,143 related to post-employment and retirement expense recorded in the first quarter of 2019.

Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and nine months ended ~~March 31,~~September 30, 2019, totaled $28,262 and ~~2018 totaled $27,420~~$83,047, respectively, compared to $26,562 and ~~$25,116, respectively,~~$78,583 for the same periods in 2018, an increase of ~~$2,304~~$1,700 and $4,464, or ~~9.2%.~~6.4% and 5.7%, between the respective periods. For the three and nine months ended ~~March 31,~~September 30, 2019, interest income increased ~~$9,476~~$2,814 and $17,607, or ~~24.9%~~6.4% and 14.2%, respectively, compared with the same periods in 2018, due ~~primarily~~ to growth in the loan ~~portfolio.~~portfolios and increased loan yields. For the three and nine months ended ~~March 31,~~September 30, 2019, interest expense increased ~~$7,172~~$1,114 and $13,143, or ~~55.5%~~6.5% and 29.0%, respectively, primarily due ~~primarily~~ to increases in interest-bearing deposits combined with increases in interest rates ~~paid on deposits.~~for money market deposits and Federal Home Loan Bank (“FHLB”) advances.

Interest-earning assets averaged ~~$4,044,231~~$3,838,191 and ~~$3,867,957~~$4,001,611 during the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, ~~an increase~~a decrease of ~~$176,274,~~$163,420, or ~~4.6%~~4.1%. This ~~increase~~decrease was ~~primarily~~ due to ~~growth~~the strategically planned asset rotation and decrease in ~~average~~the total investment securities. Average total loans ~~of $466,214, which was offset by decreases in~~increased $342,332, or 13.5%, and investment securities ~~and federal funds sold and other of $187,947 and $106,488, respectively,~~decreased $560,622, or 41.8%, when comparing the three months ended ~~March 31,~~September 30, 2019 with the same period in 2018.

When comparing the three months ended ~~March 31,~~September 30, 2019 and 2018, the yield on average interest earning assets, adjusted for tax equivalent yield, increased 7647 basis points in 2019 to ~~4.82%~~4.87% compared to ~~4.06%~~4.40% for the same period during 2018. For the three months ended ~~March 31,~~September 30, 2019, the tax equivalent yield on loans held for investment was ~~5.61%~~5.56%, and for the three months ended ~~March 31,~~September 30, 2018, the tax equivalent yield on loans held for investment was ~~5.07%~~5.41%. The primary driver for the increase in yields on loans was the increase in market interest rates when compared to the same quarter in the previous year.

Interest-bearing liabilities averaged ~~$3,490,227~~$3,202,475 during the three months ended ~~March 31,~~September 30, 2019, compared to ~~$3,371,827~~$3,463,037 for the same period in 2018, ~~an increase~~a decrease of ~~$118,400,~~$260,562, or ~~3.5%~~7.5%. Total average interest-bearing deposits ~~grew $71,408,~~decreased $247,294, or ~~2.4%~~8.1%, including ~~an increase in average money market deposit accounts of $248,369, offset by decreases~~a decline in average interest checking ~~($61,236), average savings deposits ($9,833)~~of $77,741 and average time deposits ~~($105,892)~~of $538,332 for the three months ended ~~March 31,~~September 30, 2019, as compared to the same period during 2018. Total average money market deposits increased $376,416, or 51.1%, for the three months ended September 30, 2019. Total non-interest deposits averaged $329,620, an increase of $24,188, or 7.9%, during the three months ended September 30, 2019, compared to the same period during 2018. Average FHLB advances ~~also increased by $68,044~~decreased $7,809 when comparing the three months ended ~~March 31,~~September 30, 2019 with the same period in ~~2018.~~2018 due to the reduction in the loan portfolio.

When comparing the three months ended ~~March 31,~~September 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 7829 basis points to ~~2.34%~~2.26% from ~~1.56%~~1.97%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and federal funds purchased.

Interest-earning assets averaged $3,940,142 and $3,967,909 during the nine months ended September 30, 2019 and 2018, respectively, a decrease of $27,767, or 0.7%. This decrease was due to growth in the loan portfolio over the past year. Average loans held for investment increased $401,808, or 16.6%, for the nine months ended September 30, 2019, as compared to the same period for 2018. Investment securities decreased $426,994, or 31.7%, when comparing the nine months ended September 30, 2019, with the same period in 2018. When comparing the nine months ended September 30, 2019 and 2018, the yield on average interest-earning assets, adjusted for tax equivalent yield, increased approximately 61 basis points to 4.86% in 2019 compared to 4.25% for the same period during 2018.

For the nine months ended September 30, 2019 and 2018, the tax equivalent yield on loans held for investment was 5.59% and 5.26%, respectively. The primary driver for the increase in yield on loans held for investment for the nine months ended September 30, 2019 was the increase in market interest rates during the past year.

For the nine months ended September 30, 2019, the tax equivalent yield on taxable securities was 2.75%, and for the nine months ended September 30, 2018, the tax equivalent yield on taxable securities was 2.33%. For the nine months ended September 30, 2019, the tax equivalent yield on tax-exempt securities was 3.94%, and for the nine months ended September 30, 2018, the tax equivalent yield on tax-exempt securities was 4.54%. The primary driver for the yield decrease in tax-exempt securities was the decrease in volume due to the strategically-planned balance sheet rotation focused on core loan growth.

Interest-bearing liabilities averaged $3,344,191 during the nine months ended September 30, 2019, compared to $3,451,403 for the same period in 2018, a decrease of $107,212, or 3.1%. Total average interest-bearing deposits decreased $119,744, including decreases in interest-bearing checking of $61,321 and average time deposits of $343,086, for the nine months ended September 30, 2019, as compared to the same period during 2018. Total non-interest deposits averaged $311,441, an increase of $14,548, or 4.9%, during the nine months ended September 30, 2019 compared to the same period in 2018. Average FHLB advances increased $27,086 during the nine months ended September 30, 2019, compared to the same period in 2018 due to the growth in the loan portfolio.

When comparing the nine months ended September 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 58 basis points from 1.76% to 2.34%. The increase was due to rate increases for interest-bearing deposits, FHLB advances and federal funds 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 months ended ~~March 31,~~September 30, 2019 and 2018:

