fbk-10q_20180930.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

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

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

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

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

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

As of November 5, 2018, the registrant had 30,717,008 shares of common stock, $1.00 par value per share, outstanding. The registrant has no other classes of common stock outstanding as of such date.

	September 30,			December 31,
	2018 (Unaudited)			2017
ASSETS
Cash and due from banks	$	81,366		$	29,831
Federal funds sold		801			66,127
Interest bearing deposits in financial institutions		99,463			23,793
Cash and cash equivalents		181,630			119,751
Investments:
Available-for-sale debt securities, at fair value		606,501			536,270
Equity securities, at fair value		3,067			7,722
Federal Home Loan Bank stock, at cost		13,432			11,412
Loans held for sale, at fair value		323,486			526,185
Loans		3,538,531			3,166,911
Less: allowance for loan losses		27,608			24,041
Net loans		3,510,923			3,142,870
Premises and equipment, net		86,445			81,577
Other real estate owned, net		13,587			16,442
Interest receivable		14,943			13,069
Mortgage servicing rights, at fair value		79,890			76,107
Goodwill		137,190			137,190
Core deposit and other intangibles, net		12,403			14,902
Other assets		74,670			44,216
Total assets	$	5,058,167		$	4,727,713
LIABILITIES
Deposits
Noninterest-bearing	$	962,948		$	888,200
Interest-bearing checking		876,991			895,140
Money market and savings		1,236,851			1,192,726
Customer time deposits		940,601			602,628
Brokered and internet time deposits		112,082			85,701
Total deposits		4,129,473			3,664,395
Borrowings		210,968			347,595
Accrued expenses and other liabilities		68,995			118,994
Total liabilities		4,409,436			4,130,984
SHAREHOLDERS' EQUITY
Common stock, $1 par value per share; 75,000,000 shares authorized; 30,715,792 and 30,535,517 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		30,716			30,536
Additional paid-in capital		422,302			418,596
Retained earnings		206,718			147,449
Accumulated other comprehensive (loss) income, net		(11,005	)		148
Total shareholders' equity		648,731			596,729
Total liabilities and shareholders' equity	$	5,058,167		$	4,727,713

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest income:
Interest and fees on loans	$	57,904		$	44,367		$	163,126		$	102,723
Interest on securities
Taxable		3,151			2,399			9,137			7,555
Tax-exempt		1,031			988			2,937			3,096
Other		526			661			1,303			1,208
Total interest income		62,612			48,415			176,503			114,582

Interest expense:
Deposits		7,864			3,954			18,833			8,375
Borrowings		1,993			851			4,969			1,919
Total interest expense		9,857			4,805			23,802			10,294
Net interest income		52,755			43,610			152,701			104,288
Provision for loan losses		1,818			(784	)		3,198			(1,906	)
Net interest income after provision for loan losses		50,937			44,394			149,503			106,194

Noninterest income:
Mortgage banking income		26,649			31,334			81,664			86,653
Service charges on deposit accounts		2,208			2,044			6,216			5,606
ATM and interchange fees		2,411			2,222			7,353			6,354
Investment services and trust income		1,411			1,078			3,797			2,795
(Loss) gain from securities, net		(27	)		254			(116	)		284
Gain (loss) on sales or write-downs of other real estate owned		120			75			(43	)		846
Gain (loss) from other assets		326			(389	)		239			(350	)
Other income		1,257			1,202			4,283			2,376
Total noninterest income		34,355			37,820			103,393			104,564

Noninterest expenses:
Salaries, commissions and employee benefits		35,213			34,795			103,606			94,584
Occupancy and equipment expense		3,514			3,539			10,483			9,955
Legal and professional fees		1,917			1,512			5,925			3,973
Data processing		2,562			1,761			6,735			4,722
Merger and conversion		—			15,711			1,193			16,965
Amortization of core deposit and other intangibles		777			558			2,432			1,073
Loss on sale of mortgage servicing rights		—			—			—			249
Regulatory fees and deposit insurance assessments		738			549			2,030			1,478
Software license and maintenance fees		622			523			1,882			1,344
Advertising		3,810			3,493			10,500			9,768
Other expense		8,060			6,783			24,936			20,666
Total noninterest expense		57,213			69,224			169,722			164,777

Income before income taxes		28,079			12,990			83,174			45,981
Income tax expense (Note 7)		6,702			4,602			19,978			16,601
Net income	$	21,377		$	8,388		$	63,196		$	29,380
Earnings per common share:
Basic	$	0.69		$	0.28		$	2.05		$	1.10
Fully diluted		0.68			0.27			2.01			1.08
Dividends declared per common share		0.06			—			0.12			—

	Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss), net			Total shareholders' equity
Balance at December 31, 2016	$	24,108	$	213,480		$	93,784		$	(874	)	$	330,498
Initial fair value election on mortgage servicing rights, net of taxes of $396		—		—			615			—			615
Net income		—		—			29,380			—			29,380
Other comprehensive income, net of taxes		—		—			—			2,445			2,445
Common stock issued, net of offering costs		4,807		147,914			—			—			152,721
Common stock issued in conjunction with acquisition of the Clayton Banks, net of issuance costs (See Note 2)		1,521		50,763			—			—			52,284
Stock-based compensation expense		9		4,799			—			—			4,808
Restricted stock units vested and distributed, net of shares withheld for taxes		63		(921	)		—			—			(858	)
Shares issued under employee stock purchase program		19		616			—			—			635
Balance at September 30, 2017	$	30,527	$	416,651		$	123,779		$	1,571		$	572,528

