National Commerce 10-Q 2017 Q2 Quarterly report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period from                     to                     .

Commission file number:001-36878

NATIONAL COMMERCE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	20-8627710
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
813 Shades Creek Parkway, Suite 100 Birmingham, Alabama	35209
(Address of principal executive offices)	(Zip Code)

(205) 313-8100

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☒

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

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Yes  ☐ No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock	Outstanding at August 9, 2017
Common stock, $0.01 par value	14,070,528 shares

NATIONAL COMMERCE CORPORATION

FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):	1
	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	1
	Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2017 and 2016	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016	3
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosure	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
	Signatures	52

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GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “National Commerce Corporation,” “NCC,” the “Company,” “we,” “us” and “our” refer to National Commerce Corporation and its consolidated affiliates as of June 30, 2017.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases, or expressions with similar meaning.

Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in this Quarterly Report on Form 10-Q under Part II, “Item 1A. Risk Factors” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 under Part I, “Item 1A. Risk Factors.”

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30, 2017		December 31, 2016
Assets
Cash and due from banks	$	27,619		35,897
Interest-bearing deposits with banks		197,141		181,396
Cash and cash equivalents		224,760		217,293
Investment securities held-to-maturity (fair value of $26,288 and $25,894 at June 30, 2017and December 31, 2016, respectively)		26,107		26,329
Investment securities available-for-sale		75,462		73,380
Other investments		10,600		7,879
Mortgage loans held-for-sale		19,482		15,373
Loans, net of unearned income		1,878,594		1,485,484
Less: allowance for loan losses		13,407		12,113
Loans, net		1,865,187		1,473,371
Premises and equipment, net		35,141		31,884
Accrued interest receivable		5,082		4,129
Bank-owned life insurance		31,762		28,034
Other real estate		-		2,068
Deferred tax assets, net		14,809		13,486
Goodwill		98,955		50,771
Core deposit intangible, net		4,315		2,032
Other assets		6,390		4,755
Total assets	$	2,418,052		1,950,784
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	608,280		429,030
Interest-bearing demand		322,020		262,261
Savings and money market		810,941		703,289
Time		263,287		273,130
Total deposits		2,004,528		1,667,710
Federal Home Loan Bank advances		7,000		7,000
Subordinated debt		24,527		24,500
Accrued interest payable		709		829
Other liabilities		18,028		13,701
Total liabilities		2,054,792		1,713,740
Commitments and contingencies
Shareholders’ equity:
Preferred stock, 250,000 shares authorized, no shares issued or outstanding		-		-
Common stock, $0.01 par value, 30,000,000 shares authorized, 14,070,528 and 10,934,541shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		141		109
Additional paid-in capital		318,932		205,372
Retained earnings		36,373		24,005
Accumulated other comprehensive income		448		249
Total shareholders' equity attributable to National Commerce Corporation		355,894		229,735
Noncontrolling interest		7,366		7,309
Total shareholders' equity		363,260		237,044
Total liabilities and shareholders' equity	$	2,418,052		1,950,784

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Statements of Earnings

(In thousands, except per share data)

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Interest and dividend income:
Interest and fees on loans	$	24,987		17,669	$	48,580		35,152
Interest and dividends on taxable investment securities		606		383		1,177		795
Interest on non-taxable investment securities		197		201		397		401
Interest on interest-bearing deposits and federal funds sold		676		129		1,211		347
Total interest income		26,466		18,382		51,365		36,695
Interest expense:
Interest on deposits		2,054		1,476		4,064		3,045
Interest on borrowings		70		71		141		152
Interest on subordinated debt		389		183		777		183
Total interest expense		2,513		1,730		4,982		3,380
Net interest income		23,953		16,652		46,383		33,315
Provision for loan losses		1,155		901		1,311		2,434
Net interest income after provision for loan losses		22,798		15,751		45,072		30,881
Other income:
Service charges and fees on deposit accounts		640		505		1,307		985
Mortgage origination and fee income		3,154		1,627		6,299		3,019
Merchant sponsorship revenue		602		491		1,346		1,013
Income from bank-owned life insurance		219		204		435		408
Wealth management fees		14		11		24		24
Gain on other real estate, net		105		119		104		275
Gain on sale of investment securities available-for-sale		28		-		28		-
Other		338		400		997		758
Total other income		5,100		3,357		10,540		6,482
Other expense:
Salaries and employee benefits		9,663		6,907		19,736		13,852
Commission-based compensation		1,684		1,036		3,407		1,911
Occupancy and equipment		1,479		1,131		2,952		2,266
Core deposit intangible amortization		348		192		696		383
Other		4,563		2,988		9,407		5,895
Total other expense		17,737		12,254		36,198		24,307
Earnings before income taxes		10,161		6,854		19,414		13,056
Income tax expense		3,281		2,072		6,122		4,155
Net earnings		6,880		4,782		13,292		8,901
Less: Net earnings attributable to noncontrolling interest		431		428		924		768
Net earnings attributable to National Commerce Corporation	$	6,449		4,354	$	12,368		8,133
Basic earnings per common share	$	0.49		0.40	$	0.95		0.75
Diluted earnings per common share	$	0.48		0.39	$	0.92		0.74

See accompanying notes to unaudited consolidated financial statements. 

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NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2017			2016		2017			2016
Net earnings	$	6,449		$	4,354	$	12,368			8,133
Other comprehensive income, net of tax:
Unrealized gains on investment securities available-for-sale:
Unrealized gains arising during the period, net of tax of$76, $98, $117 and $240, respectively		142			180		216			446
Reclassification adjustment for gains included in net earnings, net oftax of $11 in 2017		(17	)		-		(17	)		-
Other comprehensive income		125			180		199			446
Comprehensive income	$	6,574		$	4,534	$	12,567			8,579

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

(In thousands)

							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Noncontrolling
	Stock		Capital		Earnings		Income		Interest			Total
Balance, December 31, 2016	$	109		205,372		24,005		249		7,309			237,044
Share-based compensation expense		-		829		-		-		-			829
Net earnings attributable to National Commerce Corporation		-		-		12,368		-		-			12,368
Exercise of stock options and issuance of performance shares		3		2,598		-		-		-			2,601
Net earnings attributable to noncontrolling interest		-		-		-		-		924			924
Distributions paid to noncontrolling interest		-		-		-		-		(867	)		(867	)
Sale of common stock, net of offering expenses of $75		11		38,720		-		-		-			38,731
Acquisition of Private Bancshares, Inc., net of offering expenses of $138		18		71,413		-		-		-			71,431
Change in unrealized gain/loss on securities available-for-sale,net of tax		-		-		-		199		-			199
Balance, June 30, 2017	$	141		318,932		36,373		448		7,366			363,260

See accompanying notes to unaudited consolidated financial statements. 

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NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Statements of Cash Flows

(In thousands)

	For the Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities:
Net earnings	$	12,368			8,133
Adjustments to reconcile net earnings to net cash provided byoperating activities:
Provision for loan losses		1,311			2,434
Net earnings attributable to noncontrolling interest		924			768
Depreciation, amortization, and accretion		(226	)		465
Gain on ineffective portion of fair value hedge derivative		(46	)		(25	)
Change in mortgage loan derivative		(326	)		(36	)
Excess tax benefit from share-based compensation		(527	)		-
Gain on sale of investment securities available-for-sale		(28	)		-
Share-based compensation expense		829			557
Income from bank-owned life insurance		(435	)		(408	)
Net gain on sale of other real estate		(104	)		(275	)
Other real estate non-cash write-downs		219			-
Change in (net of effect of business combinations):
Mortgage loans held-for-sale		20,519			(4,448	)
Other assets and accrued interest receivable		461			766
Other liabilities and accrued interest payable		1,469			382
Net cash provided by operating activities		36,408			8,313
Cash flows from investing activities (net of effect of business combinations):
Proceeds from calls, maturities, and paydowns of securities available-for-sale		18,286			29,154
Proceeds from calls, maturities, and paydowns of securities held-to-maturity		412			407
Proceeds from sale of securities available-for-sale		10,283			-
Purchases of securities available-for-sale		(20,742	)		(31,757	)
Purchases of securities held-to-maturity		(250	)		-
Proceeds from sale of other investments		-			693
Purchases of other investments		(2,468	)		(2,173	)
Net cash received in acquisition		9,471			-
Net change in loans		(130,917	)		(86,396	)
Proceeds from sale of other real estate		1,973			2,080
Proceeds from the sale of premises and equipment		18			-
Purchases of premises and equipment		(3,807	)		(2,187	)
Net cash used by investing activities		(117,741	)		(90,179	)
Cash flows from financing activities (net of effect of business combinations):
Net change in deposits		48,473			(53,491	)
Repayment of Federal Home Loan Bank advances		-			(15,000	)
Issuance of subordinated debt		-			25,000
Debt offering expenses		-			(460	)
Cash distribution paid to noncontrolling interests		(867	)		(777	)
Proceeds from stock offering		38,806			-
Stock offering expenses		(75	)		-
Stock offering expenses related to acquisition		(138	)		-
Proceeds from exercise of options and warrants		2,601			300
Net cash provided by (used by) financing activities		88,800			(44,428	)
Net change in cash and cash equivalents		7,467			(126,294	)
Cash and cash equivalents at beginning of the period		217,293			212,457
Cash and cash equivalents at end of the period	$	224,760			86,163

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION

Unaudited Consolidated Statements of Cash Flows, continued

(In thousands)

	For the Six Months Ended
	June 30,
Supplemental disclosure of cash flow information:	2017		2016
Cash paid during the period for:
Interest	$	5,134		3,336
Income taxes	$	6,792		2,641
Non-cash investing and financing activities:
Change in unrealized (losses) gains on securities available-for-sale, net of tax	$	199		(446	)
Transfer of loans to other real estate	$	20		-
Assets acquired and liabilities assumed in acquisitions:
Assets acquired in acquisitions	$	353,697		-
Liabilities assumed in acquisitions	$	291,599		-

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION

Notes to Unaudited Consolidated Financial Statements

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

Note 1 – Basis of Presentation

General

The unaudited consolidated financial statements include the accounts of National Commerce Corporation (“NCC,” and, including its subsidiaries, the “Company”) and its wholly owned subsidiaries, National Bank of Commerce (“NBC” or the “Bank”) and National Commerce Risk Management, Inc. The unaudited consolidated financial statements also include the accounts of NBC’s majority-owned subsidiary, CBI Holding Company, LLC, which owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection, and accounts receivable management services to transportation companies and automotive parts and service providers nationwide.

The Bank provides a full range of commercial and consumer banking services. The Bank currently operates seven full-service banking offices in Alabama, ten full-service banking offices in central and northeast Florida (including under the trade names United Legacy Bank and Reunion Bank of Florida) and two full-service banking offices in the Atlanta, Georgia metro area (including under the trade names Private Bank of Buckhead, Private Bank of Decatur and PrivatePlus Mortgage). NBC is primarily regulated by the Office of the Comptroller of Currency (“OCC”) and is subject to periodic examinations by the OCC. The Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is subject to periodic examinations by the Federal Reserve.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s consolidated balance sheets, statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. All material intercompany transactions have been eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes as of December 31, 2016,which are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s knowledge and best estimates of the impact of current events and actions that the Company may undertake in the future. Estimates are used in accounting for, among other items, the allowance for loan losses, useful lives for depreciation and amortization, fair value of financial instruments, fair value of assets acquired and liabilities assumed in business combinations, deferred taxes and contingencies. Estimates that are particularly susceptible to significant change and therefore are critical accounting estimates for the Company include the determination of the allowance for loan losses and the assessment of deferred tax assets and liabilities. Management does not anticipate any material changes to its estimates in the near term. Factors that may affect such estimates include, but are not limited to, external market factors, such as market interest rates and employment rates; changes to operating policies and procedures; economic conditions in the Company’s markets; and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe that such differences would materially affect the consolidated financial statements in any individual reporting period presented.

Note 2– Reclassifications

Certain prior-period amounts have been reclassified to conform to the presentation used in 2017. These reclassifications had no material effect on the operations, financial condition or cash flows of the Company.

Note3 – Net Earnings per Common Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are computed by dividing net income by the sum of potential common shares that are dilutive plus the weighted-average number of shares of common stock outstanding. Anti-dilutive potential common shares (options) are excluded from the diluted earnings per share computation. For the three- and six-month periods ended June 30, 2017, there were no anti-dilutive potential common shares, compared to 102,297 anti-dilutive potential common shares for the three- and six-month periods ended June 30, 2016.

The reconciliation of the components of the basic and diluted earnings per share is as follows.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Net earnings available to common shareholders	$	6,449		4,354	$	12,368		8,133
Weighted average common shares outstanding		13,190,582		10,866,788		13,046,611		10,861,330
Dilutive effect of stock options		190,078		96,759		205,989		95,713
Dilutive effect of directors' deferred shares		29,425		15,905		29,425		15,903
Dilutive effect of performance share awards		141,660		88,520		140,679		86,960
Diluted common shares		13,551,745		11,067,972		13,422,704		11,059,906
Basic earnings per common share	$	0.49		0.40	$	0.95		0.75
Diluted earnings per common share	$	0.48		0.39	$	0.92		0.74

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Note4 –Securities

The amortized cost and fair value of held-to-maturity and available-for-sale debt securities at June 30, 2017 and December 31, 2016 were as follows.