	Three Months Ended March 31,																Three Months Ended September 30,
	2019								2018								2019								2018
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	2,764,675		$	38,238		5.61	%	$	2,299,219		$	28,732		5.07	%	$	2,848,888		$	39,926		5.56	%	$	2,517,545		$	34,337		5.41	%
Loans held for sale		9,438			115		4.94			8,680			73		3.41			22,048			217		3.90			11,059			120		4.30
Securities:
Taxable		919,549			6,394		2.82			1,059,989			6,111		2.34			570,891			3,815		2.65			1,111,376			6,460		2.31
Tax-exempt⁽⁶⁾		181,699			1,990		4.44			229,206			2,592		4.59			209,442			1,991		3.77			229,579			2,605		4.50
Restricted equity securities		22,375			334		6.05			18,658			274		5.96			24,676			292		4.69			20,775			311		5.94
Certificates of deposit at other financial institutions		3,592			20		2.26			2,814			12		1.73			3,628			22		2.41			3,113			16		2.04
Federal funds sold and other⁽²⁾		142,903			967		2.74			249,391			942		1.53			158,618			814		2.04			108,164			569		2.09
TOTAL INTEREST EARNING ASSETS	$	4,044,231		$	48,058		4.82	%	$	3,867,957		$	38,736		4.06	%	$	3,838,191		$	47,077		4.87	%	$	4,001,611		$	44,418		4.40	%
Allowance for loan and lease losses		(24,054	)							(21,683	)							(27,364	)							(22,588	)
All other assets		200,078								125,590								188,520								153,478
TOTAL ASSETS	$	4,220,255							$	3,971,864							$	3,999,347							$	4,132,501
LIABILITIES & EQUITY
Deposits:
Interest checking	$	857,096		$	4,420		2.09	%	$	918,332		$	3,166		1.40	%	$	712,992		$	3,536		1.97	%	$	790,733		$	3,406		1.71	%
Money market		992,842			5,979		2.44			744,473			2,600		1.42			1,112,573			5,815		2.07			736,157			3,489		1.88
Savings		40,609			28		0.28			50,442			38		0.31			38,952			27		0.28			46,589			34		0.29
Time deposits		1,165,666			6,563		2.28			1,271,558			4,839		1.54			928,571			5,642		2.41			1,466,903			7,208		1.95
Federal Home Loan Bank advances		364,711			1,918		2.13			296,667			1,110		1.52
Federal Home Loan Bank advances and other ⁽⁸⁾																		343,419			2,118		2.45			351,228			1,867		2.11
Federal funds purchased and other⁽³⁾		10,594			72		2.76			31,823			96		1.22			7,170			49		2.71			12,805			69		2.14
Subordinated notes and other borrowings		58,709			1,123		7.76			58,532			1,082		7.50
Subordinated notes																		58,798			1,082		7.30			58,622			1,082		7.32
TOTAL INTEREST BEARING LIABILITIES	$	3,490,227		$	20,103		2.34	%	$	3,371,827		$	12,931		1.56	%	$	3,202,475		$	18,269		2.26	%	$	3,463,037		$	17,155		1.97	%
Demand deposits		291,176								286,918								329,620								305,432
Other liabilities		61,736								13,279								68,156								12,739
Total equity		377,116								299,840								399,096								351,293
TOTAL LIABILITIES AND EQUITY	$	4,220,255							$	3,971,864							$	3,999,347							$	4,132,501
NET INTEREST SPREAD⁽⁴⁾							2.48	%							2.50	%							2.61	%							2.43	%
NET INTEREST INCOME				$	27,955							$	25,805							$	28,808							$	27,263
NET INTEREST MARGIN⁽⁵⁾							2.80	%							2.71	%							2.98	%							2.70	%

	Nine Months Ended September 30,
	2019								2018
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp			Average Yield / Rate
ASSETS:
Loans⁽¹⁾⁽⁶⁾	$	2,824,401		$	118,167		5.59	%	$	2,422,593		$	95,266			5.26	%
Loans held for sale		18,581			588		4.23			11,090			335			4.04
Securities:
Taxable		719,998			14,823		2.75			1,116,977			19,475			2.33
Tax-exempt⁽⁶⁾		199,954			5,891		3.94			229,969			7,812			4.54
Restricted equity securities		23,717			972		5.48			19,950			912			6.11
Certificates of deposit at other financial institutions		3,660			64		2.34			3,130			46			1.96
Federal funds sold and other⁽²⁾		149,831			2,640		2.36			164,200			2,155			1.75
TOTAL INTEREST EARNING ASSETS	$	3,940,142		$	143,145		4.86	%	$	3,967,909		$	126,001			4.25	%
Allowance for loan and lease losses		(26,487	)							(22,092	)
All other assets		193,775								146,044
TOTAL ASSETS	$	4,107,430							$	4,091,861
LIABILITIES & EQUITY
Deposits:
Interest checking	$	794,978		$	12,314		2.07	%	$	856,299		$	9,901			1.55	%
Money market		1,044,310			17,897		2.29			750,857			9,137			1.63
Savings		39,475			82		0.28			48,265			109			0.30
Time deposits		1,042,845			18,396		2.36			1,385,931			18,238			1.76
Federal Home Loan Bank advances and other ⁽⁸⁾		353,504			6,314		2.39			326,418			4,390			1.80
Federal funds purchased and other⁽³⁾		10,325			211		2.73			25,056			296	��		1.58
Subordinated notes		58,754			3,246		7.39			58,577			3,246			7.41
TOTAL INTEREST BEARING LIABILITIES	$	3,344,191		$	58,460		2.34	%	$	3,451,403		$	45,317			1.76	%
Demand deposits		311,441								296,893
Other liabilities		63,499								12,940
Total equity		388,299								330,625
TOTAL LIABILITIES AND EQUITY	$	4,107,430							$	4,091,861
NET INTEREST SPREAD⁽⁴⁾							2.52	%								2.49	%
NET INTEREST INCOME				$	84,685							$	80,684
NET INTEREST MARGIN⁽⁵⁾							2.87	%								2.72	%

	Net change three months ended March 31, 2019 versus March 31, 2018									Net change three months ended September 30, 2019 versus September 30, 2018
	Volume			Rate			Net Change			Volume			Rate			Net Change
INTEREST INCOME
Loans	$	5,819		$	3,687		$	9,506		$	4,519		$	1,070		$	5,589
Loans held for sale		6			36			42			119			(22	)		97
Securities
Taxable		(810	)		1,093			283			(3,142	)		497			(2,645	)
Tax-exempt		(538	)		(64	)		(602	)		(228	)		(386	)		(614	)
Restricted equity securities		55			5			60			58			(77	)		(19	)
Certificates of deposit at other financial institutions		3			5			8			3			3			6
Federal funds sold and other		(402	)		427			25			265			(20	)		245
TOTAL INTEREST INCOME	$	4,133		$	5,189		$	9,322		$	1,594		$	1,065		$	2,659
INTEREST EXPENSE
Deposits
Interest checking	$	(211	)	$	1,465		$	1,254		$	(335	)	$	465		$	130
Money market accounts		870			2,509			3,379			178			2,148			2,326
Savings		(8	)		(2	)		(10	)		(1	)		(6	)		(7	)
Time deposits		(402	)		2,126			1,724			(265	)		(1,301	)		(1,566	)
Federal Home Loan Bank advances		255			553			808
Fed funds purchased and other borrowed funds		(64	)		40			(24	)
Subordinated Notes and other borrowings		3			38			41
Federal Home Loan Bank advances and other ⁽¹⁾											(4	)		255			251
Federal funds purchased and other⁽²⁾											(3	)		(17	)		(20	)
Subordinated notes											—			—			—
TOTAL INTEREST EXPENSE	$	443		$	6,729		$	7,172		$	(430	)	$	1,544		$	1,114
NET INTEREST INCOME	$	3,690		$	(1,540	)	$	2,150		$	2,024		$	(479	)	$	1,545

The provision for loan losses represents a charge to earnings necessary to establish an 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 ~~$5,055~~$1,000 and ~~$573~~$136 for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $13,086 and $1,279 for the nine months ended September 30, 2019 and 2018, respectively. The higher provision for the three months ended ~~March 31,~~September 30, 2019 is resulting from an uptick in, and developments relating to, the Company’s classified assets. The increase during the nine months ended September 30, 2019 when compared to the same period in 2018 is ~~based on~~determined from the Company’s analysis of its ALLL, which is based on the loan portfolio’s risk ~~profile~~profile. Additionally, the increased provision for the nine months ended September 30, 2019 was driven ~~primarily~~ by a specific reserve of ~~$3,455~~$9,759 during the second quarter of 2019, related to a SNC ~~relationship, and comparatively higher loan growth, resulted in more provision being recorded.~~relationship. Nonperforming loans at ~~March 31,~~September 30, 2019 totaled ~~$11,904~~$3,107 compared to $5,696 at December 31, 2018, representing ~~0.42%~~0.11% and ~~0.22%~~0.21% of total loans for the respective periods.