Balance at December 31, 2017	$	30,536	$	418,596		$	147,449		$	148		$	596,729
Initial adoption of ASU 2016-01 (See Note 1)		—		—			(109	)		109			—
Net income		—		—			63,196			—			63,196
Other comprehensive income (loss), net of taxes		—		—			—			(11,262	)		(11,262	)
Stock-based compensation expense		9		5,318			—			—			5,327
Restricted stock units vested and distributed, net of shares withheld for taxes		142		(2,779	)		—			—			(2,637	)
Shares issued under employee stock purchase program		29		1,167			—			—			1,196
Dividends declared ($0.12 per share)		—		—			(3,818	)		—			(3,818	)
Balance at September 30, 2018	$	30,716	$	422,302		$	206,718		$	(11,005	)	$	648,731

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	63,196		$	29,380
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		3,251			3,090
Amortization of core deposits and other intangibles		2,432			1,073
Capitalization of mortgage servicing rights		(41,555	)		(45,624	)
Net change in fair value of mortgage servicing rights		(1,656	)		3,724
Stock-based compensation expense		5,327			4,808
Provision for loan losses		3,198			(1,906	)
Provision for mortgage loan repurchases		598			794
Accretion of discounts on purchased loans		(5,745	)		(3,545	)
Accretion of discounts and amortization of premiums on securities, net		2,108			1,948
Loss (gain) from securities, net		116			(284	)
Originations of loans held for sale		(4,777,814	)		(4,612,745	)
Repurchases of loans held for sale		(7,892	)		—
Proceeds from sale of loans held for sale		5,003,669			4,711,364
Gain on sale and change in fair value of loans held for sale		(71,883	)		(80,929	)
Gain on sale of mortgage servicing rights		—			(17	)
Net loss (gain) or write-downs of other real estate owned		43			(846	)
(Gain) loss from other assets		(239	)		350
Provision for deferred income taxes		4,416			8,226
Changes in:
Other assets and interest receivable		(28,473	)		4,912
Accrued expenses and other liabilities		(12,350	)		20,068
Net cash provided by operating activities		140,747			43,841
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales		221			94,743
Maturities, prepayments and calls		54,576			63,167
Purchases		(137,891	)		(57,441	)
Net increase in loans		(352,776	)		(191,033	)
Purchases of FHLB stock		(2,020	)		—
Proceeds from sale of mortgage servicing rights		39,428			11,952
Purchases of premises and equipment		(8,608	)		(2,898	)
Proceeds from the sale of premises and equipment		341			39
Proceeds from the sale of other real estate owned		3,666			4,082
Proceeds from the sale of other assets		869			—
Net cash paid in business combination		—			(135,141	)
Net cash used in investing activities		(402,194	)		(212,530	)
Cash flows from financing activities:
Net increase in demand deposits		100,724			90,247
Net increase in time deposits		364,354			(22,789	)
Net decrease in borrowings		(136,627	)		(90,429	)
Share based compensation withholding obligation		(2,637	)		(858	)
Net proceeds from sale of common stock		1,196			153,356
Dividends paid		(3,684	)		—
Net cash provided by financing activities		323,326			129,527
Net change in cash and cash equivalents		61,879			(39,162	)
Cash and cash equivalents at beginning of the period		119,751			136,327
Cash and cash equivalents at end of the period	$	181,630		$	97,165

Supplemental cash flow information:
Interest paid	$	21,690		$	9,652
Taxes paid		19,137			21,130
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	1,490		$	2,958
Transfers from other real estate owned to loans		636			201
Transfers from loans held for sale to loans		13,584			9,808
Rebooked GNMA delinquent loans under optional repurchase program		—			13,575
Derecognition of rebooked GNMA delinquent loans (See Note 1)		43,035			—
Stock consideration paid in business combination		—			52,284
Trade date payable - securities		7,253			—
Dividends declared not paid on restricted stock units		134			—
Adoption of ASU 2016-01 (See Note 1)		(109	)		—
Fair value election of mortgage servicing rights		—			1,011

FB Financial Corporation (the “Company”) is a bank holding company, headquartered in Nashville, Tennessee. The Company operates through its wholly owned bank subsidiary, FirstBank (the “Bank”), with 56 full-service bank branches across Tennessee, North Alabama and North Georgia, and a national mortgage business with office locations across the Southeast.

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

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP and general banking industry guidelines. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported results of operations for the periods then ended. Actual results could differ significantly from those estimates.

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

Effective July 31, 2017, the Bank completed its previously announced acquisitions of Clayton Bank and Trust and American City Bank headquartered in Knoxville, Tennessee and Tullahoma, Tennessee, respectively. See Note 2, “Mergers and acquisitions” in these Notes to the consolidated unaudited financial statements for further details regarding acquisitions.