	Held-to-Maturity Securities
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2017	Cost		Gains		Losses		Value
Mortgage-backed securities	$	4,576		3		4		4,575
Municipal securities		21,281		225		43		21,463
Other debt securities		250		-		-		250
Total held-to-maturity securities	$	26,107		228		47		26,288

	Amortized		Unrealized		Unrealized		Fair
December 31, 2016	Cost		Gains		Losses		Value
Mortgage-backed securities	$	5,021		2		29		4,994
Municipal securities		21,308		25		433		20,900
Total held-to-maturity securities	$	26,329		27		462		25,894

	Available-for-Sale Securities
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2017	Cost		Gains		Losses		Value
U.S. government agency obligations	$	3,368		-		4		3,364
Mortgage-backed securities		34,800		482		98		35,184
Other asset-backed securities		32,746		162		10		32,898
Municipal securities		3,859		157		-		4,016
Total available-for-sale securities	$	74,773		801		112		75,462

	Amortized		Unrealized		Unrealized		Fair
December 31, 2016	Cost		Gains		Losses		Value
U.S. government agency obligations	$	3,653		-		36		3,617
Mortgage-backed securities		38,946		458		256		39,148
Other asset-backed securities		25,991		113		12		26,092
Municipal securities		4,406		148		31		4,523
Total available-for-sale securities	$	72,996		719		335		73,380

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Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Details concerning the Company’s debt securities with unrealized losses as of June 30, 2017 and December 31, 2016 are as follows.

	Held-to-Maturity Securities
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2017	Value		Losses		Value		Losses		Value		Losses
Mortgage-backed securities	$	3,027		4		-		-		3,027		4
Municipal securities		5,568		43		-		-		5,568	��	43
Other debt securities		-		-		-		-		-		-
Total held-to-maturity securities	$	8,595		47		-		-		8,595	$	47

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2016	Value		Losses		Value		Losses		Value		Losses
Mortgage-backed securities	$	3,286		29		-		-		3,286		29
Municipal securities		17,542		433		-		-		17,542		433
Total held-to-maturity securities	$	20,828		462		-		-		20,828		462

	Available-for-Sale Securities
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2017	Value		Losses		Value		Losses		Value		Losses
U.S. government agency obligations	$	-		-		3,364		4		3,364		4
Mortgage-backed securities		9,587		98		-		-		9,587		98
Other asset-backed securities		2,990		10		-		-		2,990		10
Municipal securities		-		-		-		-		-		-
Total available-for-sale securities	$	12,577		108		3,364		4		15,941		112

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2016	Value		Losses		Value		Losses		Value		Losses
U.S. government agency obligations	$	3,617		36		-		-		3,617		36
Mortgage-backed securities		18,606		256		-		-		18,606		256
Other asset-backed securities		2,488		12		-		-		2,488		12
Municipal securities		951		31		-		-		951		31
Total available-for-sale securities	$	25,662		335		-		-		25,662		335

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As of June 30, 2017, the Company did not consider securities with unrealized losses to be other-than-temporarily impaired. The unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company has the ability and intent to hold its securities for a period of time sufficient to allow for a recovery in fair value. There were no other-than-temporary impairments charged to earnings during the three-month and six-month periods ended June 30, 2017 and 2016.

During the three-month period ended June 30, 2017, the Company sold one debt security for proceeds of $562,000 and realized a gross gain of $28,000 on this sale. During the three-month and six-month periods ended June 30, 2016, the Company did not sell any investment securities.

The amortized cost and estimated fair value of debt securities at June 30, 2017, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Municipal securities and U.S. government agencies:
0 to 5 years	$	-		-	$	-	$	-
5 to 10 years		1,045		1,055		750		759
Over 10 years		6,182		6,325		20,531		20,704
Mortgage-backed securities and otherasset-backed securities		67,546		68,082		4,826		4,825
Total	$	74,773		75,462		26,107		26,288

Note5 – Loans, Allowance for Loan Losses and Credit Quality

Major classifications of loans at June 30, 2017 and December 31, 2016 are summarized as follows.

	June 30, 2017			December 31, 2016
Commercial, financial, and agricultural	$	224,434			170,985
Factored commercial receivables		114,361			83,901
Real estate - mortgage		1,282,038			1,056,214
Real estate - construction		235,733			155,813
Consumer		22,676			19,060
		1,879,242			1,485,973
Less: Unearned fees		(648	)		(489	)
Total loans		1,878,594			1,485,484
Allowance for loan losses		(13,407	)		(12,113	)
Total net loans	$	1,865,187			1,473,371

At June 30, 2017, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $29.7 million and $21.1 million, respectively. At December 31, 2016, the carrying value and outstanding balance of PCI loans were $17.3 million and $12.0 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated.

	For the Six Months Ended June 30,
	2017			2016
Balance at beginning of period	$	375			286
Acquisition of Private Bancshares		462			-
Accretion		(796	)		(508	)
Reclassification from nonaccretable difference		673			476
Balance at period end	$	714			254

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The Company makes loans and extensions of credit to individuals and a variety of businesses located in its market areas. Through Corporate Billing, the Company also purchases receivables predominantly from transportation companies and automotive parts and service providers nationwide and occasionally purchases receivables from manufacturing and other types of companies. Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon prevailing conditions in the real estate market. Portfolio segments utilized by the Company are identified below. Relevant risk characteristics for these portfolio segments generally include (i) debt service coverage, loan-to-value ratios, and financial performance, for non-consumer loans, and (ii) credit scores, debt-to-income ratios, collateral type and loan-to-value ratios, for consumer loans.

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 for the periods indicated. Loans acquired through bank acquisitions are not included in the allowance for loan losses calculation, as these loans are recorded at fair value at acquisition, and there has been no further indication of credit deterioration that would require an additional provision.

	Commercial,			Factored
	financial, and			commercial			Real estate -			Real estate -
June 30, 2017	agricultural			receivables			mortgage			construction		Consumer			Unallocated		Total
Balance, beginning of year	$	1,588			500			8,465			1,369		191			-		12,113
Provisions charged to operating expense		(420	)		387			1,022			321		1			-		1,311
Loans charged off		(2	)		(1,352	)		(44	)		-		(31	)		-		(1,429	)
Recoveries		422			965			19			-		6			-		1,412
Balance, June 30, 2017	$	1,588			500			9,462			1,690		167			-		13,407
Ending balance, individually evaluatedfor impairment	$	-			-			-			-		-			-		-
Ending balance, collectively evaluatedfor impairment		1,588			500			9,462			1,690		167			-		13,407
Total allowance for loan losses	$	1,588			500			9,462			1,690		167			-		13,407
Loans:
Individually evaluated for impairment	$	-			-			162			-		-			-		162
Collectively evaluated for impairment		223,486			114,361			1,263,699			234,023		22,446			-		1,858,015
Acquired loans with deterioratedcredit quality		948			-			18,177			1,710		230			-		21,065
Total loans	$	224,434			114,361			1,282,038			235,733		22,676			-		1,879,242

	Commercial,			Factored
	financial, and			commercial			Real estate -		Real estate -
June 30, 2016	agricultural			receivables			mortgage		construction		Consumer			Unallocated			Total
Balance, beginning of year	$	1,345			500			5,525		1,412		236			824			9,842
Provisions charged to operating expense		278			605			1,842		346		187			(824	)		2,434
Loans charged off		(4	)		(1,319	)		-		-		(180	)		-			(1,503	)
Recoveries		33			714			107		7		8			-			869
Balance, June 30, 2016	$	1,652			500			7,474		1,765		251			-			11,642
Ending balance, individually evaluatedfor impairment	$	-			-			-		-		-			-			-
Ending balance, collectively evaluatedfor impairment		1,652			500			7,474		1,765		251			-			11,642
Total allowance for loan losses	$	1,652			500			7,474		1,765		251			-			11,642
Loans:
Individually evaluated for impairment	$	-			-			262		156		23			-			441
Collectively evaluated for impairment		183,959			70,673			965,283		155,870		20,426			-			1,396,211
Acquired loans with deterioratedcredit quality		241			-			9,481		422		239			-			10,383
Total loans	$	184,200			70,673			975,026		156,448		20,688			-			1,407,035

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The Company individually evaluates for impairment all loans that are on non-accrual status. Additionally, any troubled debt restructurings are individually evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral-dependent. Management may also elect to apply an additional collective reserve to groups of impaired loans based on current economic or market factors. Interest payments received on impaired loans are generally applied as a reduction of the outstanding principal balance. During the six months ended June 30, 2017 and 2016, the Company did not modify any loans in a manner that would be considered a troubled debt restructuring.

The following tables present impaired loans by class of loans as of June 30, 2017 and December 31, 2016. The purchased credit-impaired loans are not included in these tables because they are recorded at fair value at acquisition and there has been no further indication of credit deterioration that would require an additional provision.

			Unpaid				Average
	Recorded		Principal		Related		Recorded
June 30, 2017	Investment		Balance		Allowance		Investment
Impaired loans without related allowance:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		162		162		-		160
Real estate - construction		-		-		-		-
Consumer		-		-		-		34
Total	$	162		162		-		194
Impaired loans with related allowance:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		-		-		-		15
Real estate - construction		-		-		-		-
Consumer		-		-		-		-
Total	$	-		-		-		15
Total impaired loans:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		162		162		-		175
Real estate - construction		-		-		-		-
Consumer		-		-		-		34
Total	$	162		162		-		209

			Unpaid				Average
	Recorded		Principal		Related		Recorded
December 31, 2016	Investment		Balance		Allowance		Investment
Impaired loans without related allowance:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		180		213		-		168
Real estate - construction		-		-		-		97
Consumer		7		42		-		31
Total	$	187		255		-		296
Impaired loans with related allowance:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		-		-		-		-
Real estate - construction		-		-		-		-
Consumer		-		-		-		-
Total	$	-		-		-		-
Total impaired loans:
Commercial, financial, and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		180		213		-		168
Real estate - construction		-		-		-		97
Consumer		7		42		-		31
Total	$	187		255		-		296

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For the six months ended June 30, 2017 and 2016, the Company did not recognize a material amount of interest income on impaired loans.

The following tables present the aging of the recorded investment in past due loans and non-accrual loan balances as of June 30, 2017 and December 31, 2016, by class of loans. All loans greater than 90 days past due are placed on non-accrual status, excluding factored receivables. For Corporate Billing’s factored receivables, which are commercial trade credits rather than promissory notes, our practice is to charge off unpaid recourse receivables when they become 90 days past due from the invoice due date and the non-recourse receivables when they become 120 days past due from the statement billing date. For the recourse receivables, the invoice is charged against the client reserve account established for such purposes, unless the client reserve is insufficient, in which case the invoice is charged against the allowance for loan losses. This table includes all loans, whether acquired or non-acquired.

	30-59 Days		60-89 Days		> 90 Days		Total
June 30, 2017	Past Due		Past Due		Past Due		Past Due		Current		Total		Non-accrual
Commercial, financial, and agricultural	$	78		-		-		78		224,356		224,434		-
Factored commercial receivables		7,074		2,345		1,172		10,591		103,770		114,361		-
Real estate - mortgage		1,499		95		2,214		3,808		1,278,230		1,282,038		2,776
Real estate - construction		71		-		-		71		235,662		235,733		88
Consumer		102		9		-		111		22,565		22,676		13
Total	$	8,824		2,449		3,386		14,659		1,864,583		1,879,242		2,877

	30-59 Days		60-89 Days		> 90 Days		Total
December 31, 2016	Past Due		Past Due		Past Due		Past Due		Current		Total		Non-accrual
Commercial, financial, and agricultural	$	13		-		-		13		170,972		170,985		-
Factored commercial receivables		5,947		1,383		581		7,911		75,990		83,901		-
Real estate - mortgage		440		392		2,075		2,907		1,053,307		1,056,214		2,718
Real estate - construction		-		-		-		-		155,813		155,813		98
Consumer		68		-		-		68		18,992		19,060		21
Total	$	6,468		1,775		2,656		10,899		1,475,074		1,485,973		2,837

The Company groups 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. Loans are analyzed individually and classified according to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

Other Assets Especially Mentioned (“OAEM”): Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable.

Substandard:Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful: Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as Doubtful will be placed on non-accrual status, analyzed and fully or partially charged off based on a review of the related collateral and other relevant factors.

Loss: Specific weaknesses characterized as Doubtful that are severe enough to be considered uncollectible and of such minimal value that the continued characterization of the loan as an asset is not warranted.

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Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans. As of June 30, 2017 and December 31, 2016, based on the most recent analysis performed, the risk category of loans by class of loans was as presented in the following table. This table includes all loans, whether acquired or non-acquired.

June 30, 2017	Pass		OAEM		Substandard		Doubtful		Total
Commercial, financial, and agricultural	$	221,432		1,857		1,145		-		224,434
Factored commercial receivables		114,361		-		-		-		114,361
Real estate - mortgage		1,264,982		4,438		10,947		1,671		1,282,038
Real estate - construction		234,125		-		1,608		-		235,733
Consumer		22,153		24		486		13		22,676
Total	$	1,857,053		6,319		14,186		1,684		1,879,242

December 31, 2016	Pass		OAEM		Substandard		Doubtful		Total
Commercial, financial, and agricultural	$	168,004		1,422		1,559		-		170,985
Factored commercial receivables		83,901		-		-		-		83,901
Real estate - mortgage		1,047,797		2,163		3,586		2,668		1,056,214
Real estate - construction		155,583		-		132		98		155,813
Consumer		18,499		26		514		21		19,060
Total	$	1,473,784		3,611		5,791		2,787		1,485,973

The June 30, 2017 totals above include the loans acquired in our acquisition of Private Bancshares, Inc. (“Private Bancshares”) using risk ratings assigned during the due diligence process. These initial risk ratings were revised as necessary as of June 30, 2017.

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Note 6 – Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Securities available-for-sale, derivative financial instruments and mortgage loans held-for-sale are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate and repossessed assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded or disclosed at fair value.