Non-interest income for the three and nine months ended ~~March 31,~~September 30, 2019 was ~~$3,486~~$4,793 and $13,202, compared to ~~$3,456~~$3,442 and $11,045 for the same ~~period~~periods in ~~2018.~~2018, respectively. The following is a summary of the components of non-interest income (in thousands):

	Three Months Ended March 31,					$ Increase			% Increase			Three Months Ended September 30,						$ Increase			% Increase
	2019			2018		(Decrease)			(Decrease)			2019			2018			(Decrease)			(Decrease)
Service charges on deposit accounts	$	74		$	42	$	32			76.2	%	$	83		$	58		$	25			43.1		%
Other service charges and fees		757			751		6			0.8			1,069			747			322			43.1
Mortgage banking revenue		1,672			1,549		123			7.9			2,702			1,490			1,212			81.3
Wealth management		627			704		(77	)		(10.9	)		767			705			62			8.8
Gain on sale or call of securities		149			—		149		NM
Net (loss) gain on sale of loans		(217	)		9		(226	)		(2,511.1	)
Gain (loss) on sale or call of securities													1,493			(1	)		1,494		NM
Net loss on sale of loans													(1,758	)		—			(1,758	)	NM
Net gain on sale of foreclosed assets		4			3		1			33.3			2			3			(1	)		(33.3	)
Other		420			398		22			5.5			435			440			(5	)		(1.1	)
Total non-interest income	$	3,486		$	3,456	$	30			0.9	%	$	4,793		$	3,442		$	1,351			39.3		%

Mortgage banking revenue increased ~~$123~~$1,212 and $1,755 for the three and nine months ended ~~March 31, 2019.~~September 30, 2019, respectively. The increase was due to the volume of mortgage loans originated, the sales related to those loans and more favorable market rates in 2019, which resulted in favorable fair value adjustments on mortgage derivatives.

Gain (loss) on sale or call of securities increased $1,494 and $2,009 for the three and nine months ended September 30, 2019, respectively, when compared with the same periods in 2018. The ~~decrease in (loss) gain~~increase was due to the Company’s election to sell certain securities to take advantage of the market conditions that existed during the third quarter of 2019. During the third quarter of 2019, the Company’s management elected to sell certain of its securities as part of its balance sheet management initiatives. The Company evaluated its securities held-to-maturity and determined that certain securities no longer adhered to the Company’s strategic focus and could be sold or reinvested to potentially improve the Company’s liquidity position, duration profile and net interest margin. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and, as a result, the

Company transferred all of its securities held-to-maturity to securities available-for-sale. Once the securities were transferred to available-for-sale, certain securities were sold as part of the Company’s balance sheet management initiatives.

Net loss on sale of loans ~~is attributable~~decreased non-interest income $1,758 and $1,972 during the three and nine months ended September 30, 2019, respectively, when compared with the same periods in 2018. The losses for the three and nine months were primarily attributed to sales of several SNC relationships during the third quarter of 2019, which resulted in a loss of $1,765 that was recognized during the third quarter of 2019. The Company had also recorded a loss of $223 related to the sale of a ~~Shared National Credit~~SNC relationship during the ~~three~~first quarter of 2019 that, combined with the loss recorded in the third quarter of 2019, account for the increased loss when comparing the nine months ended ~~March 31, 2019.~~

Non-interest expense for the three and nine months ended ~~March 31,~~September 30, 2019 was ~~$22,616 compared to $15,488~~$18,614 and $60,600, and was $18,251 and $51,789 for the same ~~period~~periods in ~~2018.~~2018, respectively. The increases were the result of the following components listed in the table below (in thousands):

	Three Months Ended March 31,				$ Increase		% Increase			Three Months Ended September 30,					$ Increase			% Increase
	2019		2018							2019			2018		(Decrease)			(Decrease)
Salaries and employee benefits	$	14,743	$	9,188	$	5,555		60.5	%	$	11,632		$	10,723	$	909			8.5		%
Occupancy and equipment		3,113		2,594		519		20.0			3,360			2,933		427			14.6
FDIC assessment expense		990		660		330		50.0			(357	)		1,020		(1,377	)		(135.0	)
Marketing		319		280		39		13.9			315			306		9			2.9
Professional fees		923		869		54		6.2			1,118			1,023		95			9.3
Amortization of core deposit intangible		145		104		41		39.4			120			169		(49	)		(29.0	)
Other		2,383		1,793		590		32.9			2,426			2,077		349			16.8
Total non-interest expense	$	22,616	$	15,488	$	7,128		46.0	%	$	18,614		$	18,251	$	363			2.0		%

The increase in non-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 months ended ~~March 31,~~September 30, 2019, in comparison with the same periods of 2018, were in salaries and employee benefits, occupancy and equipment, ~~professional fees,~~ and other non-interest expense.

Salaries and employee benefits increased ~~$5,555,~~$909 and $7,561, or ~~60.5%~~8.5% and 25.1%, respectively, when comparing the three and nine months ended ~~March 31,~~September 30, 2019 with the same ~~period~~periods in 2018. The ~~increase is~~increases for both periods are primarily due to ~~$4,143 in post employment~~salary expenses and certain post-employment and retirement ~~expenses. In addition, stock-based compensation expense increased $569~~expenses of $517 and $5,951, respectively, for the three and nine months ended ~~March 31,~~September 30, 2019 in comparison with the same ~~period~~periods in ~~2018.~~2018, with $4,143 post-employment and retirement expenses recorded in the first quarter of 2019. The salary expense increase for the nine months ended September 30, 2019 is also due to the Company’s staffing growth, during which the Company went from 327 full-time equivalent employees as of September 30, 2018, to 335 as of September 30, 2019, many of which were officer level positions as the Company has enhanced its management team to properly oversee the Company’s growth. Mortgage commissions increased $629 and $441 for the same time periods, respectively.

Occupancy and equipment expense increased ~~$519,~~$427 and $1,344, or ~~20.0%~~14.6% and 16.0%, respectively, when comparing the three and nine months ended ~~March 31,~~September 30, 2019 with the same ~~period~~periods in 2018. The variance for the three months ended ~~March 31,~~September 30, 2019 versus the three months ended ~~March 31,~~September 30, 2018 is primarily attributable to increases in building rent expense of ~~$158,~~$122 and software maintenance fees of ~~$244,~~$272. The variance when comparing the nine months ended September 30, 2019 with the nine months

ended September 30, 2018 is attributable to increases in building rent expense of $481, software maintenance fees of $629 and other furniture, fixture & equipment expense ~~$60.~~of $48.

The Company’s FDIC assessment expense ~~increased $330,~~decreased $1,377 and $1,165, or ~~50.0%~~135.0% and 47.4%, respectively, when comparing the three and nine months ended ~~March 31,~~September 30, 2019 with the same ~~period~~periods in 2018. The ~~increase~~majority of the decrease in comparing the ~~three~~nine months ended ~~March 31,~~September 30, 2019 to ~~March 31,~~September 30, 2018 is due to ~~asset growth.~~

~~Professional fees increased $54, or 6.2%, when comparing~~a credit of $757 that was received from the ~~three months ended March 31, 2019 with the same period~~FDIC for a Small Bank Assessment Credit issued in ~~2018.~~September 2019. The ~~increase when comparing the three months ended March 31, 2019 with the same period in 2018 is~~FDIC assessment expense also decreased due to ~~increases~~the Company’s decline in average assets, improved Leverage Ratio and other ~~professional fees $9 and legal fees $86.~~financial ratios considered in the FDIC’s calculation for insurance assessments.

For the three and nine months ended ~~March 31,~~September 30, 2019, other non-interest expense increased ~~$590,~~$349 and $1,190, or ~~32.9%~~16.8% and 19.3%, respectively, when compared to the three and nine months ended ~~March 31,~~September 30, 2018. The increase in other non-interest expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 versus ~~March 31,~~September 30, 2018 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: ~~director fees~~ATM network expense of ~~$44~~$155 and ~~ATM Network Expense~~CDARS fee expense of ~~$69.~~$285.