Prior to May 31, 2018, the Company was considered a “controlled company” and was controlled by the Company’s Executive Chairman and former majority shareholder, James W. Ayers. During the second quarter of 2018, the Company completed a secondary offering of 3,680,000 shares of common stock pursuant to the Company’s effective registration statement on Form S-3 whereby James W. Ayers was the seller. As a result of this transaction, the Company ceased to qualify as a “controlled company” as the selling shareholder’s ownership was reduced to approximately 44% of the voting power of the Company’s issued and outstanding shares of common stock. The Company continues to qualify as an emerging growth company as defined by the “Jumpstart Our Business Startups Art” (“JOBS Act”).

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that occurred through the date of issuance of these financial statements. The Company has determined that there were no other subsequent events other than described below that occurred after September 30, 2018, but prior to the issuance of these financial statements that would have a material impact on the Company’s consolidated financial statements.

On October 22, 2018, the Company declared a regular quarterly dividend of $0.08 per share to be paid on November 15, 2018 to shareholders of record as of November 1, 2018, totaling approximately $2,548. Additionally, the Company’s Board of Directors authorized a plan to allow the repurchase of up to $50 million of the Company’s outstanding common stock, which plan will remain in effect until the earlier of October 22, 2019 or the date at which the Company has repurchased $50 million in shares.

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares issuable under the restricted stock units granted but not yet vested and distributable. Diluted EPS is computed by dividing earnings attributable to common shareholders by the weighted

average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.

Unvested share-based payment awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered to participate with common shareholders in undistributed earnings for purposes of computing EPS. Companies that have such participating securities, including the Company, are required to calculate basic and diluted EPS using the two-class method. Certain restricted stock awards granted by the Company include non-forfeitable dividend equivalents and are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.

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

Government National Mortgage Association (“GNMA”) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing and was the original transferor. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the Company is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for sale, regardless of whether the Company intends to exercise the buy-back option if the buyback option provides the transferor a more-than-trivial benefit. At September 30, 2018, there were $58,435 of delinquent GNMA loans that had previously been sold; however, the Company determined there was not a “more-than-trivial benefit” based on an analysis of interest rates and an assessment of potential reputational risk associated with these loans. As such, the Company did not rebook the GNMA loans as of September 30, 2018. At December 31, 2017, rebooked GNMA loans held for sale amounted to $43,035 with an offsetting liability included in accrued expenses and other liabilities in the same amount. The fair value option election does not apply to the GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option.

Except as set forth below, the Company did not adopt any new accounting policies that were not disclosed in the Company’s 2017 audited consolidated financial statements included on Form 10-K.

On January 1, 2018, the Company adopted the following newly issued accounting standards:

In May 2014, the FASB issued an update to Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The Company adopted this guidance on January 1, 2018 and all subsequent amendments to the ASU (collectively, “ASC 606”) which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities and derivatives that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within Noninterest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, investment services and trust income, and the sale of OREO, all within the Banking Segment. The Company has evaluated the effect of this updated on these fee-based income streams and concluded that adoption did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

The following is a summary of the implementation considerations for the revenue streams that fall within the scope of Topic 606:

In January 2016, the FASB released ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and adjust the fair value disclosures for financial instruments carried at amortized cost such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value such that these securities can be carried at cost less any impairment. Results for reporting periods beginning after January 1, 2018 are presented under this method while prior period disclosures are presented under legacy GAAP. On January 1, 2018, the Company recorded a net loss in beginning retained earnings of $109 in connection with this transition.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230).” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. This adoption did not have an impact on our financial statements.

In May 2017, the FASB issued ASU 2017-09, “Stock Compensation - Scope of Modification Accounting (Topic 718): Scope of Modification Accounting.” The amendments in this ASU provide guidance on when changes to the terms or conditions of a share-based payment award are to be accounted for as modifications. Under ASU 2017-09, entities are not required to apply modification accounting to a share-based payment award when the award’s fair value, vesting conditions, and classification as an entity or a liability instrument remain the same after the change. ASU 2017-09 is effective for all entities beginning after December 15, 2017 including interim periods within the fiscal year. The adoption of this update on January 1, 2018 did not have a significant impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU make more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. There was no impact to the Company’s financial statements or disclosures as a result of this early adoption as of January 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update will require lessees to recognize right-of-use assets and lease liabilities for all leases not considered short term leases. The provisions of the update also include (a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure requirements. The provisions of this update become effective for interim and annual periods beginning after December 15, 2018. Management has formed a cross-functional team to plan and execute the adoption of this standard and is currently in the process of reviewing lease documents and related policies. Based on leases outstanding at September 30, 2018, the Company will record an increase to assets and liabilities upon adoption. Adoption of the standard is not expected to have a material impact on the income statement. Management will continue to evaluate decisions to enter, modify or renew leases through the implementation date.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as, the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will become effective for interim and annual periods beginning after December 15, 2019. Management has established a CECL implementation working group, which includes the appropriate members of management to evaluate the impact the adoption of this ASU will have on the Company’s financial statements and disclosure and determine the most appropriate method of implementing the amendments in this ASU as well as selection of software and vendor assistance needed to implement the amendments. Management will continue to evaluate the impact this ASU will have on the Company’s financial statements through its effective date.

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.” The amendments in this ASU shorten 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, which continue to be amortized to maturity. Public business entities must prospectively apply the amendments in this ASU to annual periods beginning after December 15, 2018, including interim periods. The adoption of this update will not have an impact on the Company’s consolidated financial statements.