Cash and Cash Equivalents

For disclosure purposes, the carrying amount for cash, due from banks, interest-bearing deposits and federal funds sold is a reasonable estimate of fair value.

Investment Securities

Securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurements are based on quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques, such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors, such as credit assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or Nasdaq, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government-sponsored enterprises, municipal bonds and other asset-backed securities.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

The fair value of securities held-to-maturity is estimated using the same measurement techniques as securities available-for-sale.

Other Investments

For disclosure purposes, the carrying amount of other investments approximates their fair value.

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Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired, and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At June 30, 2017 and December 31, 2016, impaired loans were evaluated based on the fair value of the collateral.  Impaired loans for which an allowance is established based on the fair value of collateral, or loans that are charged down according to the fair value of collateral, require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2.  When the fair value is based on an appraised value, the Company records the impaired loan as nonrecurring Level 3.

For disclosure purposes, the fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable-rate loans, the carrying amount is a reasonable estimate of fair value.

Mortgage Loans Held-for-Sale

Mortgage loans held-for-sale are carried at fair value. The fair value of committed mortgage loans held-for-sale is determined by outstanding commitments from investors, and the fair value of uncommitted loans is based on the current delivery prices in the secondary mortgage market.

Bank-Owned Life Insurance

For disclosure purposes, the fair value of the cash surrender value of life insurance policies is equivalent to the carrying value.

Other Real Estate

Other real estate properties are adjusted to fair value upon the transfer of the loans to other real estate.  Subsequently, other real estate assets are carried at the lower of carrying value or fair value.  Fair value is based on independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price, the Company records the other real estate as nonrecurring Level 2.  When fair value is based on an appraised value or management’s estimate of value, the Company records the other real estate or repossessed asset as nonrecurring Level 3.

Deposits

For disclosure purposes, the fair value of demand deposits, NOW and money market accounts and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-rate maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank Advances

For disclosure purposes, the fair value of Federal Home Loan Bank (“FHLB”) advances is based on the quoted value for similar remaining maturities provided by the FHLB.

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Subordinated Debt

For disclosure purposes, the fair value of our fixed-rate subordinated debt is estimated using a discounted cash flow model that utilizes current market interest rates on borrowings with a similar maturity.

Derivative Financial Instruments

Derivative financial instruments are recorded at fair value on a recurring basis.  The value of the Company’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis, on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of the interest rate swaps are determined by using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves derived from observable market interest rate curves).

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company considers the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that a majority of the inputs used to value its derivatives falls within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company or the counterparty. However, as of June 30, 2017 and December 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Commitments to Extend Credit and Standby Letters of Credit

Because commitments to extend credit and standby letters of credit are generally short-term and made using variable rates, the carrying value and estimated fair value associated with these instruments are immaterial.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016.

June 30, 2017	Level 1		Level 2		Level 3		Total
U.S. government agency obligations	$	-		3,364		-		3,364
Mortgage-backed securities		-		35,184		-		35,184
Municipal securities		-		4,016		-		4,016
Other asset-backed securities		-		32,898		-		32,898
Total investment securities available-for-sale	$	-		75,462		-		75,462
Mortgage loans held-for-sale	$	-		19,482		-		19,482
Derivative assets	$	-		1,145		-		1,145
Derivative liabilities	$	-		711		-		711

December 31, 2016	Level 1		Level 2		Level 3		Total
U.S. government agency obligations	$	-		3,617		-		3,617
Mortgage-backed securities		-		39,148		-		39,148
Municipal securities		-		4,523		-		4,523
Other asset-backed securities		-		26,092		-		26,092
Total investment securities available-for-sale		-		73,380		-		73,380
Mortgage loans held-for-sale	$	-		15,373		-		15,373
Derivative assets	$	-		427		-		427
Derivative liabilities	$	-		366		-		366

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2017 and December 31, 2016.

June 30, 2017	Level 1		Level 2		Level 3		Total
Other real estate	$	-		-		-		-
Non-accrual loans		-		-		2,877		2,877

December 31, 2016	Level 1		Level 2		Level 3		Total
Other real estate	$	-		-		2,068		2,068
Non-accrual loans		-		-		2,837		2,837

The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2017 and December 31, 2016 were as follows:

June 30, 2017	Fair Value		Valuation Technique		Unobservable Inputs		Range of Discounts				Weighted Average Discounts
Other real estate	$	-		N/A		N/A			N/A			N/A
Non-accrual loans		2,877		Third party appraisals and discounted cash flows		Collateral discounts and discount rates		0%	-	100%		34%
December 31, 2016
Other real estate	$	2,068		Third party appraisals, sales contracts, broker price opinions		Collateral discounts and estimated costs to sell		11%	-	35%		11%
Non-accrual loans		2,837		Third party appraisals and discounted cash flows		Collateral discounts and discount rates		0%	-	100%		33%

The inputs used to determine the fair value of other real estate include market conditions, estimated holding period, underlying collateral characteristics and discount rates. The inputs used to determine the fair value of impaired loans include market conditions, loan term, estimated holding period, underlying collateral characteristics and discount rates.

For the three months ended June 30, 2017, there were no changes in the methods and significant inputs used to estimate fair value.

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The following table shows the significant unobservable inputs used in the fair value measurement of Level 3 assets.

	Carrying		Estimated Fair Value
June 30, 2017	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	224,760		224,760		-		-
Investment securities held-to-maturity		26,107		-		26,288		-
Investment securities available-for-sale		75,462		-		75,462		-
Other investments		10,600		-		10,600		-
Loans, net		1,865,187		-		1,863,248		2,877
Mortgage loans held-for-sale		19,482		-		19,482		-
Bank-owned life insurance		31,762		-		31,762		-
Derivative assets		1,145		-		1,145		-
Liabilities:
Deposits		2,004,528		-		1,911,369		-
Federal Home Loan Bank advances		7,000		-		7,191		-
Subordinated debt		24,527		-		24,199		-
Derivative liabilities		711		-		711		-

	Carrying		Estimated Fair Value
December 31, 2016	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	217,293		217,293		-		-
Investment securities held-to-maturity		26,329		-		25,894		-
Investment securities available-for-sale		73,380		-		73,380		-
Other investments		7,879		-		7,879		-
Loans, net		1,473,371		-		1,470,491		2,837
Mortgage loans held-for-sale		15,373		-		15,373		-
Bank-owned life insurance		28,034		-		28,034		-
Derivative assets		427		-		427		-
Liabilities:
Deposits		1,667,710		-		1,616,266		-
Federal Home Loan Bank advances		7,000		-		7,247		-
Subordinated debt		24,500		-		22,794		-
Derivative liabilities		366		-		366		-

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include mortgage banking operations, deferred income taxes, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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Note 7 – Segment Reporting

The Company’s three reportable segments represent distinct product lines and are viewed separately for strategic planning purposes and internal reporting. The following table is a reconciliation of the reportable segment revenues, expenses and profit to the Company’s consolidated totals.

	Retail and
	Commercial		Mortgage		Receivables			Elimination
	Banking		Division (1)		Factoring			Entries (2)			Total
For the Three Months Ended June 30, 2017
Interest income	$	23,557		169		3,549			(809	)		26,466
Interest expense		2,422		91		809			(809	)		2,513
Net interest income		21,135		78		2,740			-			23,953
Provision for loan and lease losses		849		-		306			-			1,155
Noninterest income		1,473		3,606		21			-			5,100
Noninterest expense		12,676		3,534		1,527			-			17,737
Net earnings before tax and noncontrolling interest		9,083		150		928			-			10,161
Income tax expense		3,035		57		189			-			3,281
Noncontrolling interest		-		-		(431	)		-			(431	)
Net earnings atributable to National Commerce Corporation	$	6,048		93		308			-			6,449
For the Six Months Ended June 30, 2017
Interest income	$	45,518		392		6,976			(1,521	)		51,365
Interest expense		4,797		185		1,521			(1,521	)		4,982
Net interest income		40,721		207		5,455			-			46,383
Provision for loan and lease losses		924		-		387			-			1,311
Noninterest income		3,399		7,082		59			-			10,540
Noninterest expense		26,011		7,163		3,024			-			36,198
Net earnings before tax and noncontrolling interest		17,185		126		2,103			-			19,414
Income tax expense		5,626		48		448			-			6,122
Noncontrolling interest		-		-		(924	)		-			(924	)
Net earnings attributable to National Commerce Corporation	$	11,559		78		731			-			12,368
Total assets as of June 30, 2017	$	2,366,619		19,482		118,461			(86,510	)		2,418,052
For the Three Months Ended June 30, 2016
Interest income	$	15,732		150		2,970			(470	)		18,382
Interest expense		1,670		60		470			(470	)		1,730
Net interest income		14,062		90		2,500			-			16,652
Provision for loan and lease losses		784		-		117			-			901
Noninterest income		1,312		2,041		4			-			3,357
Noninterest expense		9,245		1,699		1,310			-			12,254
Net earnings before tax and noncontrolling interest		5,345		432		1,077			-			6,854
Income tax expense		1,661		164		247			-			2,072
Noncontrolling interest		-		-		(428	)		-			(428	)
Net earnings atributable to National Commerce Corporation	$	3,684		268		402			-			4,354
For the Six Months Ended June 30, 2016
Interest income	$	31,431		265		5,969			(970	)		36,695
Interest expense		3,276		104		970			(970	)		3,380
Net interest income		28,155		161		4,999			-			33,315
Provision for loan and lease losses		1,829		-		605			-			2,434
Noninterest income		2,944		3,494		44			-			6,482
Noninterest expense		18,657		3,048		2,602			-			24,307
Net earnings before tax and noncontrolling interest		10,613		607		1,836			-			13,056
Income tax expense		3,518		231		406			-			4,155
Noncontrolling interest		-		-		(768	)		-			(768	)
Net earnings attributable to National Commerce Corporation	$	7,095		376		662			-			8,133
Total assets as of June 30, 2016	$	1,686,402		19,468		93,429			(63,517	)		1,735,782

(1) Noninterest income for the mortgage division segment includes intercompany income allocation.

(2) Entry to remove intercompany interest allocated to the receivables factoring segment. For segment reporting purposes, weallocate funding costs to the receivables factoring segment at the federal funds rate plus 2.50%.

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Note 8 –Goodwilland Intangibles

Changes to the carrying amount of goodwill for the six months ended June 30, 2017 are provided in the following table.

Balance, December 31, 2016	$	50,771
Acquisition of Private Bancshares		48,184
Balance, June 30, 2017	$	98,955

The adjustments to goodwill made during the six months ended June 30, 2017 resulted from the acquisition of Private Bancshares, Inc. on January 1, 2017. For additional information on the acquisition, see Note 10 to the unaudited consolidated financial statements below.

A summary of core deposit intangible assets as of June 30, 2017 and December 31, 2016 is as follows.

	June 30, 2017			December 31, 2016
Gross carrying amount	$	6,294			3,315
Less: accumulated amortization		(1,979	)		(1,283	)
Net carrying amount	$	4,315			2,032

Note 9 –Cash and Cash Equivalents

Cash equivalents include amounts due from banks, interest-bearing deposits with the Federal Reserve Bank of Atlanta (“FRB”), the FHLB and correspondent banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The Company is required to maintain average reserve balances with the FRB or in cash. At June 30, 2017 and December 31, 2016, the Company’s reserve requirements were approximately $14,366,000 and $8,139,000, respectively.

Note 10 – Acquisition

Effective January 1, 2017, the Company completed its merger with Private Bancshares. Private Bancshares was the parent company of Private Bank of Buckhead, headquartered in Atlanta, Georgia, and was merged with and into NCC. Simultaneously with the holding company merger, Private Bank of Buckhead merged with and into NBC, but NBC continues to operate the former offices of Private Bank of Buckhead under the trade names “Private Bank of Buckhead,” “Private Bank of Decatur” and “PrivatePlus Mortgage.”

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At the effective time of the merger, each share of common stock of Private Bancshares issued and outstanding was converted into the right to receive either 0.85417 shares of NCC common stock or cash in the amount of $20.50. The Company paid approximately $8,322,000 in cash and issued 1,809,189 shares of NCC common stock for the issued and outstanding shares of Private Bancshares common stock.

The acquisition of Private Bancshares was accounted for using the purchase method of accounting in accordance with Accounting Standards Codification (ASC) 805,Business Combinations. Assets acquired, liabilities assumed, and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

The following table presents the assets acquired and liabilities assumed of Private Bancshares as of January 1, 2017 at their initial fair value estimates:

	As Recorded By		Fair Value				As Recorded
	Private Bancshares		Adjustments				By the Company
Cash and cash equivalents	$	17,793		-				17,793
Investment securities		10,030		(312	)	a		9,718
Other investments		252						252
Mortgage loans held-for-sale		24,628		-				24,628
Loans		266,750		(6,716	)	b		260,034
Allowance for loan losses		3,306		(3,306	)	c		-
Net loans		263,444		(3,410	)			260,034
Premises and equipment, net		558		(95	)	d		463
Core deposit intangible		-		2,979		e		2,979
Bank-owned life insurance		3,294		-				3,294
Other real estate and repossessions		-		-				-
Other assets		2,569		1,576		f		4,145
Total assets	$	322,568		738				323,306
Noninterest-bearing deposits	$	135,822		-				135,822
Interest-bearing deposits		150,260		131		g		150,391
Total deposits		286,082		131				286,213
Repurchase liability		2,201		-				2,201
Other liabilities		3,374		(189	)	h		3,185
Total liabilities		291,657		(58	)			291,599
Net identifiable assets acquired over liabilities assumed		30,911		796				31,707
Goodwill		-		48,184				48,184
Net assets acquired over liabilities assumed	$	30,911		48,980				79,891
Consideration:
Shares of common stock issued				1,809,189
Estimated value per share of the Company's stock			$	37.15
Fair value of Company stock issued				67,211
Cash paid for shares and in lieu of fractional shares				8,322
Value of assumed stock options and restricted stock units converted to common stock				4,358
Fair value of total consideration transferred			$	79,891

Explanation of fair value adjustments:

a. Adjustment reflects fair value adjustments of the available-for-sale portfolio at acquisition date.

b. Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.

c. Adjustment reflects the elimination of Private Bancshares’ allowance for loan losses.

d. Adjustment reflects the write-off of certain fixed assets.

e. Adjustment reflects the recording of core deposit intangible asset.

f. Adjustment to record the deferred tax asset created by purchase adjustments.

g. Adjustment reflects the fair value adjustment to time deposit accounts.

h. Adjustment to reflect unrecorded liabilities.