The Company recognized income tax expense for the three and nine months ended ~~March 31,~~September 30, 2019 of ~~$334,~~$2,117 and $3,157 compared to ~~$2,459~~$1,068 and $5,790 for the three and nine months ended ~~March 31, 2018.~~September 30, 2018, respectively. The Company’s quarter-to-date income tax expense for the period ended ~~March 31,~~September 30, 2019 reflects an effective income tax rate of ~~10.3%,~~15.8%. The Company’s year-to-date income tax expense for the period ended September 30, 2019 reflects an effective income tax rate of 14.0% which is a ~~significant~~ decrease compared to ~~19.7%~~15.8% for the same period in ~~2018 resulting~~2018. The primary drivers are from the Company’s participation in Tennessee’s Community Investment Tax Credit (CITC) program, ~~and due to~~ the ~~current~~first quarter’s ~~$4.1 million~~$4,143 related to ~~post employment~~post-employment and retirement expenses, ~~along with $3.5 million~~and $9,759 related to a specific loan loss provision on a ~~shared national credit (SNC).~~SNC relationship during the nine months ended September 30, 2019.

COMPARISON OF BALANCE SHEETS AT ~~March 31,~~September 30, 2019 and December 31, 2018

The Company’s total assets decreased by ~~$11,003,~~$431,115, or ~~0.3%~~10.1%, from December 31, 2018 to ~~March 31,~~September 30, 2019. The 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 ~~three~~nine months ended ~~March 31,~~September 30, 2019, offset by organic growth in the loan portfolio.

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 ~~March 31,~~September 30, 2019 and December 31, 2018 were ~~$2,807,377~~$2,796,233 and $2,665,399, respectively, an increase of ~~$141,978,~~$130,834 or ~~5.3%~~4.9%. As a percentage of total assets, total loans, net of deferred fees, at ~~March 31,~~September 30, 2019 and December 31, 2018 were ~~66.2%~~73.2% and 62.7% ~~of total assets,~~, 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 develop new relationships and broaden its presence in its primary markets in Middle Tennessee which include, Williamson County, Davidson County and Rutherford County.

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

~~The table below provides a summary of the Share National Credit portfolio for the periods noted.~~

Shared National Credit ("SNC"s) and Healthcare Portfolios

March 31, 2019

December 31, 2018

September 30, 2018

June 30, 2018

March 31, 2018

QoQ
Growth*

YoY
Growth

Total SNC

$
229,608

$
249,033

$
162,588

$
155,798

$
117,721

(31.6
%)

95.0
%

% of Total loans held for investment

8.2
%

9.3
%

6.4
%

6.3
%

5.1
%

Healthcare

$
318,020

$
290,464

$
285,284

$
257,225

$
199,425

38.5
%

59.5
%
SNC

107,156

123,097

103,772

107,894

89,162

(52.5
%)

20.2
%
Non-SNC

210,864

167,367

181,512

149,331

110,263

105.4
%

91.2
%

*Annualized

	September 30, 2019						December 31, 2018
Types of Loans	Amount			% of Total Loans			Amount			% of Total Loans
Total loans
Real estate:
Construction and land development	$	598,211			21.4	%	$	584,440			21.9	%
Commercial		945,435			33.8	%		802,260			30.1	%
Residential		672,526			24.0	%		682,882			25.6	%
Commercial and industrial		578,056			20.6	%		592,793			22.2	%
Consumer and other		5,955			0.2	%		5,568			0.2	%
Total gross loans		2,800,183			100.0	%		2,667,943			100.0	%
Less: deferred loan fees, net		(3,950	)					(2,544	)
allowance for loan losses		(26,474	)					(23,451	)
Total loans, net allowance for loan losses	$	2,769,759					$	2,641,948

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

Total gross loans increased ~~5.3%~~5.0% during the ~~first three~~nine months ended ~~March 31,~~September 30, 2019, due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of ~~4.8%~~7.1% with growth ~~occurring~~ in the ~~residential real estate 1.7% and~~ commercial real estate ~~11.4% segments.~~segment of 17.8%, and the construction and development segment of 2.4%. The Company also experienced ~~an increase~~a decrease of ~~7.5%~~2.5% in the commercial and industrial segment during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

Real estate loans ~~including $74 of PCI loans,~~ comprised ~~77.2%~~79.1% of the loan portfolio at ~~March 31,~~September 30, 2019. The largest portion of the real estate segments as of ~~March 31,~~September 30, 2019, was commercial real estate loans, which totaled ~~41.2%~~42.7% of real estate loans. Commercial real estate loans totaled ~~$893,490~~$945,435 at ~~March 31,~~September 30, 2019, and comprised ~~31.8%~~33.8% 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 other properties.

Construction and land development loans totaled ~~$581,340~~$598,211 at ~~March 31,~~September 30, 2019, and comprised ~~26.8%~~27.0% of total real estate loans and ~~20.7%~~21.4% 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 includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-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 ~~$694,264~~$672,526 and comprised ~~32.0%~~30.3% of real estate loans and ~~24.7%~~24.0% of total loans at ~~March 31,~~September 30, 2019.

Commercial and industrial loans totaled ~~$637,363~~$578,056 at ~~March 31, 2019 which includes $1,946 of PCI loans.~~September 30, 2019. Loans in this classification comprised ~~22.7%~~20.6% of total loans at ~~March 31,~~September 30, 2019. The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and commercial healthcare loans.

The banking agencies define a “Shared National Credit” ~~(SNC)~~(“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 ~~$229,608~~$144,476 at ~~March 31,~~September 30, 2019, decreasing ~~$19,425, or 31.6%,~~148.8% annualized, from ~~$249,033~~$231,216 at ~~December 31, 2018.~~June 30, 2019, driven by the sales and paydowns of $86.7 of SNCs during the third quarter of 2019. 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:

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 ~~March 31,~~September 30, 2019, excluding net unearned ~~net~~ fees and costs.

	March 31, 2019								September 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	$	300,870	$	146,717	$	133,753	$	581,340	$	269,573	$	188,563	$	140,075	$	598,211
Commercial		52,879		258,502		582,109		893,490		60,514		277,771		607,150		945,435
Residential		43,045		164,953		486,266		694,264		41,878		162,501		468,147		672,526
Commercial and industrial		75,135		395,320		166,908		637,363		88,416		407,928		81,712		578,056
Consumer and other		1,712		2,407		329		4,448		3,808		1,860		287		5,955
Total	$	473,641	$	967,899	$	1,369,365	$	2,810,905	$	464,189	$	1,038,623	$	1,297,371	$	2,800,183
Fixed interest rate	$	142,237	$	377,726	$	420,834	$	940,797	$	141,835	$	444,076	$	403,993	$	989,904
Variable interest rate		331,404		590,173		948,531		1,870,108		322,354		594,547		893,378		1,810,279
Total	$	473,641	$	967,899	$	1,369,365	$	2,810,905	$	464,189	$	1,038,623	$	1,297,371	$	2,800,183

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.

The Company maintains an 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:

The 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 covers non-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 ALLL are shown at ~~March 31,~~September 30, 2019 and December 31, 2018.