In June 2018, FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting for employee share-based payment awards, nonemployee share-based payment awards will be measured at grant-date fair value of the equity instruments obligated to be issued when the good has been delivered or the service rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the company

In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements. This update is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The new disclosure guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements and disclosures.

On July 31, 2017, the Bank completed its merger with Clayton Bank and Trust (“CBT”) and American City Bank (“ACB” and together with CBT, the “Clayton Banks”), pursuant to the Stock Purchase Agreement with Clayton HC, Inc., a Tennessee corporation (“Seller”), and James L. Clayton, the majority shareholder of Seller, dated February 8, 2017, as amended on May 26, 2017, with a purchase price of approximately $236,484. The Company issued 1,521,200 shares of common stock and paid cash of $184,200 to purchase all of the outstanding shares of the Clayton Banks. At closing, the Clayton Banks merged with and into FirstBank, with FirstBank continuing as the surviving banking entity.

Prior to the merger, the Clayton Banks operated 18 banking locations across Tennessee. The merger with the Clayton Banks has allowed the Company to further its strategic initiatives by expanding its geographic footprint in Knoxville and other Tennessee markets and accelerating the growth of the Company’s Banking segment.

Goodwill of $90,323 recorded in connection with the transaction resulted primarily from anticipated synergies arising from the combination of certain operational areas of the Clayton Banks and the Company as well as the purchase premium inherent to buying a complete and successful banking operation. Goodwill is included in the Banking segment as substantially all of the operations resulting from the Clayton Banks merger is included in the Banking segment.

In connection with the transaction, the Company incurred $0 and $1,193 in merger and conversion expenses during the three and nine months ended September 30, 2018 compared with $15,711 and $16,965 for the same periods in 2017.

For income tax purposes, the merger with the Clayton Banks was treated as an asset purchase. As an asset purchase for income tax purposes, the carrying value of assets and liabilities for the Clayton Banks are the same for both financial reporting and income tax purposes; therefore, no deferred taxes were recorded at the date of acquisition. Additionally, this treatment allows for the deductibility of goodwill and intangibles for income tax purposes over 15 years.

The Company accounted for the Clayton Banks transaction under the acquisition method under ASC Topic 805. Accordingly, the fair value of the assets acquired and liabilities assumed along with the resulting goodwill was recorded as of the date of the merger. The Company’s operating results include the operating results of the acquired assets and assumed liabilities of the Clayton Banks subsequent to the acquisition date.

As of December 31, 2017, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no material changes to preliminary purchase accounting adjustments. The following tables present the final estimated fair

value of net assets acquired as of the July 31, 2017 acquisition date and the consideration paid and an allocation of the purchase price to net assets acquired:

The following unaudited pro forma condensed consolidated financial information presents the results of operations for the three and nine months ended September 30, 2017 as though the merger had been completed as of January 1, 2016. The unaudited estimated pro forma information combines the historical results of the Clayton Banks with the Company’s historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments including loan discount accretion, amortization of core deposit and other intangibles and amortization of the discount on time deposits for the period presented. The pro forma information is not indicative of what would have occurred had the acquisition taken place on January 1, 2016 and does not include the effect of all cost-saving or revenue-enhancing strategies.

The amortized cost of securities and their fair values at September 30, 2018 and December 31, 2017 are shown below:

As of September 30, 2018, the Company also had $3,067 in marketable equity securities recorded at fair value. Net losses of $27 and $108 were recognized due to changes in fair value of these securities during the three and nine months ended September 30, 2018, respectively. As of January 1, 2018, the Company adopted ASU 2016-01 (See Note 1) and reclassified $3,604 of other securities without readily determinable market values to other assets.

Securities pledged at September 30, 2018 and December 31, 2017 had a carrying amount of $358,220 and $337,604, respectively, and were pledged to secure a Federal Reserve Bank line of credit, public deposits and repurchase agreements.

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2018 and December 31, 2017 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgage underlying the security may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.

The Company recognized $1 in gains related to the early call of available for sale securities during the nine months ended September 30, 2018 and September 30, 2017.

The following tables show gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

As of September 30, 2018 and December 31, 2017, the Company’s securities portfolio consisted of 337 and 294 securities, 221 and 124 of which were in an unrealized loss position, respectively.

The Company evaluates available-for-sale debt securities with unrealized losses for other-than-temporary impairment (OTTI) on a quarterly basis and recorded no OTTI for the three or nine months ended September 30, 2018 or 2017. Impairment is assessed at the individual security level. The Company considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. For debt securities, the unrealized losses associated with these investment securities are primarily driven by interest rates and are not due to the credit quality of the securities. The Company currently does not intend to sell those investments with unrealized losses, and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

Loans outstanding at September 30, 2018 and December 31, 2017, by major lending classification are as follows:

As of September 30, 2018 and December 31, 2017, $700,639 and $761,197, respectively, of qualifying residential mortgage loans (including loans held for sale) and $580,651 and $207,370, respectively, of qualifying commercial mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line. As of September 30, 2018 and December 31, 2017, $1,313,796 and $724,312, respectively, of qualifying loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.