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The discounts on loans will be accreted to interest income over the estimated average life of the loans using a level yield method. The core deposit intangible asset is being amortized over a seven-year life on an accelerated basis.

The following unaudited supplemental pro forma information is presented to show estimated results assuming Private Bancshares was acquired as of January 1, 2016. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisition as of January 1, 2016 and should not be considered as representative of future operating results. Pro forma information for 2017 is not necessary because Private Bancshares is included in the Company’s results for the entire three- and six-month periods ended June 30, 2017.

	For the Three Months Ended		For the Six Months Ended
Performance Measures (pro forma, unaudited)	June 30, 2016		June 30, 2016
Net interest income	$	20,381	$	40,728
Net earnings	$	5,083	$	9,506
Diluted earnings per common share	$	0.39	$	0.73

Note 11 – Derivative Financial Instruments and Hedging Transactions

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by derivative instruments is interest rate risk. Interest rate swaps are used to manage interest rate risk associated with certain of the Company’s fixed-rate loans. The Company has also entered into interest rate swap contracts with certain of its customers. To hedge the associated risk, the Company entered into reciprocal interest rate swap agreements with a third party. To mitigate the interest rate risk associated with the Company’s mortgage loans that are mandatory delivery, the Company enters into forward commitments to sell mortgage-backed securities.

ASC 815,Derivatives and Hedging, requires companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. As of June 30, 2017 and December 31, 2016, the approximate fair values and notional amounts of the Company’s derivative instruments, as well as their location on the consolidated balance sheet, were as follows.

	Balance Sheet				Notional
June 30, 2017	Location	Fair Value			Amount
Interest rate swaps designated as fair value hedges	Other Liabilities	$	(228	)		15,488
Interest rate swaps with customers	Other Assets	$	483			40,104
Reciprocal interest rate swaps	Other Liabilities	$	(483	)		40,104
Forward commitment to sell mortgage-backed securities	Other Assets	$	14			24,500
Interest rate lock commitments on residential mortgages	Other Assets	$	648			37,872

	Balance Sheet				Notional
December 31, 2016	Location	Fair Value			Amount
Interest rate swaps designated as fair value hedges	Other Liabilities	$	(276	)		15,847
Interest rate swaps with customers	Other Assets	$	91			26,624
Reciprocal interest rate swaps	Other Liabilities	$	(91	)		26,624
Forward commitment to sell mortgage-backed securities	Other Assets	$	90			15,000
Interest rate lock commitments on residential mortgages	Other Assets	$	246			26,463

During the six months ended June 30, 2017, the Company recognized a gain of approximately $46,000 related to the ineffective portion of derivatives designated as fair value hedges. The gains and losses are included in other income in the consolidated statements of earnings.

Note 12 –Common Stock Offering

On June 12, 2017, the Company completed an underwritten public offering of 1,104,000 shares of the Company’s stock at a price to the public of $37.00 per share for gross proceeds of $40.8 million, which included 144,000 shares pursuant to the exercise of the underwriters’ over-allotment option. The net proceeds to the Company after deducting the underwriters’ discount and offering expenses totaled $38.7 million.

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Note 13 – Recently Issued Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04,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 No. 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. The Company expects to adopt the guidance upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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,which shortens the amortization period for certain callable debt securities held at a premium.Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently reviewing its portfolio of debt securities to determine the impact that this ASU will have on its consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto for the year ended December 31, 2016, which are contained inour Annual Report on Form 10-K for the year ended December 31, 2016. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those contained in forward-looking statements as a result of many factors, including those discussed in our 2016 Annual Report on Form 10-K under “Part I, Item 1A. – Risk Factors,” as well as other unknown risks and uncertainties.

All amounts in the tables in this section are in thousands of dollars, except per share data, yields, percentages and rates, or when specifically identified. The words “we,” “us,” “our,” the “Company,” “NCC” and similar terms used in this section refer to National Commerce Corporation and its consolidatedsubsidiaries, unless the context indicates otherwise.

Our Business

NCC is a financial holding company headquartered in Birmingham, Alabama. We engage in the business of banking through our wholly owned banking subsidiary, National Bank of Commerce, which we may refer to as the “Bank” or “NBC.”

Through the Bank, we provide a broad array of financial services to businesses, business owners and professionals through seven full-service banking offices in Alabama, ten full-service banking offices in central and northeast Florida, and two full-service banking offices in the Atlanta, Georgia metro area. We also own a 70% equity interest in CBI Holding Company, LLC (”CBI”), which owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama that provides factoring, invoicing, collection and accounts receivable management services primarily to transportation companies and automotive parts and service providers throughout the United States and parts of Canada.

Overview ofSecond Quarter2017Results

Net income was $6.4 million in the second quarter ended June 30, 2017, compared to $4.4 million in the second quarter of 2016. Several important measures from the 2017 second quarter include:

● Net interest margin (taxable equivalent) of 4.34%, compared to 4.23% for the second quarter of 2016.

● Return on average assets of 1.06%, compared to 1.00% for the second quarter of 2016.

● Second quarter 2017 loan growth (excluding mortgage loans held-for-sale) of $63.9 million, representing a 14.1% annualized growth rate. Excluding factoring receivables, loans grew $48.8 million, representing a 11.4% annualized growth rate.

● Deposits decreased $75.8 million during the second quarter of 2017.

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● $133.1 million in mortgage production, compared to $91.5 million for the second quarter of 2016.

● $251.0 million in purchased volume in the factoring division, compared to $167.1 million for the second quarter of 2016.

● Decrease in non-acquired non-performing assets to $1.2 million, from $2.5 million at March, 31, 2017 and $2.7 million at December 31, 2016.

● Annualized net charge-offs of 0.07% of average loans, compared to 0.05% for the second quarter of 2016 and net recoveries of 0.07% for the first quarter of 2017.

● During the second quarter of 2017, we completed an underwritten public offering of 1,104,000 shares of the Company’s common stock at $37.00 per share. The net proceeds to the Company after deducting the underwriters’ discount and offering expenses totaled $38.7 million.

● Ending book value per share of $25.82.

Acquisition

On January 1, 2017, the Company closed the previously announced merger of Private Bancshares, Inc. (“Private Bancshares”), the parent company of Private Bank of Buckhead (“PBB”), headquartered in Atlanta, Georgia, with and into NCC. Simultaneously with the holding company merger, PBB merged with and into NBC, but the former offices of PBB continue to operate under the trade names “Private Bank of Buckhead,” “Private Bank of Decatur” and “PrivatePlus Mortgage.”

In connection with the merger, each share of common stock of Private Bancshares issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive either 0.85417 shares of NCC common stock or cash in the amount of $20.50. NCC paid approximately $8,322,000 in cash and issued 1,809,189 shares of common stock in exchange for all of the issued and outstanding shares of Private Bancshares common stock at the effective time of the merger. See Note 10 to the Unaudited Consolidated Financial Statements for more information on the acquisition.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to NCC’s audited consolidated financial statements for the year ended December 31, 2016,which are contained in our Annual Report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or future periods. The use of estimates, assumptions and judgments is necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.

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The following briefly describes the more complex policies involving a significant degree of judgment about valuation and the application of complex accounting standards and interpretations.

Allowance for Loan Losses

We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management. Some of the more critical judgments supporting our allowance for loan losses include judgments about the creditworthiness of borrowers and the estimated value of underlying collateral, assumptions about cash flow, determinations of loss factors for estimating credit losses, and judgments regarding the impact of current events, conditions and other factors affecting the level of inherent losses. Under different conditions or using different assumptions, the actual or estimated credit losses that we ultimately realize may be different from our estimates. In determining the allowance, we estimate losses on individual impaired loans, or groups of loans that are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional, national and global economic factors on the quality of the loan portfolio. Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see Note 1 to NCC’s consolidated financial statements for the year ended December 31, 2016, which are contained in our Annual Report on Form 10-K.

Investment Securities Impairment

We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a security with respect to which there is an unrealized loss is impaired on an other-than-temporary basis. We consider many factors in this assessment, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and, for debt securities, external credit ratings and recent downgrades. Securities with respect to which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value. The credit portion of the impairment, if any, is recognized as a realized loss in current earnings.

Income Taxes

Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes an asset or liability representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events recognized in the financial statements. A valuation allowance may be established to the extent necessary to reduce the deferred tax asset to a level at which it is “more likely than not” that the tax asset or benefit will be realized. The ultimate realization of tax benefits depends on many factors, including the sufficiency of taxable income, the availability of tax loss carrybacks or credits, the reversal of taxable temporary differences and tax planning strategies within the reversal period and the state of applicable tax laws with respect to the realization of recorded tax benefits.

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Business Combinations

Assets purchased and liabilities assumed in a business combination are recorded at their respective fair values. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of the purchased assets or assumed liabilities. On the date of acquisition, when the loans exhibit evidence of credit deterioration since origination and it is probable that we will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as non-accretable difference. We must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows will generally result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield, which will have a positive impact on interest income. Purchased loans without evidence of credit deterioration are recorded in the same manner.

Mortgage Loans Held-for-Sale

The Company records its mortgage loans held-for-sale at fair value. The fair value of committed residential loans held-for-sale is determined by outstanding commitments from investors, and the fair value of uncommitted loans is based on the current delivery prices in the secondary mortgage market. To mitigate the interest rate risk associated with mandatory delivery, the Company enters into forward commitments to sell mortgage-backed securities and records the change in fair value of these derivatives through income.

Comparison of Results of Operations for theThreeand Six MonthsEndedJune 30, 2017 andJune 30,2016

The following is a narrative discussion and analysis of significant changes in our results of operations for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016.

Net Income

During the three months ended June 30, 2017, our net income was $6.4 million, compared to $4.4 million for the three months ended June 30, 2016, an increase of 48.1%. During the six months ended June 30, 2017, our net income was $12.4 million, compared to $8.1 million for the six months ended June 30, 2016, an increase of 52.1%. Our results of operations for the three and six months ended June 30, 2017 included the results of Private Bancshares. We acquired Private Bancshares on January 1, 2017, and, therefore, its results are not included in our results of operations for three and six months ended June 30, 2016.

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The primary reason for the increase in net income for the three and six months ended June 30, 2017 compared to the same period of 2016 was an increase in net interest income. During the three months ended June 30, 2017, net interest income was $24.0 million, an increase of $7.3 million, or 43.8%, compared to the three months ended June 30, 2016. During the six months ended June 30, 2017, net interest income was $46.4 million, an increase of $13.1 million, or 39.2%, compared to the six months ended June 30, 2016. This increase was a result of higher levels of loan volume and other earning assets from organic growth and the acquisition of Private Bancshares. Total noninterest income during the three months ended June 30, 2017 was $5.1 million, an increase of $1.7 million compared to the three months ended June 30, 2016. Total noninterest income during the six months ended June 30, 2017 was $10.5 million, an increase of $4.1 million, or 62.6%, compared to the six months ended June 30, 2016. Each category of noninterest income increased during the three and six months ended June 30, 2017 compared to the same periods of 2016. The largest increase in noninterest income during the three and six months ended June 30, 2017 was in revenue from the mortgage division. During the three and six months ended June 30, 2017, mortgage origination and fee income increased $1.5 million and $3.3 million, respectively, compared to the same periods of 2016.

The increases in net interest income and noninterest income were partially offset by an increase in other noninterest expense during the three and six months ended June 30, 2017. Total noninterest expense during the three months ended June 30, 2017 was $17.7 million, an increase of $5.5 million, or 44.7%, compared to the three months ended June 30, 2016. Total noninterest expense during the six months ended June 30, 2017 was $36.2 million, an increase of $11.9 million, or 48.9%, compared to the six months ended June 30, 2016. This increase during each period of 2017 was primarily a result of the addition of the operating expenses of Private Bancshares and costs associated with the overall growth of the Company. Private Bancshares was not included in our results of operations for the three and six months ended June 30, 2016.

A majority of the changes in our net interest income, noninterest income and noninterest expense for the three and six months ended June 30, 2017, compared to the same periods of 2016, resulted from the additional revenues and expenses of Private Bancshares, which we acquired on January 1, 2017. During the three months ended June 30, 2017, net interest income, noninterest income and noninterest expense attributable to the acquired operations of Private Bancshares were approximately $4.7 million, $711 thousand and $3.3 million, respectively. During the six months ended June 30, 2017, net interest income, noninterest income and noninterest expense attributable to the acquired operations of Private Bancshares were approximately $8.9 million, $2.2 million and $7.4 million, respectively.