	March 31, 2019							December 31, 2018							Increase (Decrease)								September 30, 2019							December 31, 2018							Increase (Decrease)
	Loan Balance		ALLL Balance		%			Loan Balance		ALLL Balance		%			Loan Balance			ALLL Balance					Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance		ALLL Balance		ALLL to Total Loans			Loan Balance			ALLL Balance
Non impaired loans	$	2,714,663	$	24,233		0.89	%	$	2,568,930	$	23,249		0.91	%	$	145,733		$	984		-2 bps		$	2,734,166	$	26,308		0.95	%	$	2,568,930	$	23,249		0.87	%	$	165,236		$	3,059		8 bps
Non-PCI acquired loans (Note 1)		82,701		169		0.20			91,344		185		0.20			(8,643	)		(16	)	0 bps
Acquired loans ⁽¹⁾																								62,989		83		0.00			91,344		185		0.01			(28,355	)		(102	)	-1 bps
Impaired loans		11,521		3,455		29.99			5,654		17		0.30			5,867			3,438		2969 bps			3,028		83		0.00			7,669		17		0.00			(4,641	)		66		0 bps
Non-PCI loans		2,808,885		27,857		0.99			2,665,928		23,451		0.88			142,957			4,406		11 bps
PCI loans		2,020		—		—			2,015		—		—			5			—			—
Total loans	$	2,810,905	$	27,857		0.99	%	$	2,667,943	$	23,451		0.88	%	$	142,962		$	4,406		11 bps		$	2,800,183	$	26,474		0.95	%	$	2,667,943	$	23,451		0.88	%	$	132,240		$	3,023		7 bps

At ~~March 31,~~September 30, 2019, the ALLL was ~~$27,857,~~$26,474, compared to $23,451 at December 31, 2018. The ALLL as a percentage of total loans HFI was ~~0.99%~~0.95% at ~~March 31,~~September 30, 2019 and 0.88% at December 31, 2018. ~~The~~During the nine months at September 30, 2019, the Company’s loan growth and management’s evaluation of the risk profile, combined with ~~recent~~an uptick in and developments ~~in one SNC relationship during the first quarter of 2019~~relating to our classified assets, are the primary reasons for the $3,023 increase in the allowance amount.

As of September 30, 2019, the Company’s total non-performing assets (NPA) were 0.08% of assets, or $3,107, a decrease of approximately $2,589 from December 31, 2018. The NPA/ALLL coverage ratio was 852% at September 30, 2019, more than double the 415% coverage present at December 31, 2018. Classified Assets were $50,090 at September 30, 2019, representing 1.77% of loans HFI, up from 1.45% of loans HFI at December 31, 2018. Potential problem loans, which are not included in nonperforming assets, amounted to $47,062, or 1.7% of total loans held for investment at September 30, 2019, compared to $33,223, or 1.2% of total loans held for investment at December 31, 2018. Potential problem loans represent those loans where information about possible credit problems of borrowers has caused management to have doubts about the borrower’s ability to comply with present repayment terms. This definition is for substandard loans, which are still accruing interest and excluding the impact of substandard nonaccrual loans.

	Three Months Ended March 31, 2019			Three Months Ended March 31, 2018			Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
Beginning balance	$	23,451		$	21,247		$	23,451		$	21,247
Loans charged-off:
Construction & land development		—			39			59			39
Commercial real estate		—			—
Residential real estate		15			7			15			7
Commercial & industrial		568			49			10,066			49
Consumer & other		70			11			126			22
Total loans charged-off		653			106			10,266			117
Recoveries on loans previously charged-off:
Construction & land development		—			—			—			1
Commercial real estate		—			—
Residential real estate		2			19			17			43
Commercial & industrial		—			—			101			10
Consumer & other		2			5			85			16
Total loan recoveries		4			24			203			70
Net charge-offs		(649	)		(82	)		(10,063	)		(47	)
Provision for loan losses charged to expense		5,055			573			13,086			1,279
Total allowance at end of period	$	27,857		$	21,738		$	26,474		$	22,479
Total loans, gross, at end of period⁽¹⁾	$	2,810,905		$	2,312,243		$	2,800,183		$	2,552,686
Average gross loans⁽¹⁾	$	2,764,675		$	2,301,054		$	2,827,966		$	2,424,936
Allowance to total loans		0.99	%		0.94	%		0.95	%		0.88	%
Net charge-offs (recoveries) to average loans, annualized		0.10	%		0.01	%		0.48	%		0.00	%

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

	March 31, 2019					December 31, 2018					September 30, 2019					December 31, 2018
	Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans			Amount		% of Loan Segment to Total Loans
Real estate loans:
Construction and land development	$	4,680		20.7	%	$	4,743		21.9	%	$	4,896		21.4	%	$	4,743		21.9	%
Commercial		7,118		31.8			6,725		30.1			7,605		33.8			6,725		30.1
Residential		4,726		24.7			4,743		25.6			4,644		24.0			4,743		25.6
Total real estate		16,524		77.2			16,211		77.6			17,145		79.2			16,211		77.6
Commercial and industrial		11,283		22.6			7,166		22.2			9,268		20.6			7,166		22.2
Consumer and other		50		0.2			74		0.2			61		0.2			74		0.2
	$	27,857		100.0	%	$	23,451		100.0	%	$	26,474		100.0	%	$	23,451		100.0	%

Non-performing loans consist of non-accrual loans and loans that are past due 90 days or more and still accruing interest. Non-performing assets consist of non-performing loans plus ~~OREO (i.e.,~~foreclosed real ~~estate acquired through foreclosure or deed in lieu of foreclosure).~~estate. Loans are placed on non-accrual status when they are past due 90 days ~~and /~~ and/or management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-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 of non-performing loans is non-accrual loans, which as of ~~March 31,~~September 30, 2019 totaled ~~$11,724.~~$3,028. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest which totaled ~~$180~~$79 at ~~March 31,~~September 30, 2019. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection.

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

	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Non-accrual loans	$	11,724		$	5,488		$	3,028		$	5,488
Past due loans 90 days or more and still accruing interest		180			208			79			208
Total non-performing loans		11,904			5,696			3,107			5,696
Foreclosed real estate and repossessed assets		-			-			—			—
Total non-performing assets		11,904			5,696			3,107			5,696
Total non-performing loans as a percentage of total loans		0.42	%		0.21	%		0.11	%		0.21	%
Total non-performing assets as a percentage of total assets		0.28	%		0.13	%		0.08	%		0.13	%
Allowance for loan losses as a percentage of non-performing loans		234	%		412	%		852	%		412	%

As of ~~March 31,~~September 30, 2019, there were 13 loans on non-accrual status. The amount and number are further delineated by ~~collateral~~loan segment and number of loans in the table below.

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans		Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
Construction & land development	$	583		5.0	%		1	$	429		14.2	%		1
Commercial real estate		153		1.3			1
Residential real estate		1,811		15.4			6		2,359		77.9			9
Commercial & industrial		9,177		78.3			5		240		7.9			3
Consumer		—		—			—
Total non-accrual loans	$	11,724		100.0	%		13	$	3,028		100.0	%		13

The investment securities portfolio is intended to provide the Company with adequate liquidity and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-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. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, totaled ~~$799,301~~$612,371 at ~~March 31,~~September 30, 2019, compared to $1,030,668 at December 31, 2018, a decrease of ~~$231,367,~~$418,297, or ~~22.4%~~40.6%. The decrease in available-for-sale securities was primarily attributed to security sales during the first ~~three~~nine months of 2019. Offsetting the decrease in available-for-sale securities, was the transfer of the held-to-maturity securities portfolio into available-for-sale during the second quarter of 2019. Held-to-maturity balances with an amortized cost of $117,409 and a fair value of $121,964 were transferred into the available-for-sale portfolio. Given the continued fall in interest rates, the Company elected to make this change to provide more opportunities to reposition the portfolio.

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 ~~$118,831~~$0 at ~~March 31,~~September 30, 2019, compared to $121,617 at December 31, 2018, a decrease of ~~$2,786,~~$121,617, or ~~2.3%~~100.0%. The ~~decrease is attributable~~change was primarily the result of the transfer of the portfolio to ~~securities that matured or had principal~~available-for-sale discussed above during the third quarter of 2019 in addition to pay downs ~~during~~and the ~~first three months~~amortization of ~~2019.~~premiums/discounts on the securities.