As of September 30, 2018 and December 31, 2017, the recorded balance of purchased credit impaired loans (“PCI”) loans accounted for under ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $73,651 and $88,835, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated.

Included in the ending balance of the accretable yield on PCI loans in the table above at September 30, 2018, is a purchase accounting liquidity discount of $3,626. There is also a purchase accounting nonaccretable credit discount of $4,579 related to the PCI loan portfolio at September 30, 2018 and an accretable credit and liquidity discount on non-PCI loans of $8,393 and $2,637, respectively.

Interest revenue, through accretion of the difference between the recorded balance of the loans and the expected cash flows, is being recognized on all PCI loans. Accretion of interest income amounting to $2,103 and $6,943 was recognized on purchased credit impaired loans during the three and nine months ended September 30, 2018, respectively, compared with $1,646 and $3,258 for the three and nine months ended September 30, 2017, respectively. This includes both the contractual interest income and the purchase accounting contribution through accretion of the liquidity discount and credit mark for changes in estimated cash flows. The total purchase accounting contribution through accretion for all purchased

loans was $2,130 and $5,745 for three and nine months ended September 30, 2018, respectively, compared with $1,537 and $3,545 for the three and nine months ended September 30, 2017, respectively.

The following provides the allowance for loan losses by portfolio segment and the related investment in loans net of unearned interest for the three and nine months ended September 30, 2018 and 2017:

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage		Commercial real estate owner occupied			Commercial real estate non-owner occupied		Consumer and other			Total
Three Months Ended September 30, 2018
Beginning balance - June 30, 2018	$	4,747		$	9,023		$	3,378		$	795		$	391	$	3,290		$	3,272	$	1,451		$	26,347
Provision for loan losses		847			(754	)		47			25			292		236			639		486			1,818
Recoveries of loans previously charged-off		104			13			99			31			—		10			—		103			360
Loans charged off		(333	)		(14	)		(4	)		(13	)		—		(55	)		—		(498	)		(917	)
Ending balance - September 30, 2018	$	5,365		$	8,268		$	3,520		$	838		$	683	$	3,481		$	3,911	$	1,542		$	27,608
Nine Months Ended September 30, 2018
Beginning balance - December 31, 2017	$	4,461		$	7,135		$	3,197		$	944		$	434	$	3,558		$	2,817	$	1,495		$	24,041
Provision for loan losses		1,088			35			235			(175	)		249		(163	)		1,043		886			3,198
Recoveries of loans previously charged-off		374			1,127			157			102			—		141			51		416			2,368
Loans charged off		(558	)		(29	)		(69	)		(33	)		—		(55	)		—		(1,255	)		(1,999	)
Ending balance - September 30, 2018	$	5,365		$	8,268		$	3,520		$	838		$	683	$	3,481		$	3,911	$	1,542		$	27,608

	Commercial and industrial			Construction			1-to-4 family residential mortgage			Residential line of credit			Multi- family residential mortgage		Commercial real estate owner occupied			Commercial real estate non-owner occupied			Consumer and other			Total
Three Months Ended September 30, 2017
Beginning balance - June 30, 2017	$	5,440		$	5,579		$	2,974		$	1,445		$	513	$	3,983		$	2,452		$	861		$	23,247
Provision for loan losses		315			(476	)		(269	)		(565	)		10		65			24			112			(784	)
Recoveries of loans previously charged-off		200			1,022			86			157			—		24			1			104			1,594
Loans charged off		(221	)		—			(32	)		(9	)		—		(64	)		—			(249	)		(575	)
Ending balance - September 30, 2017	$	5,734		$	6,125		$	2,759		$	1,028		$	523	$	4,008		$	2,477		$	828		$	23,482
Nine Months Ended September 30, 2017
Beginning balance - December 31, 2016	$	5,309		$	4,940		$	3,197		$	1,613		$	504	$	3,302		$	2,019		$	863		$	21,747
Provision for loan losses		(848	)		111			(409	)		(749	)		19		731			(1,184	)		423			(1,906	)
Recoveries of loans previously charged-off		1,794			1,080			126			368			—		39			1,642			400			5,449
Loans charged off		(521	)		(6	)		(155	)		(204	)		—		(64	)		—			(858	)		(1,808	)
Ending balance - September 30, 2017	$	5,734		$	6,125		$	2,759		$	1,028		$	523	$	4,008		$	2,477		$	828		$	23,482

The following table provides the allocation of the allowance for loan losses by loan category broken out between loans individually evaluated for impairment, loans collectively evaluated for impairment and loans acquired with deteriorated credit quality as of September 30, 2018 and December 31, 2017:

The following table provides the amount of loans by loan category broken between loans individually evaluated for impairment, loans collectively evaluated for impairment and loans acquired with deteriorated credit quality as of September 30, 2018 and December 31, 2017:

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

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

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

The following table shows credit quality indicators by portfolio class at September 30, 2018 and December 31, 2017:

September 30, 2018	Pass		Watch		Substandard		Total
Loans, excluding purchased credit impaired loans
Commercial and industrial	$	781,698	$	50,230	$	6,908	$	838,836
Construction		479,035		3,926		1,387		484,348
Residential real estate:
1-to-4 family mortgage		517,598		9,119		6,914		533,631
Residential line of credit		211,114		1,328		2,299		214,741
Multi-family mortgage		86,000		78		186		86,264
Commercial real estate:
Owner occupied		465,223		17,022		14,421		496,666
Non-owner occupied		593,771		16,720		1,282		611,773
Consumer and other		191,140		2,978		4,503		198,621
Total loans, excluding purchased credit impaired loans	$	3,325,579	$	101,401	$	37,900	$	3,464,880

Purchased credit impaired loans
Commercial and industrial	$	—	$	1,068	$	535	$	1,603
Construction		—		3,276		3,547		6,823
Residential real estate:
1-to-4 family mortgage		—		15,666		4,423		20,089
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		—		4,311		3,172		7,483
Non-owner occupied		—		8,433		8,130		16,563
Consumer and other		—		18,451		2,639		21,090
Total purchased credit impaired loans	$	—	$	51,205	$	22,446	$	73,651
Total loans	$	3,325,579	$	152,606	$	60,346	$	3,538,531

December 31, 2017	Pass		Watch		Substandard		Total
Loans, excluding purchased credit impaired loans
Commercial and industrial	$	657,595	$	50,946	$	4,390	$	712,931
Construction		431,242		7,388		1,968		440,598
Residential real estate:
1-to-4 family mortgage		440,202		9,522		7,767		457,491
Residential line of credit		192,427		1,184		1,375		194,986
Multi-family mortgage		61,234		142		978		62,354
Commercial real estate:
Owner occupied		451,140		28,308		4,462		483,910
Non-owner occupied		517,253		14,199		1,972		533,424
Consumer and other		189,081		2,712		589		192,382
Total loans, excluding purchased credit impaired loans	$	2,940,174	$	114,401	$	23,501	$	3,078,076

Purchased credit impaired loans
Commercial and industrial	$	—	$	1,499	$	645	$	2,144
Construction		—		3,324		4,404		7,728
Residential real estate:
1-to-4 family mortgage		—		20,284		3,214		23,498
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		20		20
Commercial real estate:
Owner occupied		—		4,631		7,331		11,962
Non-owner occupied		—		7,359		10,805		18,164
Consumer and other		—		19,751		5,568		25,319
Total purchased credit impaired loans	$	—	$	56,848	$	31,987	$	88,835
Total loans	$	2,940,174	$	171,249	$	55,488	$	3,166,911

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at September 30, 2018 or December 31, 2017 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection.

Nonperforming loans include loans that are no longer accruing interest (non-accrual loans) and loans past due ninety or more days and still accruing interest. Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

The following table provides the period-end amounts of loans that are past due thirty to eighty-nine days, past due ninety or more days and still accruing interest, loans not accruing interest, loans current on payments accruing interest and purchased credit impaired loans by category at September 30, 2018 and December 31, 2017:

September 30, 2018	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Purchased Credit Impaired loans		Total
Commercial and industrial	$	2,491	$	120	$	2,158	$	834,067	$	1,603	$	840,439
Construction		337		17		270		483,724		6,823		491,171
Residential real estate:
1-to-4 family mortgage		4,170		875		1,633		526,953		20,089		553,720
Residential line of credit		635		492		831		212,783		—		214,741
Multi-family mortgage		—		—		—		86,264		—		86,264
Commercial real estate:
Owner occupied		1,943		111		2,203		492,409		7,483		504,149
Non-owner occupied		636		—		1,206		609,931		16,563		628,336
Consumer and other		2,099		749		54		195,719		21,090		219,711
Total	$	12,311	$	2,364	$	8,355	$	3,441,850	$	73,651	$	3,538,531

December 31, 2017	30-89 days past due		90 days or more and accruing interest		Non-accrual loans		Loans current on payments and accruing interest		Purchased Credit Impaired loans		Total
Commercial and industrial	$	5,859	$	90	$	533	$	706,449	$	2,144	$	715,075
Construction		1,412		241		300		438,645		7,728		448,326
Residential real estate:
1-to-4 family mortgage		4,678		956		2,548		449,309		23,498		480,989
Residential line of credit		527		134		699		193,626		—		194,986
Multi-family mortgage		—		—		—		62,354		20		62,374
Commercial real estate:
Owner occupied		521		358		2,582		480,449		11,962		495,872
Non-owner occupied		121		—		1,371		531,932		18,164		551,588
Consumer and other		1,945		217		68		190,152		25,319		217,701
Total	$	15,063	$	1,996	$	8,101	$	3,052,916	$	88,835	$	3,166,911

Impaired loans recognized in conformity with ASC 310-20 at September 30, 2018 and December 31, 2017, segregated by class, were as follows:

September 30, 2018	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	1,691	$	1,691	$	350
Residential real estate:
1-to-4 family mortgage		184		485		8
Commercial real estate:
Owner occupied		567		639		58
Total	$	2,442	$	2,815	$	416
With no related allowance recorded
Commercial and industrial	$	1,932	$	2,106	$	—
Construction		1,276		1,313		—
Residential real estate:
1-to-4 family mortgage		1,309		1,315		—
Residential line of credit		253		253		—
Multi-family mortgage		187		186		—
Commercial real estate:
Owner occupied		1,468		2,161		—
Non-owner occupied		1,049		1,781		—
Consumer and other		80		80		—
Total	$	7,554	$	9,195	$	—
Total impaired loans	$	9,996	$	12,010	$	416