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Net Interest Income and Net Interest Margin Analysis

Comparison of net interest income for the three months ended June 30, 2017 and 2016

The largest component of our net income is net interest income – the difference between the income earned on interest-earning assets and the interest paid on deposits and borrowed funds used to support our assets. Net interest income divided by average earning assets represents our net interest margin. The major factors that affect net interest income and net interest margin are changes in volume, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our net interest margin can also be affected by economic conditions, the competitive environment, loan demand and deposit flow. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin as our primary source of earnings.

The following table shows, for the periods indicated, the average balances of each principal category of our assets, liabilities and shareholders’ equity and the average yields on assets and average costs of liabilities. Such yields and costs are calculated by dividing annualized income or expense by the average daily balances of the associated assets or liabilities.

AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
	For the Three Months Ended
(Dollars in thousands)	June 30, 2017							June 30, 2016
Assets	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Loans (1)	$	1,849,258	$	24,823		5.38	%	$	1,391,789	$	17,523		5.06	%
Mortgage loans held-for-sale		18,321		170		3.72			17,288		151		3.51
Securities:
Taxable securities		81,645		606		2.98			78,907		383		1.95
Tax-exempt securities (1)		25,573		313		4.91			26,036		319		4.93
Cash balances in other banks		249,361		676		1.09			80,140		129		0.65
Total interest-earning assets		2,224,158	$	26,588		4.79			1,594,160	$	18,505		4.67
Noninterest-earning assets		218,088							148,959
Total assets	$	2,442,246						$	1,743,119
Liabilities and shareholders' equity
Interest-bearing transaction accounts	$	341,238	$	243		0.29	%	$	210,776	$	124		0.24	%
Savings and money market deposits		821,130		1,138		0.56			603,173		698		0.47
Time deposits		290,097		673		0.93			288,350		654		0.91
Federal Home Loan Bank advances and other borrowed money		7,000		70		4.01			7,000		71		4.08
Subordinated debt		24,520		389		6.36			11,605		183		6.34
Total interest-bearing liabilities		1,483,985	$	2,513		0.68			1,120,904	$	1,730		0.62
Noninterest-bearing deposits		612,910							388,363
Total funding sources		2,096,895							1,509,267
Noninterest-bearing liabilities		16,465							10,495
Shareholders' equity		328,886							223,357
Total liabilities and shareholders equity	$	2,442,246						$	1,743,119
Net interest rate spread						4.11	%						4.05	%
Net interest income/margin (taxable equivalent)				24,075		4.34	%				16,775		4.23	%
Tax equivalent adjustment				122							123
Net interest income/margin			$	23,953		4.32	%			$	16,652		4.20	%

(1) Yields on tax-exempt loans and securities have been computed on a tax-equivalent basis using an income tax rate of 37%.

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Net interest income increased $7.3 million, or 43.8%, to $24.0 million for the three months ended June 30, 2017, compared to $16.7 million for the same period of 2016. The increase was due to an increase in interest income of $8.1 million, resulting from higher levels of loan volume from organic growth and the acquisition of Private Bancshares. This increase in interest income was partially offset by a $783 thousand increase in interest expense. The increase in interest income was primarily due to a 32.9% increase in average loans outstanding for the three months ended June 30, 2017, compared to the three months ended June 30, 2016. The resulting net interest margin for the three months ended June 30, 2017 rose to 4.32%, from 4.20% during the three months ended June 30, 2016.

Interest-earning assets averaged $2.2 billion for the three months ended June 30, 2017, compared to $1.6 billion for the three months ended June 30, 2016, an increase of $630.0 million, or 39.5%. Additional information on growth in our loan portfolio for these periods is presented below. The yield on average interest-earning assets increased twelve basis points to 4.79% for the three months ended June 30, 2017, compared to 4.67% for the three months ended June 30, 2016. During the three months ended June 30, 2017, the loan yield was 5.38%, compared to 5.06% during the three months ended June 30, 2016. The increase in loan yield was attributable to increased accretion on our acquired loans due to early pay-offs and increased cash flow projections, higher rates on the Private Bancshares loans than on the rest of our existing portfolio and increased rates on floating rate loans resulting from increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR rates. Private Bancshares contributed average loan balances of $279.8 million during the three months ended June 30, 2017.

Interest-bearing liabilities averaged $1.5 billion for the three months ended June 30, 2017, compared to $1.1 billion for the three months ended June 30, 2016, an increase of $363.1 million, or 32.4%. The rate on total interest-bearing liabilities was 68 basis points for the three months ended June 30, 2017, compared to 62 basis points for the three months ended June 30, 2016. The increase in the rate paid on interest-bearing liabilities is primarily due to the effect of recent increases in short-term rate indices, such as the prime rate, and the fact that rates paid on Private Bancshares’ interest-bearing deposits were generally higher than the rates paid on our other deposits. The increase in interest-bearing and noninterest-bearing average deposits was due to organic deposit production and the inclusion of Private Bancshares’ deposits in our results for the three months ended June 30, 2017.

Average noninterest-bearing deposits increased to $612.9 million during the three months ended June 30, 2017, compared to $388.4 million during the three months ended June 30, 2016. This increase in average noninterest-bearing deposits, together with the increased volume of interest-earning assets and higher yields on interest-earning assets, led to the higher net interest margin for the three months ended June 30, 2017.

The following table reflects, for the periods indicated, the changes in our net interest income due to changes in the volume of interest-earning assets and interest-bearing liabilities and the associated rates paid or earned on these assets and liabilities.

ANALYSIS OF CHANGES IN NET INTEREST INCOME
	For the Three Months Ended
	June 30,
(Dollars in thousands)				2017 vs. 2016
	Variance due to
Interest-earning assets	Volume			Yield/Rate			Total
Loans	$	6,122		$	1,178		$	7,300
Mortgage loans held-for-sale		10			9			19
Securities:
Taxable securities		13			210			223
Tax-exempt securities		(5	)		(1	)		(6	)
Cash balances in other banks		414			133			547
Total interest-earning assets	$	6,554		$	1,529		$	8,083
Interest-bearing liabilities
Interest-bearing transaction accounts	$	89		$	30		$	119
Savings and money market deposits		286			154			440
Time deposits		5			14			19
Federal Home Loan Bank advances and other borrowed money		-			(1	)		(1	)
Subordinated debt		205			1			206
Total interest-bearing liabilities	$	585		$	198		$	783
Net interest income
Net interest income (taxable equivalent)		5,969			1,331			7,300
Taxable equivalent adjustment		-			(1	)		(1	)
Net interest income	$	5,969		$	1,332		$	7,301

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Comparison of net interest income for the six months ended June 30, 2017 and 2016

The following table shows, for the periods indicated, the average balances of each principal category of our assets, liabilities and shareholders’ equity and the average yields on assets and average costs of liabilities. Such yields and costs are calculated by dividing annualized income or expense by the average daily balances of the associated assets or liabilities.

AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
	For the Six Months Ended
(Dollars in thousands)	June 30, 2017							June 30, 2016
Assets	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Loans (1)	$	1,821,404	$	48,201		5.34	%	$	1,372,263	$	34,896		5.11	%
Mortgage loans held-for-sale		20,055		392		3.94			13,896		266		3.85
Securities:
Taxable securities		84,836		1,177		2.80			70,337		795		2.27
Tax-exempt securities (1)		25,698		630		4.94			26,039		637		4.92
Cash balances in other banks		253,991		1,211		0.96			115,729		347		0.60
Total interest-earning assets		2,205,984	$	51,611		4.72			1,598,264	$	36,941		4.65
Noninterest-earning assets		219,041							152,432
Total assets	$	2,425,025						$	1,750,696
Liabilities and shareholders' equity
Interest-bearing transaction accounts	$	336,824	$	460		0.28	%	$	207,558	$	247		0.24	%
Savings and money market deposits		812,879		2,234		0.55			611,801		1,460		0.48
Time deposits		298,205		1,370		0.93			297,228		1,338		0.91
Federal Home Loan Bank advances and other borrowed money		8,002		141		3.55			8,980		152		3.40
Subordinated debt		24,514		777		6.39			5,803		183		6.34
Total interest-bearing liabilities		1,480,424	$	4,982		0.68			1,131,370	$	3,380		0.60
Noninterest-bearing deposits		606,937							387,519
Total funding sources		2,087,361							1,518,889
Noninterest-bearing liabilities		16,692							10,763
Shareholders' equity		320,972							221,044
	$	2,425,025						$	1,750,696
Net interest rate spread						4.04	%						4.05	%
Net interest income/margin (taxable equivalent)				46,629		4.26	%				33,561		4.22	%
Tax equivalent adjustment				246							246
Net interest income/margin			$	46,383		4.24	%			$	33,315		4.19	%

(1) Yields on tax-exempt loans and securities have been computed on a tax-equivalent basis using an income tax rate of 37%.

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Net interest income increased $13.1 million, or 39.2%, to $46.4 million for the six months ended June 30, 2017, compared to $33.3 million for the same period of 2016. The increase was due to an increase in interest income of $14.7 million, resulting from higher levels of loan volume from organic growth and the acquisition of Private Bancshares. This increase in interest income was partially offset by a $1.6 million increase in interest expense. The increase in interest income was primarily due to a 32.7% increase in average loans outstanding for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The resulting net interest margin for the six months ended June 30, 2017 increased to 4.24%, from 4.19% during the six months ended June 30, 2016.

Interest-earning assets averaged $2.2 billion for the six months ended June 30, 2017, compared to $1.6 billion for the six months ended June 30, 2016, an increase of $607.7 million, or 38.0%. Additional information on growth in our loan portfolio for these periods is presented below. The yield on average interest-earning assets increased by seven basis points to 4.72% for the six months ended June 30, 2017, compared to 4.65% for the six months ended June 30, 2016. During the six months ended June 30, 2017, the loan yield was 5.34%, compared to 5.11% during the six months ended June 30, 2016. The recent increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR, increased accretion on our acquired portfolios due to early pay-offs and increased cash flow projections, and higher rates on loans acquired from Private Bancshares led to higher yields on our loan portfolio during the six months ended June 30, 2017 compared to the six months ended June 30, 2016. Private Bancshares contributed average loan balances of $274.9 million during the six months ended June 30, 2017.

Interest-bearing liabilities averaged $1.5 billion for the six months ended June 30, 2017, compared to $1.1 billion for the six months ended June 30, 2016, an increase of $349.1 million, or 30.9%. The average rate on total interest-bearing liabilities was 68 basis points for the six months ended June 30, 2017, compared to 60 basis points for the six months ended June 30, 2016. The increase in average deposits was due to organic deposit production and the inclusion of Private Bancshares’ deposits in our results for the six months ended June 30, 2017.

Average noninterest-bearing deposits increased to $606.9 million during the six months ended June 30, 2017, compared to $387.5 million during the six months ended June 30, 2016. This increase in average noninterest-bearing deposits, together with the increased volume of interest-earning assets and slightly higher yields on interest-earning assets, led to the higher net interest margin for the six months ended June 30, 2017.

The following table reflects, for the periods indicated, the changes in our net interest income due to changes in the volume of interest-earning assets and interest-bearing liabilities and the associated rates paid or earned on these assets and liabilities.

ANALYSIS OF CHANGES IN NET INTEREST INCOME
	For the Six Months Ended
	June 30,
(Dollars in thousands)				2017 vs. 2016
	Variance due to
Interest-earning assets	Volume			Yield/Rate		Total
Loans	$	11,742			1,563		13,305
Mortgage loans held-for-sale		120			6		126
Securities:
Taxable securities		180			202		382
Tax-exempt securities		(10	)		3		(7	)
Cash balances in other banks		577			287		864
Total interest-earning assets	$	12,609		$	2,061	$	14,670
Interest-bearing liabilities
Interest-bearing transaction accounts	$	172			41		213
Savings and money market deposits		527			247		774
Time deposits		4			28		32
Federal Home Loan Bank advances and other borrowed money		(18	)		7		(11	)
Subordinated debt		593			1		594
Total interest-bearing liabilities	$	1,278		$	324	$	1,602
Net interest income
Net interest income (taxable equivalent)		11,331			1,737		13,068
Taxable equivalent adjustment		-			-		-
Net interest income	$	11,331			1,737		13,068

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Provision for Loan Losses

During the three and six months ended June 30, 2017, we recorded a provision for loan losses of $1.1 million and $1.3 million, respectively. During the three and six months ended June 30, 2016, we recorded a provision for loan losses of $901 thousand and $2.4 million, respectively. The additional provision for loan losses during the three months ended June 30, 2017 compared to the three months ended March 31, 2017 was a result of strong loan growth and the maturity of $17.9 million of acquired loans that were renewed and underwritten by the Company and are no longer classified as acquired. The underwriting on these loans was updated, and these loans are no longer considered acquired loans. Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses, which is a charge to earnings, and is decreased by charge-offs and increased by loan recoveries. In determining the proper level of the allowance for loan losses, we consider our historical loan loss experience, the general economic environment, our overall portfolio composition and other relevant information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated for impairment and an impairment is deemed necessary, the impaired portion of the loan amount is charged off. As of June 30, 2017, $261 thousand of our recorded allowance was related to impaired loans.

Noninterest Income

In addition to net interest margin, we generate other types of recurring noninterest income from our operations. Our banking operations generate revenue from service charges and fees on deposit accounts. Our mortgage division generates revenue from originating and selling mortgages, and we have a revenue-sharing relationship with a registered broker-dealer. In addition to these types of recurring noninterest income, NBC owns life insurance on several key employees and records income on the increase in the cash surrender value of these policies. NBC also earns revenue as a sponsor bank for a provider of electronic transaction processing services for retail merchants and the consumer finance industry. This sponsorship into the VISA and MasterCard networks allows the processor to accept debit and credit card transactions, and we earn a fee on each such transaction.