The combined securities portfolios represented ~~21.7%~~16.0% and 27.1% of total assets at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. At ~~March 31,~~September 30, 2019, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of ~~$22,803~~$24,764 and $21,831 at ~~March 31,~~September 30, 2019 and December 31, 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)~~(“FRB”) and the Federal Home Loan Bank System ~~(FHLB)~~(“FHLB”). The FHLB and 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 totaled ~~$12,682~~$12,449 at ~~March 31,~~September 30, 2019 compared to $12,371 at December 31, 2018, an increase of ~~$311,~~$78, or ~~2.5%~~0.6%. ~~The increase is primarily attributed to an increase of $389 in leasehold improvements net of depreciation related to several of the Company’s locations.~~

At ~~March 31,~~September 30, 2019, total deposits were ~~$3,315,844, an increase~~$3,061,950, a decrease of ~~$115,963,~~$369,857, or ~~3.4%~~10.8%, compared to $3,431,807 at December 31, 2018. Included in the Company’s funding strategy are brokered deposits, public funds deposits and reciprocal deposits. Total brokered deposits decreased ~~$79,112,~~$208,313, or ~~9.9%~~26.1%, to ~~$718,683~~$589,482 at ~~March 31,~~September 30, 2019, when compared with $797,795 at December 31, 2018, which reflects the Company’s strategy to reduce its dependence on non-core funding. Public funds deposits decreased ~~$153,904,~~$433,355, or ~~19.7%~~55.4%, to ~~$628,985~~$349,535 at ~~March 31,~~September 30, 2019 when compared with ~~$782,889~~$782,890 at December 31, 2018 due to the Company’s strategy to redirect some of the Company’s local government customers into the reciprocal account relationships, thereby decreasing the Company’s requirements to collateralize those public funds deposits. As a result, reciprocal deposits increased ~~$122,509,~~$53,693, or ~~39.2%~~17.2%, to ~~$435,191~~$366,375 at ~~March~~September 30, 2019, compared to $312,682 at December 31, ~~2019.~~2018.

Time deposits, excluding brokered deposits and public funds, as of ~~March 31,~~September 30, 2019, amounted to ~~$412,650,~~$420,800, compared to $532,445 as of December 31, 2018, a decrease of ~~$119,795,~~$111,645, or ~~22.5%~~21.0%.

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

	March 31, 2019		September 30, 2019
Three months or less	$	178,399	$	98,697
Three through six months		74,839		33,680
Six through twelve months		58,875		112,970
Over twelve months		150,667		153,572
Total	$	462,780	$	398,919

The Company had no federal funds purchased from correspondent banks or repurchase agreements as of ~~March 31,~~September 30, 2019 and December 31, 2018.

The Company has established a line of credit with the FHLB of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages and home equity lines of credit. At ~~March 31,~~September 30, 2019 and at December 31, 2018, advances totaled ~~$416,500~~$220,000 and $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
2019	$	261,500		2.30	%	$	65,000		2.19	%
2020		155,000		2.41	%		155,000		2.41	%
Total	$	416,500		2.34	%	$	220,000		2.34	%

At ~~March 31,~~September 30, 2019, the Company’s subordinated notes, net of issuance costs, totaled ~~$58,738,~~$58,827 compared with $58,693 at December 31, 2018. For more information related to the subordinated notes and the related issuance costs, please see Note 1112 of the consolidated financial statements.

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 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. The Bank’s ability to pay a dividend may be restricted due to regulatory requirements as well as the 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 as available-for-sale, and sales of brokered deposits. As of ~~March 31,~~September 30, 2019, ~~$799,301~~$612,371 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. ~~Another $118,831 of the portfolio was classified as held-to-maturity and is reported at amortized cost.~~ Approximately ~~$711,826~~$342,286 of the total ~~$918,132~~$612,371 investment securities portfolio on hand at ~~March 31,~~September 30, 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 and the Federal Reserve Bank.

As of ~~March 31,~~September 30, 2019, the Company’s equity was ~~$383,514,~~$408,261, as compared with $372,833 as of December 31, 2018. The increase in equity was due to the Company’s earnings of ~~$2,901~~$19,398 in the ~~first quarter of~~nine months ended September 30, 2019, the ~~increase in~~ common stock increase of ~~$1,853, offset by~~$4,937, less dividends paid of $1,751 and the ~~$8,754~~$2,244 decrease for the amortization of security premiums with the adoption of ASU 2017-08, plus the $15,088 increase in the valuation of available-for-sale securities.

On January 23, 2019, we announced that our board of directors had authorized a share repurchase program for 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 nine months ended September 30, 2019, we repurchased 7,043 and 26,223 shares of our common stock at a weighted average price of $27.21 and $27.12 and an aggregate cost of $191 and $711, respectively.

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~~refinancing’s tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities.

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At ~~March 31,~~September 30, 2019, the Company had unfunded loan commitments outstanding of ~~$49,565,~~$57,033, unused lines of credit of ~~$751,601,~~$767,631, and outstanding standby letters of credit of ~~$40,461.~~$55,539.

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 these non-GAAP financial measures in its analysis of our performance:

We believe these non-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 our non-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 to non-GAAP financial measures that other companies use.

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

	As of or for the Three Months Ended															As of or for the Three Months Ended
(Amounts in thousands, except share/per share data and percentages)	March 31, 2019			December 31, 2018			Sept 30, 2018			June 30, 2018			Mar 31, 2018			September 30, 2019			June 30 2019			March 31 2019			December 31, 2018			Sept 30, 2018
Total shareholders’ equity	$	383,421		$	372,740		$	356,074		$	348,059		$	304,762		$	408,168		$	393,516		$	383,421		$	372,740		$	356,074
Less: Preferred stock		—			—			—			—			—			—			—			—			—			—
Total common shareholders’ equity		383,421			372,740			356,074			348,059			304,762
Total common equity																	408,168			393,516			383,421			372,740			356,074
Common shares outstanding		14,574,339			14,538,085			14,525,351			14,480,240			13,258,142			14,636,484			14,628,287			14,574,339			14,538,085			14,525,351
Book value per share	$	26.31		$	25.64		$	24.51		$	24.04		$	22.99		$	27.89		$	26.90		$	26.31		$	25.64		$	24.51
Total common shareholders’ equity		383,421			372,740			356,074			348,059			304,762
Total common equity																	408,168			393,516			383,421			372,740			356,074
Less: Goodwill and other intangible assets		19,020			19,128			19,327			19,499			10,074			18,763			18,885			19,020			19,128			19,327
Tangible common shareholders’ equity	$	364,401		$	353,612		$	336,747		$	328,560		$	294,688
Tangible common equity																$	389,405		$	374,631		$	364,401		$	353,612		$	336,747
Common shares outstanding		14,574,339			14,538,085			14,525,351			14,480,240			13,258,142			14,636,484			14,628,287			14,574,339			14,538,085			14,525,351
Tangible book value per share	$	25.00		$	24.32		$	23.18		$	22.69		$	22.23		$	26.61		$	25.61		$	25.00		$	24.32		$	23.18
Average total common equity		377,116			299,840			351,293			340,175			299,840			399,096			388,460			377,116			299,840			351,293
Less: Average Preferred stock		—			—			—			—			—			—			—			—			—			—
Less: Average Goodwill and other intangible assets		19,109			19,268			19,433			19,860			10,136			18,763			18,971			19,109			19,268			19,433
Average tangible common shareholders’ equity	$	358,007		$	280,572		$	331,860		$	320,315		$	289,704		$	380,333		$	369,489		$	358,007		$	280,572		$	331,860
Net income available to common shareholders		2,901			3,743			10,549			10,161			10,052			11,324			5,173			2,901			3,743			10,549
Average tangible common equity		358,007			325,012			331,860			320,315			289,704			380,333			369,489			358,007			325,012			331,860
Return on average tangible common equity(1)		3.3	%		4.6	%		12.6	%		12.7	%		14.1	%		11.8	%		5.6	%		3.3	%		4.6	%		12.6	%
Efficiency Ratio:
Net interest income	$	27,420		$	26,920		$	26,562		$	26,905		$	25,116		$	28,262		$	27,365		$	27,420		$	26,920		$	26,562
Noninterest income		3,486			(383	)		3,442			4,147			3,456			4,793			4,923			3,486			(383	)		3,442
Operating revenue		30,906			26,537			30,004			31,052			28,572			33,055			32,288			30,906			26,537			30,004
Expense
Total noninterest expense		22,616			21,689			18,251			18,050			15,488			18,614			19,370			22,616			21,689			18,251
Efficiency ratio(2)		73.2	%		81.7	%		60.8	%		58.1	%		54.2	%		56.3	%		60.0	%		73.2	%		81.7	%		60.8	%