December 31, 2017	Recorded investment		Unpaid principal		Related allowance
With a related allowance recorded:
Commercial and industrial	$	53	$	53	$	20
Residential real estate:
1-to-4 family mortgage		194		495		18
Commercial real estate:
Owner occupied		844		1,123		120
Non-owner occupied		144		150		33
Total	$	1,235	$	1,821	$	191
With no related allowance recorded:
Commercial and industrial	$	1,526	$	1,570	$	—
Construction		1,289		1,313		—
Residential real estate:
1-to-4 family mortgage		1,068		1,072		—
Multi-family mortgage		978		978		—
Commercial real estate:
Owner occupied		1,676		2,168		—
Non-owner occupied		1,576		2,325		—
Consumer and other		25		25		—
Total	$	8,138	$	9,451	$	—
Total impaired loans	$	9,373	$	11,272	$	191

Average recorded investment and interest income on a cash basis recognized during the three and nine months ended September 30, 2018 and 2017 on impaired loans, segregated by class, were as follows:

	Three Months Ended				Nine Months Ended
September 30, 2018	Average recorded investment		Interest income recognized (cash basis)		Average recorded investment		Interest income recognized (cash basis)
With a related allowance recorded:
Commercial and industrial	$	922	$	81	$	872	$	84
Residential real estate:
1-to-4 family mortgage		186		2		189		7
Commercial real estate:
Owner occupied		661		7		706		34
Non-owner occupied		—		—		72		2
Total	$	1,769	$	90	$	1,839	$	127
With no related allowance recorded:
Commercial and industrial	$	1,983	$	21	$	1,729	$	80
Construction		1,279		35		1,283		70
Residential real estate:
1-to-4 family mortgage		1,313		15		1,189		60
Residential line of credit		127		8		127		8
Multi-family mortgage		569		2		583		26
Commercial real estate:
Owner occupied		1,490		27		1,572		87
Non-owner occupied		1,049		—		1,313		7
Consumer and other		54		1		53		2
Total	$	7,864	$	109	$	7,849	$	340
Total impaired loans	$	9,633	$	199	$	9,688	$	467
September 30, 2017
With a related allowance recorded:
Commercial and industrial	$	392	$	2	$	454	$	2
Residential real estate:
1-to-4 family mortgage		148		7		151		7
Commercial real estate:
Owner occupied		843		39		856		39
Non-owner occupied		328		3		650		3
Consumer and other		11		1		12		1
Total	$	1,722	$	52	$	2,123	$	52
With no related allowance recorded:
Commercial and industrial	$	633	$	34	$	698	$	34
Construction		797		41		1,991		41
Residential real estate:
1-to-4 family mortgage		1,584		51		1,721		51
Residential line of credit		—		—		156		—
Multi-family mortgage		995		34		1,008		34
Commercial real estate:
Owner occupied		1,737		92		1,913		92
Non-owner occupied		1,590		12		1,317		12
Consumer and other		13		—		14		—
Total	$	7,349	$	264	$	8,818	$	264
Total impaired loans	$	9,071	$	316	$	10,941	$	316

As of September 30, 2018 and December 31, 2017, the Company has a recorded investment in troubled debt restructurings of $7,679 and $8,604, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one lower than the current market rate. The Company has allocated $66 and $172 of specific reserves for those loans at September 30, 2018 and December 31, 2017, respectively, and has committed to lend additional amounts totaling up to $0 and $2, respectively to these customers. Of these loans, $2,829 and $3,205 were classified as non-accrual loans as of September 30, 2018 and December 31, 2017, respectively.

The following tables present the financial effect of TDRs recorded during the periods indicated:

There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2018 or 2017.

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

The terms of certain other loans were modified during the nine months ended September 30, 2018 and 2017 that did not meet the definition of a troubled debt restructuring. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

The amount reported as other real estate owned includes property acquired through foreclosure in addition to excess facilities held for sale and is carried at fair value less estimated cost to sell the property. The following table summarizes other real estate owned for the three and nine months ended September 30, 2018 and 2017:

Foreclosed residential real estate properties totaled $2,694 and $3,631 as of September 30, 2018 and December 31, 2017, respectively. The recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $324 and $19 at September 30, 2018 and December 31, 2017, respectively.

Other real estate owned also included excess land and facilities held for sale amounting to $5,381 and $5,895 as of September 30, 2018 and December 31, 2017, respectively.

Changes in the Company’s mortgage servicing rights were as follows for the three and nine months ended September 30, 2018 and 2017:

The following table summarizes servicing income and expense included in mortgage banking income and other noninterest expense within the Mortgage Segment operating results, respectively, for the three and nine months ended September 30, 2018 and 2017, respectively:

Data and key economic assumptions related to the Company’s mortgage servicing rights as of September 30, 2018 and December 31, 2017 are as follows:

From time to time, the Company enters agreements to sell certain tranches of mortgage servicing rights. Upon consummation of the sale, the Company continues to subservice the underlying mortgage loans until they can be transferred to the purchaser. During the three months ended September 30, 2018, the Company sold $39,428 of mortgage servicing rights on $3,181,483 of serviced mortgages. There was not a material gain or loss recognized in this transaction. During the nine months ended September 30, 2017, the Company sold $11,935 of mortgage servicing rights on $1,086,465 of serviced mortgages and recognized a loss of $249 in connection with this transaction. As of September 30, 2018 and December 31, 2017, there were no loans being serviced that related to the sale of mortgage servicing rights.