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

NONINTEREST INCOME
	For the Three Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(Dollars in thousands)	2017		2016		2017		2016
Service charges and fees on deposit accounts	$	640	$	505	$	1,307	$	985
Mortgage origination and fee income		3,154		1,627		6,299		3,019
Merchant sponsorship revenue		602		491		1,346		1,013
Income from bank-owned life insurance		219		204		435		408
Wealth management fees		14		11		24		24
Gain on sale of other real estate		105		119		104		275
Gain on sale of investments		28		-		28		-
Other noninterest income		338		400		997		758
Total noninterest income	$	5,100	$	3,357	$	10,540	$	6,482

Noninterest income for the three months ended June 30, 2017 and 2016 was $5.1 million and $3.4 million, respectively. Noninterest income for the six months ended June 30, 2017 and 2016 was $10.5 million and $6.5 million, respectively. The inclusion of Private Bancshares in our results of operations accounted for approximately $711 thousand of the $1.7 million increase in noninterest income recorded during the three months ended June 30, 2017 and approximately $2.2 million of the $4.1 million increase recorded during the six months ended June 30, 2017.

All categories of noninterest income (except for wealth management fees, which were relatively flat comparing the respective six-month periods) experienced an increase during the three and six months ended June 30, 2017 compared to same periods of 2016. The most significant increase in noninterest income for both periods of 2017 was from the mortgage division. Mortgage origination and fee income increased $1.5 million to $3.2 million during the three months ended June 30, 2017, compared to $1.6 million during the three months ended June 30, 2016. Mortgage origination and fee income increased $3.3 million to $6.3 million during the six months ended June 30, 2017, compared to $3.0 million during the six months ended June 30, 2016. A large portion of this increase was due to the acquisition of Private Bancshares, which had a large retail mortgage operation. Increased production led to higher mortgage division income. During the three months ended June 30, 2017, total production was $133.1 million, compared to $91.5 million during the three months ended June 30, 2016. During the six months ended June 30, 2017, total production was $264.0 million, compared to $155.3 million during the six months ended June 30, 2016.

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Service charges and fees on deposit accounts increased by $135 thousand to $640 thousand for the three months ended June 30, 2017, and increased $322 thousand to $1.3 million for the six months ended June 30, 2017, compared to the same periods in 2016. The addition of Private Bancshares contributed $37 thousand and $144 thousand of the increases for the three- and six-month periods ended June 30, 2017, respectively. The remaining portion of this increase was a result of an increase in the number of deposit accounts as we continue to open new accounts and gain market share in our markets.

Merchant sponsorship revenue increased by $111 thousand to $602 thousand for the three months ended June 30, 2017, and increased $333 thousand to $1.3 million for the six months ended June 30, 2017, compared to the same periods in 2016. The increase was due to growth in the volume of transactions we processed.

During the three and six months ended June 30, 2017, we recorded net gains on the sale of other real estate totaling $105 thousand and $104 thousand, respectively. During the three and six months ended June 30, 2016, we recorded gains on the sale of other real estate totaling $119 thousand and $275 thousand, respectively.

Noninterest expense

The increase in our total noninterest expense during the three and six months ended June 30, 2017 reflects the continued growth of the Company (organic growth and growth through acquisition), as well as the expansion of our operational framework, employee base and facilities infrastructure as we build the foundation to support our growth strategies.

The following table presents the primary components of noninterest expense for the periods indicated.

NONINTEREST EXPENSE
	For the Three Months Ended				For the Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(Dollars in thousands)	2017		2016		2017		2016
Salaries and employee benefits	$	9,663	$	6,907	$	19,736	$	13,852
Commission-based compensation		1,684		1,036		3,407		1,911
Occupancy and equipment expense		1,479		1,131		2,952		2,266
Data processing expenses		1,007		618		1,955		1,285
Advertising and marketing expenses		327		191		795		351
Legal fees		193		179		426		301
FDIC insurance assessments		408		257		666		520
Property and casualty insurance premiums		209		166		352		389
Accounting and audit expenses		294		249		612		499
Consulting and other professional expenses		517		184		1,014		427
Telecommunications expenses		169		140		355		299
Other real estate owned, repossessed asset and other collection expenses		49		89		321		148
Core deposit intangible amortization		348		192		696		383
Other noninterest expense		1,390		915		2,911		1,676
Total noninterest expense	$	17,737	$	12,254	$	36,198	$	24,307

Noninterest expense for the three months ended June 30, 2017 and 2016 was $17.7 million and $12.3 million, respectively. Noninterest expense for the six months ended June 30, 2017 and 2016 was $36.2 million and $24.3 million, respectively. The inclusion of Private Bancshares in our results of operations accounted for approximately $3.3 million of the $5.5 million increase in noninterest expense recorded during the three months ended June 30, 2017. The inclusion of Private Bancshares accounted for approximately $7.4 million of the $11.9 million increase in noninterest expense recorded during the six months ended June 30, 2017.

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Two of the largest components of noninterest expense are related to employee costs shown in the table above as salaries and employee benefits and commission-based compensation. Salaries continue to increase as our company grows and we expand our presence in the markets we serve. Higher incentive compensation accruals during the three and six months ended June 30, 2017 and a larger workforce have contributed to the increase in salaries and employee benefits. Commission-based compensation expense is directly related to mortgage loan origination activity and certain production activity at Corporate Billing. The higher levels of revenue for the mortgage division, including the addition of Private Bancshares, contributed to the increased commission-based compensation during each period of 2017, compared to the same periods of 2016.    Additionally, salaries and benefits expense and commission-based compensation expense for Private Bancshares’ employees contributed approximately $2.2 million of the $3.4 million increase in salaries and employee benefits expense and commission-based compensation expense recorded during the three months ended June 30, 2017 and contributed approximately $4.9 million of the $7.4 million increase in salaries and employee benefits and commission-based compensation expense recorded during the six months ended June 30, 2017 compared to the same periods in 2016.

Most categories of noninterest expense increased during the three and six months ended June 30, 2017. This was largely a result of the additional expenses associated with the operations of Private Bancshares. Our other noninterest expenses continue to increase as the size and complexity of our company grows.

Income Tax Provision

Income tax expense of $3.3 million was recognized during the three months ended June 30, 2017, compared to income tax expense of $2.1 million during the three months ended June 30, 2016. Income tax expense of $6.1 million was recognized during the six months ended June 30, 2017, compared to income tax expense of $4.2 million during the six months ended June 30, 2016. The increase in income tax expense during the each of the 2017 periods was due to an increase in pre-tax income. Our effective tax rate for the three months ended June 30, 2017 was 32.3% (33.7% including the minority interest in CBI), compared to 30.2% (32.2% including the minority interest in CBI) during the three months ended June 30, 2016. Our effective tax rate for the six months ended June 30, 2017 was 31.5% (33.1% including the minority interest in CBI), compared to 31.8% (33.8% including the minority interest in CBI) during the six months ended June 30, 2016. During the six months ended June 30, 2017, the Company adopted ASU No. 2016-09Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting. Upon adoption, the excess tax benefit from issuing share-based payments to employees is recorded as a reduction of tax expense. During the first six months of 2017, we recorded a tax benefit of $527 thousand, lowering our effective tax rate for the period. The effective tax rate is also affected by items of income and expense that are not subject to federal and state taxation.

Comparison of Balance Sheets atJune 30, 2017 and December 31, 2016

Overview

Our total assets increased $467.3 million, or 24.0%, from $2.0 billion at December 31, 2016 to $2.4 billion at June 30, 2017. Cash and cash equivalents increased by $7.5 million during the first six months of 2017. The reduction in cash and cash equivalents during the second quarter of 2017 was due to a reduction in deposits and an increase in loans. Loans increased by $391.8 million, or 26.6%, during the first six months of 2017. The Private Bancshares acquisition added total assets and loans of $323.2 million and $260.0 million, respectively.

During the first six months of 2017, deposits increased $336.8 million and totaled $2.0 billion at June 30, 2017. The Private Bancshares acquisition added $286.2 million in deposits. The remaining increase was a result of organic deposit growth in our existing markets. As expected, a portion of our first quarter of 2017 growth that was seasonal in nature exited the bank during the second quarter of 2017. We also experienced an outflow of certain higher-priced deposits from a few large depositors seeking higher rates who moved to other financial institutions willing to pay a higher rate. Deposit production is one of our primary focuses, as deposits serve as a low-cost funding source.

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Investment Securities

We use our securities portfolio primarily to enhance our overall yield on interest-earning assets and as a source of liquidity, as a tool to manage our balance sheet sensitivity and regulatory capital ratios, and as a base from which to pledge assets for public deposits. When our liquidity position exceeds current needs and our expected loan demand, other investments are considered as a secondary earnings alternative. As investments mature, they are used to meet current cash needs, or they are reinvested to maintain our desired liquidity position. We have designated the majority of our securities as available-for-sale to provide flexibility in case an immediate need for liquidity arises, and we believe that the composition of the portfolio offers needed flexibility in managing our liquidity position and interest rate sensitivity without adversely impacting our regulatory capital levels. Securities available-for-sale are reported at fair value, with unrealized gains or losses reported as a separate component of other comprehensive income, net of related deferred taxes. Purchase premiums and discounts are recognized in income using the interest method over the terms of the securities. Securities classified as held-to-maturity are carried at amortized cost on our balance sheet.

During the six months ended June 30, 2017, we elected to use a portion of our balance sheet liquidity to invest $7.0 million in a United States Treasury security for pledging purposes and $6.8 million (net) in other asset-backed securities. We may invest excess liquidity in securities when management determines that the yield, liquidity and interest rate risk are appropriate.

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at June 30, 2017 and December 31, 2016.

INVESTMENT SECURITIES AVAILABLE-FOR-SALE
	As of
	June 30,				December 31,
(Dollars in thousands)	2017				2016
	Cost		Market		Cost		Market
U.S. government agency obligations (excluding mortgage-backed securities)	$	3,368		3,364		3,653		3,617
Securities issued by states and political subdivisions		3,859		4,016		4,406		4,523
Residential mortgage pass-through securities		34,800		35,184		38,946		39,148
Other asset-backed securities		32,746		32,898		25,991		26,092
Total investment securities available-for-sale	$	74,773		75,462		72,996		73,380

INVESTMENT SECURITIES HELD-TO-MATURITY
	As of
	June 30,				December 31,
(Dollars in thousands)	2017				2016
	Cost		Market		Cost		Market
Securities issued by states and political subdivisions	$	21,281		21,463		21,308		20,900
Residential mortgage pass-through securities		4,576		4,575		5,021		4,994
Other debt securities		250		250		-		-
Total investment securities held-to-maturity	$	26,107		26,288		26,329		25,894

We invest primarily in mortgage-backed securities, municipal securities and obligations of government-sponsored entities and agencies of the United States, though we may in some situations also invest in direct obligations of the United States or obligations guaranteed as to the principal and interest by the United States. All of our mortgage-backed securities are residential securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). During 2016, we began investing in other asset-backed securities. These securities are collateralized by commercial loans, and we have invested in tranches rated AAA, AA and A by Standard & Poor’s and/or Moody’s.

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Loans

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that management attempts to control and counterbalance. Total loans averaged $1.8 billion during the six months ended June 30, 2017, or 82.6% of average earning assets, compared to $1.4 billion, or 85.9% of average earning assets, for the six months ended June 30, 2016. At June 30, 2017, total loans, net of unearned income, were $1.9 billion, compared to $1.5 billion at December 31, 2016, an increase of $393.1 million, or 26.5%. Excluding the loans acquired in the Private Bancshares acquisition, loans increased by $133.7 million, or 9.0%.

The organic, or non-acquired, growth in the Bank’s loan portfolio is attributable to the Bank’s ability to attract new customers from other financial institutions. We have also been successful in building banking relationships with new customers in all of the markets that we serve. We have hired several new bankers in our markets, and these employees have been successful in transitioning their former clients and new clients to the Bank. Our bankers are expected to be involved in their communities and to maintain business development efforts to develop relationships with clients, and our philosophy is to be responsive to customer needs by providing decisions in a timely manner. In addition to our business development efforts, many of the markets in which we operate have shown signs of economic recovery over the past few years, which has increased demand for the services that we provide.

The table below provides a summary of the loan portfolio composition as of the dates indicated.

COMPOSITION OF LOAN PORTFOLIO
	As of
	June 30,						December 31,
(Dollars in thousands)	2017						2016
	Amount			Percent of Total			Amount			Percent of Total
Construction, land development, and other land loans	$	235,733			12.54	%	$	155,813			10.49	%
Secured by farmland		16,446			0.88			15,036			1.01
Secured by 1-4 family residential properties		464,878			24.74			387,342			26.07
Secured by multifamily (5 or more) residential properties		48,588			2.59			47,060			3.17
Secured by nonfarm nonresidential properties		752,126			40.02			606,776			40.83
Loans secured by real estate		1,517,771			80.77			1,212,027			81.57
Commercial and industrial loans		204,441			10.88			150,268			10.11
Factored commercial receivables		114,361			6.09			83,901			5.65
Consumer loans		22,676			1.21			19,060			1.28
Other loans		19,993			1.05			20,717			1.39
Total gross loans		1,879,242			100.00	%		1,485,973			100.00	%
Unearned income		(648	)					(489	)
Total loans, net of unearned income		1,878,594						1,485,484
Allowance for loan losses		(13,407	)					(12,113	)
Total net loans	$	1,865,187					$	1,473,371

In the context of this discussion, a "real estate mortgage loan" is defined as any loan secured by real estate, other than a loan for construction purposes, regardless of the purpose of the loan. It is common practice for financial institutions in our market areas, and for us in particular, to obtain a security interest in or lien on real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. This practice tends to increase the magnitude of the real estate loan portfolio. In many cases, we prefer real estate collateral to many other potential collateral sources, such as accounts receivable, inventory and equipment.