	As of and for the three months ended											As of and for the three months ended
	Mar 31, 2019		Dec 31, 2018			Sep 30, 2018		Jun 30, 2018		Mar 31, 2018		Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018			Sep 30, 2018
Income Statement Data ($):
Interest income		47,523		46,046			43,717		42,136		38,047		46,531		47,453		47,523		46,046			43,717
Interest expense		20,103		19,125			17,155		15,231		12,931		18,269		20,088		20,103		19,125			17,155
Net interest income		27,420		26,921			26,562		26,905		25,116		28,262		27,365		27,420		26,921			26,562
Provision for loan losses		5,055		975			136		570		573		1,000		7,031		5,055		975			136
Noninterest income (expense)		3,486		(384	)		3,442		4,147		3,456		4,793		4,923		3,486		(384	)		3,442
Noninterest expense		22,616		21,689			18,251		18,050		15,488		18,614		19,370		22,616		21,689			18,251
Net income before taxes		3,235		3,873			11,617		12,432		12,511		13,441		5,887		3,235		3,873			11,617
Income tax expense		334		122			1,068		2,263		2,459		2,117		706		334		122			1,068
Net income		2,901		3,743			10,549		10,161		10,052		11,324		5,181		2,901		3,751			10,549
Pre-tax pre-provision profit													14,441		12,918		8,290		4,848			11,753
Earnings before interest and taxes		23,338		23,048			28,722		27,663		25,442		31,710		25,975		23,338		23,048			28,722
Net income available to common shareholders		2,901		3,743			10,549		10,161		10,052		11,324		5,173		2,901		3,743			10,549
Weighted average diluted common shares		14,804,830		14,821,540			14,903,751		14,814,059		13,672,384		14,991,363		14,894,140		14,804,830		14,821,540			14,903,751
Earnings per share, basic		0.20		0.26			0.73		0.71		0.76		0.77		0.35		0.20		0.26			0.73
Earnings per share, diluted		0.19		0.25			0.70		0.68		0.73		0.75		0.34		0.19		0.25			0.70
Dividend per share		0.04		—			—		—		—		0.04		0.04		0.04		—			—
Profitability (%)
Return on average assets		0.28		0.35			1.01		0.98		1.03		1.12		0.51		0.28		0.35			1.01
Return on average equity		3.1		4.1			11.9		12.0		13.6		11.3		5.3		3.1		4.1			11.9
Return on average tangible common equity⁽³⁾		3.3		4.6			12.6		12.7		14.1		11.8		5.6		3.3		4.3			12.6
Efficiency ratio⁽³⁾		73.2		81.7			60.8		58.1		54.2
Efficiency ratio													56.3		60.0		73.2		81.7			60.8
Net interest margin⁽¹⁾		2.80		2.69			2.70		2.74		2.71		2.98		2.84		2.80		2.69			2.70
Balance Sheet Data ($):
Loans (including HFS)		2,829,107		2,676,502			2,564,684		2,488,862		2,322,889		2,852,803		2,907,526		2,829,107		2,676,502			2,564,684
Loan loss reserve		27,857		23,451			22,479		22,341		21,738		26,474		27,443		27,857		23,451			22,479
Cash		300,113		280,212			144,660		176,870		246,164		178,747		150,721		300,113		280,212			144,660
Securities		918,132		1,152,285			1,319,774		1,357,918		1,399,801		612,371		834,095		918,132		1,152,285			1,319,774
Goodwill		18,176		18,176			18,176		18,176		9,124		18,176		18,176		18,176		18,176			18,176
Intangible assets (Sum of core deposit intangible and SBA servicing rights)		844		952			1,151		1,323		950		587		709		844		952			1,151
Assets		4,238,436		4,249,439			4,167,813		4,165,238		4,083,663		3,818,324		4,071,971		4,238,436		4,249,439			4,167,813
Deposits		3,315,843		3,431,807			3,371,550		3,398,025		3,355,153		3,061,950		3,146,645		3,315,843		3,431,807			3,371,550
Liabilities		3,854,922		3,876,606			3,811,636		3,817,076		3,778,798		3,410,063		3,678,362		3,854,922		3,876,606			3,811,636
Total shareholders' equity		383,421		372,740			356,074		348,059		304,865		408,168		393,516		383,421		372,740			356,074
Total equity		383,514		372,833			356,177		348,162		304,762		408,261		393,609		383,514		372,833			356,177
Tangible common equity⁽³⁾		364,401		353,612			336,747		328,560		294,688		374,631		374,631		364,401		353,612			336,747
Asset Quality (%)
Nonperforming loans/ total loans⁽²⁾		0.42		0.21			0.16		0.14		0.15		0.11		0.16		0.42		0.21			0.16
Nonperforming assets / (total loans⁽²⁾+ foreclosed assets)		0.42		0.21			0.23		0.21		0.22		0.11		0.16		0.42		0.21			0.23
Loan loss reserve / total loans⁽²⁾		0.99		0.88			0.88		0.90		0.94		0.95		0.95		0.99		0.88			0.88
Net charge-offs (recoveries) / average loans		0.10		0.00			0.00		0.00		0.01
Net charge-offs (recoveries) / average loans HFI⁽⁴⁾													0.27		1.04		0.10		0.00			0.00
Capital (%)
Tangible common equity to tangible assets⁽³⁾		8.6		8.4			8.1		7.9		7.2		9.9		9.2		8.6		8.4			8.1
Leverage ratio		8.8		8.8			8.7		8.3		7.8		9.7		9.2		8.8		8.8			8.7
Common Equity Tier 1 ratio		11.3		12.2			12.2		12.1		11.5		12.0		11.2		11.3		12.2			12.2
Tier 1 risk-based capital ratio		11.3		12.2			12.2		12.1		11.5		12.0		11.2		11.3		12.2			12.2
Total risk-based capital ratio		14.0		14.9			15.0		15.0		14.4		14.6		13.7		14.0		14.9			15.0

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 date of the first sale of common equity securities under our Registration Statement on Form S-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have $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 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 in non-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 to non-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.

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 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 a 12-month time period ended ~~March 31,~~September 30, 2019, net interest income was estimated to ~~decrease 1.40%~~increase 1.89% and ~~3.63%~~3.31% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to ~~increase 0.84%~~decrease 0.24% and ~~2.58%~~1.20% 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 ~~March 31,~~September 30, 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		110,455		2,783			2.58	%		120,675		1,427		1.20	%
-100		108,577		905			0.84	%		119,532		284		0.24	%
Base		107,672		—			0.00	%		119,248		—		—
+100		106,162		(1,510	)		(1.40	%)		121,506		2,258		1.89	%
+200		103,761		(3,911	)		(3.63	%)		123,192		3,944		3.31	%
+300		101,128		(6,544	)		(6.08	%)		124,465		5,217		4.37	%
+400		98,589		(9,083	)		(8.44	%)		125,895		6,647		5.57	%

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. Accordingly, the modeling analysis may not be an accurate indicator of how our net interest income will be affected by changes in interest rates as the inputs utilized by management may be inaccurate. 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. The model is a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

(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 Rule 13a-15(e) under the Exchange Act) as of ~~March 31,~~September 30, 2019, the end of the fiscal quarter covered by this Quarterly Report on Form 10-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 Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 19, 2019.