The principal component of our loan portfolio is loans secured by real estate. At June 30, 2017, this category totaled $1.5 billion and represented 80.8% of our total loan portfolio, compared to $1.2 billion, or 81.6% of the total loan portfolio, at December 31, 2016. Each category of real estate mortgage loans increased during the first six months of 2017.

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Loans secured by nonfarm nonresidential properties (“commercial mortgage loans”) increased by $145.4 million, or 24.0%, to $752.1 million at June 30, 2017, compared to $606.8 million at December 31, 2016. Excluding the acquired Private Bancshares loans, commercial mortgage loans increased by $46.6 million, or 7.7%, during the six months ended June 30, 2017. Commercial mortgage loans comprise the single largest category of our loans, and at June 30, 2017, accounted for 40.0% of our entire loan portfolio. Our management team has a great deal of experience and expertise in commercial mortgages, and this loan type has traditionally comprised a large portion of our loan portfolio. Of the $752.1 million in total commercial mortgage loans at June 30, 2017, approximately $308.9 million were loans secured by owner-occupied properties.

Residential mortgage loans increased by $77.5 million, or 20.0%, to $464.9 million at June 30, 2017, compared to $387.3 million at December 31, 2016. Excluding the acquired Private Bancshares loans, residential mortgage loans increased by $29.9 million, or 7.7%, during the six months ended June 30, 2017. At June 30, 2017, residential mortgages accounted for 24.7% of our entire loan portfolio.

Real estate construction, land development and other land loans totaled $235.7 million at June 30, 2017, an increase of 51.3% from $155.8 million at December 31, 2016. Excluding the acquired Private Bancshares loans, real estate construction, land development and other land loans increased by $12.6 million, or 8.1%, during the six months ended June 30, 2017. At June 30, 2017, this loan type accounted for 12.5% of our total loan portfolio.

Commercial and industrial loans totaled $204.4 million at June 30, 2017, an increase of 36.1% from $150.3 million at December 31, 2016. Excluding the acquired Private Bancshares loans, commercial and industrial loans increased by $19.6 million, or 13.1%, during the six months ended June 30, 2017. At June 30, 2017, this loan type accounted for 10.9% of our total loan portfolio.

Factored commercial receivables at Corporate Billing totaled $114.4 million at June 30, 2017, compared to $83.9 million at December 31, 2016. This balance fluctuates based on several variables, such as when receivables are purchased and when and how quickly payments are received.

Allowance for Loan Losses, Provision for Loan Losses and Asset Quality

Allowance forLoanLosses andProvision for Loan Losses

The allowance for loan losses represents our estimate of probable inherent credit losses in our loan portfolio. We determine the allowance based on an ongoing evaluation of risk as it correlates to potential losses within the portfolio. Increases to the allowance are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

In determining the amount of the allowance, we utilize our risk department’s independent analysis of the minimum required loan loss reserve for the Bank. In this analysis, problem loans are reviewed for impairment or for loss exposure based on their payment performance and probability of default and the value of any collateral securing the loan. These totals are specifically allocated to the reserve. The loan portfolio is then divided into various homogeneous risk pools utilizing a combination of collateral codes and/or loan purpose codes and internal risk ratings. Historical losses are used to estimate the probable loss in the current portfolio based on both an average loss methodology and a migration loss methodology. The methodologies and the time periods considered are subjective and vary for each risk pool based on systematic risk relative to our ability to estimate losses for that risk pool. Because every loan has a risk of loss, the calculation begins with a minimum loss allocation for each loan pool. The minimum loss is estimated based on long-term trends for the Bank, the banking industry and the economy. Loss allocations are adjusted for changes in the economy, problem loans, payment performance, loan policy, management, credit administration systems, credit concentrations, loan growth and other elements over the time periods utilized in the methodology. The adjusted loss allocations are then applied to the current balances in their respective loan pools. Loss allocations are totaled, yielding the required allowance for loan losses.

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We incorporate the data from the allowance calculation with interim changes to that data in our ongoing determination of the allowance for loan losses. We then take into consideration other factors that may support an allowance in excess of required minimums. These factors include systems changes, historically high loan growth, changes in the economy and company management and lending practices at the time at which the loans were made. We believe that the data that we use in determining the allowance for loan losses is sufficient to estimate the potential losses in the loan portfolio; however, actual results could differ from management’s estimates.

The following table presents a summary of changes in the allowance for loan losses for the periods indicated.

ALLOWANCE FOR LOAN LOSSES
	As of and for the Three Months Ended						As of and for the Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2017			2016			2017			2016
Total loans oustanding, net of unearned income	$	1,878,594		$	1,406,576		$	1,878,594			1,406,576
Average loans oustanding, net of unearned income	$	1,849,258		$	1,391,789		$	1,821,404			1,372,263
Allowance for loan losses at beginning of period	$	12,565		$	10,927		$	12,113			9,842
Charge-offs:
Loans secured by real estate		44			-			44			-
Commercial and industrial loans		1			-			1			-
Factored receivables		722			431			1,352			1,319
Consumer loans		-			153			31			180
All other loans		1			3			1			4
Total charge-offs		768			587			1,429			1,503
Recoveries:
Loans secured by real estate		15			64			19			114
Commercial and industrial loans		1			26			3			26
Factored receivables		417			308			965			714
Consumer loans		4			3			6			7
All other loans		18			-			419			8
Total recoveries		455			401			1,412			869
Net charge-offs		313			186			17			634
Provision for loan losses		1,155			901			1,311			2,434
Allowance for loan losses at period end	$	13,407		$	11,642		$	13,407			11,642
Allowance for loan losses to period end loans		0.71	%		0.83	%		0.71	%		0.83	%
Net charge-offs to average loans		0.07	%		0.05	%		0.00	%		0.09	%

The table above does not include the allowances of United Legacy Bank (”United”), Reunion Bank of Florida (“RBF”) or Private Bancshares that were established prior to each bank’s respective date of acquisition. In accordance with ASC Topic 805,Business Combinations, United’s, RBF’s and Private Bancshares’ allowances for loan losses were not brought forward at acquisition; instead, the acquired loans were recorded at fair value, and any discount to fair value was recorded against the loans rather than as an allowance for loan losses. The portion of the discount deemed related to credit quality was recorded as a non-accretable difference, and the remaining discount was recorded as an accretable discount and accreted into interest income over the estimated average life of the loans using the level yield method. At June 30, 2017, our total acquired loan portfolios totaled $511.3 million and had an aggregate related non-accretable difference of $7.9 million and accretable discount of $5.0 million.

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For the acquired loan portfolio, the allowance is determined for each loan pool and compared to the remaining discount for that pool. If the allowance amount calculated under the Company’s methodology is greater than the Company’s remaining discount, this amount is added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology is less than the Company’s recorded discount, no additional allowance or provision is recognized. Our analysis indicates that no additional allowance is necessary on our acquired loan portfolio at this time.

Overall, asset quality indicators have remained steady or even improved, and, as a result, provision expense related directly to asset quality has been minimal. During the six months ended June 30, 2017, we recorded a provision expense of $1.3 million due to growth in the loan portfolio. The Company continues to experience organic growth, as well as growth through the maturity and renewal of approximately $17.9 million in previously acquired loans. These loans are no longer classified as acquired and have no remaining discount based on the fact that they have now been underwritten by the Company.

Allocation of the Allowance for Loan Losses

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 represents management’s allocation of the allowance for loan losses to specific loan categories as of the dates indicated.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
	As of
	June 30,					December 31,
(Dollars in thousands)	2017					2016
	Amount		Percent of Loans in each Category to Total Loans			Amount		Percent of Loans in each Category to Total Loans
Commercial, financial and agricultural	$	1,588		11.94	%	$	1,588		11.51	%
Factored receivables		500		6.09			500		5.65
Real estate - mortgage		9,462		68.22			8,465		71.07
Real estate - construction		1,690		12.54			1,369		10.49
Consumer		167		1.21			191		1.28
	$	13,407		100.00	%	$	12,113		100.00	%

Our allowance for loan losses is composed of general reserves and specific reserves. General reserves are determined by applying loss percentages to each segment of our portfolio based on that segment’s historical loss experience and adjustment factors derived from internal and external environmental conditions. All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with U.S. GAAP. Loans for which specific reserves are provided are excluded from the calculation of general reserves.

Nonperforming Assets

The following table presents our nonperforming assets as of the dates indicated.

NONPERFORMING ASSETS
	As of
	June 30,						December 31,
(Dollars in thousands)	2017			2016			2016
Nonaccrual loans	$	2,877			3,347			2,837
Loans past due 90 days or more and still accruing		1,172			406			581
Total nonperforming loans		4,049			3,753			3,418
Other real estate and repossessed assets		-			2,160			2,068
Total nonperforming assets	$	4,049			5,913			5,486
Allowance for loan losses to period-end loans		0.71	%		0.83	%		0.82	%
Allowance for loan losses to period-endnonperforming loans		331.12			310.21			354.39
Net charge-offs to average loans		0.00			0.09			0.07
Nonperforming assets to period-end loansand foreclosed property and repossessed assets		0.22			0.42			0.37
Nonperforming loans to period-end loans		0.22			0.27			0.23

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Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. In addition to a consideration of these factors, we have a consistent and continuing policy of placing all loans on nonaccrual status if they become 90 days or more past due, excluding factored receivables. For Corporate Billing’s factored receivables, which are trade credits rather than promissory notes, our practice is to charge off unpaid recourse receivables when they become 90 days past due from the invoice due date and to charge off unpaid non-recourse receivables when they become 120 days past due from the statement billing date. For the recourse receivables, the amount of the invoice is charged against the client reserve account established for such purposes, unless the client reserve and the client’s financial resources are insufficient, in which case either the amount of the invoice is charged against loans or the balance is considered impaired and the client is responsible for repaying the unpaid obligation of the account debtor.When a loan is placed on nonaccrual status, all accrued interest on the loan is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until collection of both principal and interest becomes reasonably certain. Payments received while a loan is on nonaccrual status will be applied to the loan’s outstanding principal balance. When a problem loan is resolved, there may ultimately be an actual write-down or charge-off of the principal balance of the loan that would necessitate additional charges to the allowance for loan losses.    

Total nonperforming assets decreased by $1.4 million to $4.0 million at June 30, 2017, from $5.5 million at December 31, 2016. During the second quarter of 2017, the Company sold its only piece of other real estate and recognized a gain of $105 thousand. Asset quality has been and will continue to be a primary focus of management.

Deposits

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market accounts and savings and time deposits, are the primary funding source for the Bank. We offer a variety of products designed to attract and retain customers, with a primary focus on building and expanding client relationships. We continually focus on establishing a comprehensive relationship with consumer and business borrowers, seeking deposits as well as lending relationships.

The following table details the composition of our deposit portfolio as of the dates indicated.

COMPOSITION OF DEPOSITS
	As of
	June 30,					December 31,
(Dollars in thousands)	2017					2016
	Amount		Percent of Total			Amount		Percent of Total
Noninterest-bearing demand	$	608,280		30.34	%	$	429,030		25.73	%
Interest-bearing demand		322,020		16.06			262,261		15.73
Savings and money market		810,941		40.46			703,289		42.17
Time less than $100k		61,544		3.07			64,073		3.84
Time equal to or greater than $100k and less than $250k		75,934		3.79			73,028		4.38
Time equal to or greater than $250k		125,809		6.28			136,029		8.15
Total deposits	$	2,004,528		100.00	%	$	1,667,710		100.00	%

Total deposits were $2.0 billion at June 30, 2017, an increase of $336.8 million from December 31, 2016. Excluding the acquired Private Bancshares deposits, deposits increased by $50.6 million, or 3.0%, during the six months ended June 30, 2017. During the second quarter of 2017, deposits decreased due to expected seasonal withdrawals and the departure of certain depositors with large deposit accounts seeking higher rates offered at other financial institutions.

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Other Funding Sources

We supplement our deposit funding with wholesale funding when needed for balance sheet planning or when the terms are attractive and will not disrupt our offering rates in our markets. One of our sources of wholesale funding is the Federal Home Loan Bank of Atlanta (“FHLB”). We had FHLB borrowings of $7.0 million at June 30, 2017 and December 31, 2016. We have not initiated any additional borrowings from the FHLB since 2012. During 2014, we issued $48.9 million of brokered deposits to fund a portion of the Bank’s acquisition of its controlling interest in Corporate Billing. Several of these brokered deposits have matured, and as of June 30, 2017, we had $22.7 million of brokered deposits outstanding. Another funding source that we have used to supplement our local funding is internet certificates of deposit. We have used this source to book certificates of deposit that mature in three to five years at rates that are lower than we would offer in our local markets, typically below the rates indicated on the LIBOR swap curve for similar maturities. We had internet certificates of deposit balances of $5.4 million and $6.7 million at June 30, 2017 and December 31, 2016, respectively. The decrease in internet certificates of deposit during the first six months of 2017 was due to the contractual maturities of the certificates of deposit.

Liquidity

Market and public confidence in our financial strength and in financial institutions in general will have a significant role in our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.

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. We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of, and demands for, funds on a daily, weekly and monthly 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 our cash needs as they arise. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations, such as loan commitments, lease obligations and deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they collectively contribute to provide adequate liquidity to meet our needs.

Funds are available from a number of basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows. Other funding sources include federal funds purchased, brokered certificates of deposit and borrowings from the FHLB. We also have access to the public and private capital markets as markets conditions allow.

Cash and cash equivalents at June 30, 2017 and December 31, 2016 were $224.8 million and $217.3 million, respectively. Based on the balance of cash and cash equivalents, we believe that our liquidity resources were sufficient at June 30, 2017 to fund loans and meet our other cash needs as necessary.

Contractual Obligations

While our liquidity monitoring and management considers both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations.

CONTRACTUAL OBLIGATIONS
As of June 30, 2017
(Dollars in thousands)	Due in 1 year or less		Due after 1 through 3 years		Due after 3 through 5 years		Due after 5 years		Total
Federal Home Loan Bank advances	$	-	$	7,000	$	-	$	-	$	7,000
Subordinated debt		-		-		-		24,527		24,527
Certificates of deposit of less than $100k		46,176		10,436		4,881		51		61,544
Certificates of deposit of $100k or more		121,133		46,080		34,530		-		201,743
Operating leases		1,716		2,689		2,395		4,007		10,807
Total contractual obligations	$	169,025	$	66,205	$	41,806	$	28,585	$	305,621

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Off-Balance Sheet Arrangements

We are a party to credit-related financial instruments with off-balance sheet risks in the normal course of business in order to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recorded on our balance sheet. Our exposure to credit loss is represented by the contractual amounts of these commitments. We follow the same credit policies in making these types of commitments as we do for on-balance sheet instruments.

Our off-balance sheet arrangements are summarized in the following table as of the dates indicated.

CREDIT EXTENSION COMMITMENTS
	As of
	June 30,		December 31,
(Dollars in thousands)	2017		2016
Unfunded lines	$	464,048	$	337,415
Letters of credit		12,828		11,766
Total credit extension commitments	$	476,876		349,181

Interest Sensitivity and Market Risk

Interest Sensitivity

We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique that we employ is simulation analysis, as augmented by a “gap” analysis.

In simulation analysis, we review each individual asset and liability category and its projected behavior in various interest rate environments. These projected behaviors are based on our past experiences and on current competitive environments in the markets in which we compete. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates projections of net interest income. We also periodically verify the validity of this approach by comparing actual results with those that were projected in previous models.

Another technique used in interest rate management, but to a lesser degree than simulation analysis, is the measurement of the interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale or trading securities, replacing an asset or liability at maturity or adjusting the interest rate during the life of an asset or liability.

We evaluate interest rate sensitivity risk and then formulate guidelines regarding asset generation and repricing and sources and prices of off-balance sheet commitments in order to decrease interest sensitivity risk. We use computer simulations to measure the net income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net income over specified periods of time.

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The following table illustrates our interest rate sensitivity at June 30, 2017, assuming that the relevant assets and liabilities are collected and paid, respectively, based on historical experience rather than their stated maturities.

INTEREST SENSITIVITY ANALYSIS
As of June 30, 2017
(Dollars in thousands)
Interest-earning assets	0-1 Mos			1-3 Mos		3-12 Mos			1-3 Yrs		3-5 Yrs		> 5 Yrs			Total
Loans (1)	$	866,794			61,718		170,173			305,126		346,974		147,291			1,898,076
Securities		33,608			6,609		7,677			9,146		10,766		33,763			101,569
Cash balances in other banks		197,141			-		-			-		-		-			197,141
Total interest-earning assets	$	1,097,543			68,327		177,850			314,272		357,740		181,054			2,196,786
Interest-bearing liabilities
Interest-bearing transactions accounts	$	131,027			4,190		18,858			50,286		44,479		73,180			322,020
Savings and money market deposits		482,777			8,922		40,143			84,306		61,558		133,235			810,941
Time deposits		11,411			36,286		119,465			56,537		39,345		243			263,287
Federal Home Loan Bank and other borrowed money		-			-		-			7,000		-		-			7,000
Subordinated debt		-			-		-			-		24,527		-			24,527
Total interest-bearing liabilities	$	625,215			49,398		178,466			198,129		169,909		206,658			1,427,775
Interest sensitivity gap
Period gap	$	472,328			18,929		(616	)		116,143		187,831		(25,604	)		769,011
Cumulative gap		472,328			491,257		490,641			606,784		794,615		769,011
Cumulative gap - Rate-Sensitive Assets/Rate-Sensitive Liabilities		21.50	%		22.36		22.33			27.62		36.17		35.01

(1) Includes mortgage loans held-for-sale

We generally benefit from an increase in market rates of interest when we have an asset-sensitive gap (a positive number) and generally benefit from a decrease in market interest rates when we have a liability-sensitive gap (a negative number). As shown in the table above, we are asset-sensitive on a cumulative basis throughout all timeframes presented. The interest sensitivity analysis presents only a static view of the timing and repricing opportunities, without taking into consideration the fact that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short timeframe, but those are viewed by management as significantly less interest-sensitive than market-based rates, such as those paid on non-core deposits. For this and other reasons, we rely more on the simulation analysis (as described above) in managing interest rate risk. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

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Market Risk

Our earnings are dependent, to a large degree, on our net interest income, which is the difference between interest income earned on all earning assets, primarily consisting of loans and securities, and interest paid on all interest-bearing liabilities, primarily consisting of deposits. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises primarily from inherent interest rate risk in our lending, investing and deposit-gathering activities. We seek to reduce our exposure to market risk through actively monitoring and managing interest rate risk. Management relies on static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest-earning assets and interest-bearing liabilities, which quantifies, to a large extent, the degree of market risk inherent in our balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest-bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 400 basis points below the current prevailing rates to 400 basis points above the current prevailing rates. We make certain assumptions regarding the effect that varying levels of interest rates have on certain earning assets and interest-bearing liabilities, based on both historical experience and consensus estimates of outside sources.

The following table illustrates the results of our simulation analysis to determine the extent to which market risk would affect net interest margin for the next twelve months if prevailing interest rates increased or decreased by the specified amounts from current rates. As described above, this model uses estimates and assumptions regarding the manner in which asset and liability accounts will react to changes in prevailing interest rates. However, to isolate the market risk inherent in the balance sheet, the model assumes that no growth in the balance sheet occurs during the projection period. The model also assumes an immediate and parallel shift in interest rates, which would result in no change in the shape or slope of the interest rate yield curve. Because of the inherent use of these estimates and assumptions in the simulation model to derive this market risk information, the actual results of the future impact of market risk on our net interest margin may (and likely will) differ from those set forth in the table.

MARKET RISK
	Impact on Net Interest Income
	As of
	June 30,			December 31,
Change in prevailing interest rates	2017			2016
+400 basis points		20.29	%		22.37	%
+300 basis points		15.26			16.79
+200 basis points		10.25			11.20
+100 basis points		5.09			5.51
0 basis points		-			-
-100 basis points		(6.14	)		(5.31	)
-200 basis points		(12.69	)		(11.75	)
-300 basis points		(16.63	)		(16.32	)
-400 basis points		(19.79	)		(20.19	)

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Capital Resources

Total shareholders’ equity attributable to NCC at June 30, 2017 was $355.9 million, or 14.7% of total assets. At December 31, 2016, total shareholders’ equity attributable to NCC was $229.7 million, or 11.8% of total assets.

On June 12, 2017, the Company completed an underwritten public offering of 1,104,000 shares of the Company’s common stock at a price to the public of $37.00 per share for gross proceeds of $40.8 million, which included 144,000 shares pursuant to the exercise of the underwriters’ over-allotment option. The net proceeds to the Company after deducting the underwriters’ discount and offering expenses totaled $38.7 million. Other factors increasing equity during the six months ended June 30, 2017 included our acquisition of Private Bancshares, the exercise of options to purchase our common stock and other share-based compensation and our net income.

In July 2013, the Federal Reserve and the OCC issued final rules implementing the Basel III regulatory capital framework, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules took effect for the Company and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules. Among other things, the rules (i) revised the minimum capital requirements and adjusted the prompt corrective action thresholds applicable to financial institutions under the agencies’ jurisdiction, (ii) revised the regulatory capital elements, (iii) added a new common equity Tier 1 capital ratio, (iv) increased the minimum Tier 1 capital ratio requirements and (v) implemented a new capital conservation buffer. The rules permit certain banking organizations to retain, through a one-time election, the then-existing treatment for accumulated other comprehensive income. The Company and Bank made the election to retain the then-existing treatment for accumulated other comprehensive income.

The rules are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off-balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity, such as preferred stock, that may be included in capital. Certain items, such as goodwill and other intangible assets, are deducted from total capital in arriving at the various regulatory capital measures, such as common equity Tier 1 capital, Tier 1 capital and total risk-based capital. Our objective is to maintain our current status as a “well−capitalized” institution under applicable federal regulations. As of June 30, 2017, the Bank was “well-capitalized” under the regulatory framework for prompt corrective action.

Under the current regulatory guidelines, banks must meet minimum capital adequacy levels based on both total assets and risk-adjusted assets. All banks are required to maintain a minimum ratio of total capital to risk-weighted assets of 8%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6%, a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a minimum ratio of Tier 1 capital to average assets (leverage ratio) of 4%. Adherence to these guidelines has not had an adverse impact on us.

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The table below calculates and presents regulatory capital based on the regulatory capital ratio requirements under Basel III. As of January 1, 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes and is subject to a three-year phase-in period. The capital conservation buffer will be fully phased-in on January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than 2.5% (or the required phase-in amount in years prior to 2019) will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The ratios for the Company and Bank are currently sufficient to satisfy the fully phased-in conservation buffer.

The following table sets forth selected consolidated capital ratios at June 30, 2017 and December 31, 2016 for both NBC and NCC.

CAPITAL ADEQUACY ANALYSIS
(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
As of June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital(to Risk-Weighted Assets)
NCC	$	287,744		15.18	%	$	151,690		8.00	%		N/A		N/A
NBC	$	239,094		12.62	%	$	151,575		8.00	%	$	189,468		10.00	%
Tier 1 Capital(to Risk-Weighted Assets)
NCC	$	249,810		13.17	%	$	113,768		6.00	%		N/A		N/A
NBC	$	225,687		11.91	%	$	113,682		6.00	%	$	151,576		8.00	%
Common Equity Tier 1 Capital(to Risk-Weighted Assets)
NCC	$	249,810		13.17	%	$	85,326		4.50	%		N/A		N/A
NBC	$	225,687		11.91	%	$	85,261		4.50	%	$	123,155		6.50	%
Tier 1 Capital(to Average Assets)
NCC	$	249,810		10.69	%	$	93,491		4.00	%		N/A		N/A
NBC	$	225,687		9.67	%	$	93,313		4.00	%	$	116,641		5.00	%
As of December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital(to Risk-Weighted Assets)
NCC	$	208,664		13.90	%	$	120,102		8.00	%		N/A		N/A
NBC	$	178,150		11.88	%	$	120,007		8.00	%	$	150,008		10.00	%
Tier 1 Capital(to Risk-Weighted Assets)
NCC	$	172,051		11.46	%	$	90,076		6.00	%		N/A		N/A
NBC	$	166,037		11.07	%	$	90,005		6.00	%	$	120,007		8.00	%
Common Equity Tier 1 Capital(to Risk-Weighted Assets)
NCC	$	172,051		11.46	%	$	67,557		4.50	%		N/A		N/A
NBC	$	166,037		11.07	%	$	67,504		4.50	%	$	97,506		6.50	%
Tier 1 Capital(to Average Assets)
NCC	$	172,051		9.57	%	$	71,909		4.00	%		N/A		N/A
NBC	$	166,037		9.25	%	$	71,822		4.00	%	$	89,777		5.00	%

Banking regulations limit the amount of dividends that a bank can pay without the prior approval of its regulatory authorities. These restrictions are based on levels of regulatory classified assets, prior years’ net earnings and the ratio of equity capital to assets. The Bank is currently permitted to pay dividends to NCC, subject to safety and soundness requirements and other limitations imposed by law and federal regulatory authorities. However, NCC’s board of directors has not declared a dividend since its inception and has no current plans to do so. Future determinations regarding our dividend policy will be made at the discretion of NCC’s board of directors based on factors that it deems relevant at that time.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is contained in Part I, Item 2 herein under the heading “Interest Sensitivity and Market Risk.”

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017, the Company’s disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries may be involved from time to time in various routine legal proceedings incidental to our respective businesses. Neither the Company nor any of its subsidiaries is currently engaged in any legal proceedings that are expected to have a material adverse effect on our results of operations or financial position.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 that could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number	Exhibit Description
3.1	Certificate of Incorporation of National Commerce Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-198219), filed with the Securities and Exchange Commission on August 18, 2014)
3.1A	Amendment to Certificate of Incorporation of National Commerce Corporation (incorporated by reference to Exhibit 3.1A to the Company’s Annual Report on Form 10-K (File No. 000-55336), filed with the Securities and Exchange Commission on February 20, 2016)
3.2	By-Laws of National Commerce Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (File No. 333-198219), filed with the Securities and Exchange Commission on August 18, 2014)
10.1	Form of Shareholder Voting Agreement, by and between National Commerce Corporation and each director and certain officers of Patriot Bank (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (File No. 333-218826), filed with the Securities and Exchange Commission on June 19, 2017)
10.2	Form of Option Termination Agreement, by and between Patriot Bank and each holder of outstanding options to purchase common stock of Patriot Bank (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-4 (File No. 333-218826), filed with the Securities and Exchange Commission on June 19, 2017)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive Data Files for the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017

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SIGNATURES

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

	NATIONAL COMMERCE CORPORATION (Registrant)
Date: August 9, 2017	/s/ Richard Murray, IV
	Richard Murray, IV President and Chief Executive Officer
Date: August 9, 2017	/s/ William E. Matthews, V
	William E. Matthews, V Chief Financial Officer

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