~~None.~~The following table discloses shares of our common stock repurchased during the three months ended September 30, 2019:

On May 6, 2019, the Bank and Nolensville Real Estate Partners, LLC entered into a Triple Net Office Lease Agreement (the “Lease”) related to the relocation of the Bank’s Nolensville, Tennessee branch, which is currently located at 7177 Nolensville Road, Suite A3, Nolensville, Tennessee 37135, to the premises subject to the Lease, which is located at 7216 Nolensville Road, Suite 100, Nolensville, Tennessee 37135. Nolensville Real Estate Partners, LLC is an affiliate of Henry W. Brockman, Jr. and Dr. David H. Kemp, each of whom are directors of the Company and the Bank. The Lease has a term of 15 years, which the Bank has the option to renew for two successive five year periods, and provides for monthly rent payments of $9,453 per month for the first year of the term of the Lease, subject to annual adjustments thereafter.

On May 7, 2019, Sally E. Bowers entered into a Severance Agreement and General Release with the Bank, pursuant to which Ms. Bowers resigned from her position as Executive Vice President, Chief Mortgage Officer of the Bank, effective May 10, 2019. The Severance Agreement provides that Ms. Bowers will receive, in exchange for her release of all potential claims against the Company, and in accordance with the terms of her Confidentiality, Non-Competition, and Non-Solicitation Agreement dated as of January 29, 2014, a payment of (i) $132,934, which is equal to 12 months of Ms. Bowers’ current base pay, and (ii) $6,866.21, which is equal to one times the average cash incentive bonus pay earned by Ms. Bowers based on the last three years, in each case payable in bi-monthly installments. In addition, all of Ms. Bowers' outstanding, unvested equity awards will become fully vested on May 10, 2019.

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.

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)


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


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

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	67
Notes to Consolidated Financial Statements	78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3032
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4751
Item 4. Controls and Procedures	4751

PART II OTHER INFORMATION

Item 1. Legal Proceedings	4852
Item 1A. Risk Factors	4852
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4852
Item 3. Defaults Upon Senior Securities	4852
Item 4. Mine Safety Disclosures	4852
Item 5. Other Information	4852
Item 6. Exhibits	4953

SIGNATURES

	Three Months Ended March 31,
	2019			2018
Net income	$	2,901		$	10,052
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		13,111			(14,577	)
Reclassification adjustment for gains included in net income		(149	)		—
Net unrealized gains (losses)		12,962			(14,577	)
Tax effect, includes $58 and $0, respectively, income tax (benefit) expense from sales of securities		(4,208	)		3,808
Total other comprehensive income (loss)		8,754			(10,769	)
Comprehensive income (loss)	$	11,655		$	(717	)

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☒

Weighted-average remaining lease term									~~March 31,~~September 30, 2019
Operating leases									~~14.8~~11.40 years
Finance lease									~~11.9~~14.26 years

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

Lease costs
Operating lease cost	$	1,262
Variable lease cost		99
Short-term lease cost		24
Finance lease cost
Interest on lease liabilities⁽¹⁾		41
Amortization of right-of-use asset		50
Total lease cost	$	1,476

Lease costs	September 30, 2019
Operating lease costs	$	3,808
Variable lease costs		306
Short-term lease costs		136
Finance lease costs
Interest on lease liabilities⁽¹⁾		123
Amortization of right-of-use asset		151
Total lease costs	$	4,524

Grant year	Units Awarded		Service period		Period in which units to be settled into shares of common stock
2019		3,447		0.5		2019
2019		154,304		3	2022

	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)					Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Liability derivatives
Interest rate swap agreements	$	(230	)	$	—	$	(1,460	)	$	—

	September 30, 2019		December 31, 2018
Unused lines of credit	$	767,631	$	654,584
Standby letters of credit		55,539		40,024
Unfunded loan commitments		57,033		28,731

	Net change nine months ended September 30, 2019 versus September 30, 2018
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	15,801		$	7,100		$	22,901
Loans held for sale		226			27			253
Securities
Taxable		(6,922	)		2,270			(4,652	)
Tax-exempt		(1,020	)		(901	)		(1,921	)
Restricted equity securities		172			(112	)		60
Certificates of deposit at other financial institutions		8			10			18
Federal funds sold and other		(189	)		674			485
TOTAL INTEREST INCOME	$	8,076		$	9,068		$	17,144
INTEREST EXPENSE
Deposits
Interest checking	$	(7	)	$	2,420		$	2,413
Money market accounts		3,571			5,189			8,760
Savings		(20	)		(7	)		(27	)
Time deposits		(4,515	)		4,673			158
Federal Home Loan Bank advances and other⁽¹⁾		364			1,560			1,924
Fed funds purchased and other⁽²⁾		(174	)		89			(85	)
Subordinated Notes		—			—			—
TOTAL INTEREST EXPENSE	$	(781	)	$	13,924		$	13,143
NET INTEREST INCOME	$	8,857		$	(4,856	)	$	4,001

SNC and Healthcare Portfolios	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			QoQ (Decline)*			YoY (Decline) Growth
Total SNCs	$	144,476		$	231,216		$	228,538		$	249,033		$	162,587			(148.8	%)		(11.1	%)

% of Total loans held for investment		5.2	%		8.0	%		8.1	%		9.3	%		6.4	%

Healthcare	$	273,106		$	329,818		$	320,611		$	290,464		$	285,284			(68.2	%)		(4.3	%)
SNC		85,932			118,460			107,156			123,097			103,772			(108.9	%)		(17.2	%)
Non-SNC		187,174			211,358			213,455			167,367			181,512			(45.4	%)		3.1	%

*Annualized

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)
July 1, 2019 to July 31, 2019		4,528	$	27.13		4,528	$	29,358
August 1, 2019 to August 31, 2019		2,515		27.35		2,515		29,289
September 1, 2019 to September 30, 2019		—		—		—		29,289

Exhibit No.	Description


10.1	~~Executive Transition~~Employment Agreement, ~~dated March 8, 2019, between~~by and among Franklin Financial Network, Inc., Franklin Synergy Bank and ~~Richard E. Herrington~~J. Myers Jones, III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form ~~8-k~~8-K filed with the Securities and Exchange Commission on ~~March 8,~~September 3, 2019).

10.2*	~~Triple Net Office Lease Agreement, by and between Nolensville Real Estate Partners, LLC and Franklin Synergy Bank, on May 6, 2019.~~

10.3*	~~Severance Agreement and General Release, by and between Franklin Synergy Bank and Sally Bowers, dated May 7, 2019.~~

10.4*	~~Commencement Agreement, by and between South Royal Oaks Partners, LLC and Franklin Synergy Bank, dated December 8, 2018~~.

10.5*10.2	Employment Agreement, by and among Franklin Financial Network, Inc., Franklin Synergy Bank and Christopher J. Black (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019)~~Commencement~~.
10.3	Employment Agreement, by and between ~~SS McEwen, LLC and~~ Franklin Synergy Bank ~~dated January 1, 2019~~and David J. McDaniel, IV (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019).

10.6*10.4	Non-Compete and Non-Solicitation Agreement, by and among Franklin Financial Network, Inc., Franklin Synergy Bank and J. Myers Jones, III (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019)~~Commencement~~.
10.5	Non-Compete and Non-Solicitation Agreement, by and among Franklin Financial Network, Inc., Franklin Synergy Bank and Christopher J. Black (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019).
10.6	Non-Compete and Non-Solicitation Agreement, by and between ~~204 9~~^th ~~Avenue Partners, LLC and~~ Franklin Synergy Bank ~~dated February 14, 2019~~and David J. McDaniel, IV (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 3, 2019).

31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

32**	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).

101*	Interactive Data Files.

	Franklin Financial Network, INC.

~~May 9,~~October 31, 2019	By:	/s/ Christopher J. Black
		Christopher J. Black Executive Vice President and Chief Financial Officer
		On behalf of the registrant and as Chief Financial Officer (Principal Financial Officer)