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

Federal income tax expense differs from the statutory federal rates of 21% for the three and nine months ended September 30, 2018 and 35% for the three and nine months ended September 30, 2017 due to the following:

The components of the net deferred tax liability at September 30, 2018 and December 31, 2017, are as follows:

Tax periods for all fiscal years after 2014 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

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

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

In connection with the sale of mortgage loans to third party investors, the Bank makes usual and customary representations and warranties as to the propriety of its origination activities. Occasionally, the investors require the Bank to repurchase loans sold to them under the terms of the warranties. When this happens, the loans are recorded at fair value with a corresponding charge to a valuation reserve. During the three and nine months ended September 30, 2018, the total principal amount of loans repurchased (or indemnified for) was $2,322 and $4,984, respectively, and $1,137 and $2,907 during the same periods in 2017. The Company has established a reserve associated with loan repurchases. This reserve is recorded in accrued expenses and other liabilities on the consolidated balance sheet. The following table summarizes the activity in the repurchase reserve:

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

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Under such commitments, interest rates for a mortgage loan are typically locked in for up to forty-five days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. The Company also enters into best effort or mandatory delivery forward commitments to sell residential mortgage loans to secondary market investors. Gains and losses arising from changes in the valuation of the rate-lock commitments and forward commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.

The Company enters into forward commitments, futures and options contracts that are not designated as economic hedges. Additionally, the Company enters into designated hedging instruments to offset the changes in fair value of its MSR. Gains and losses associated with these instruments are included in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.

The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures.

During the nine months ended September 30, 2017, the Company entered into two interest rate swap agreements with notional amounts totaling $30,000 to hedge interest rate exposure on outstanding subordinate debentures included in long-term debt totaling $30,930. Under these agreements, the Company receives a variable rate of interest and pays a fixed rate of interest. The interest rate swap contracts, which mature in June of 2024, are designated as cash flow hedges with the objective of reducing the variability in cash flows resulting from changes in interest rates. As of September 30, 2018 and December 31, 2017, the fair value of these contracts was $1,519 and $305, respectively.

During the three and nine months ended September 30, 2017, the Company entered into three interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $30,000, $35,000 and $35,000 for a period of three, four and five years, respectively. These interest rate swaps were designated as cash flow hedges with the objective of reducing the variability of cash flows associated with $100,000 of FHLB borrowings obtained in conjunction with the Clayton Bank acquisition. Under these contracts, the Company receives a variable rate of interest and pays a fixed rate of interest. As of December 31, 2017, the fair value of these contracts was $1,127 included in those designated as hedging below. During the nine months ended September 30, 2018, these swaps were cancelled, locking in a tax-adjusted gain of $1,564 in other comprehensive income to be accreted over the three, four and five-year terms of the underlying contracts. As of September 30, 2018, there was $1,510 remaining in other comprehensive income to be accreted into income.

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

Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, the Company may be required to post margin to these counterparties. At September 30, 2018 and December 31, 2017, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and posted collateral of $10,913 and $4,309, respectively, against its obligations under these agreements. Cash collateral related to derivative contracts is recorded in other assets in the consolidated balance sheets.

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

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

The following table discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments designated as cash flow hedges for the periods presented:

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

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

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

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

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

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

During the first quarter of 2018, the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” The amendments included within this standard, which are applied prospectively, require the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure the fair value using an exit price notion. Prior to adopting the amendments included in the standard, the Company measured fair value under an entry price notion.

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

significant inputs to the valuation are unobservable, the available-for-sale securities are classified within Level 3 of the fair value hierarchy.

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

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

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

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

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

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

The following table contains the estimated fair values and the related carrying values of the Company's financial instruments. Items which are not financial instruments are not included. Due to the adoption of ASU 2016-01 as of

January 1, 2018, the fair value as presented below is measured using the exit price notion in the periods after adoption and may not be comparable with prior periods presented as a result of the change in methodology.

			Fair Value
September 30, 2018	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	181,630	$	181,630	$	—	$	—	$	181,630
Investment securities		609,568		—		609,568		—		609,568
Federal Home Loan Bank Stock		13,432	N/A		N/A		N/A		N/A
Loans, net		3,510,923		—		—		3,508,972		3,508,972
Loans held for sale		323,486		—		323,486		—		323,486
Interest receivable		14,943		—		14,943		—		14,943
Mortgage servicing rights		79,890		—		—		79,890		79,890
Derivatives		13,662		—		13,662		—		13,662
Financial liabilities:
Deposits:
Without stated maturities	$	3,076,790	$	3,076,790	$	—	$	—	$	3,076,790
With stated maturities		1,052,683		—		1,052,825		—		1,052,825
Securities sold under agreement to repurchase and federal funds sold		50,117		50,117		—		—		50,117
Federal Home Loan Bank advances		129,921		—		130,023		—		130,023
Subordinated debt		30,930		—		30,000		—		30,000
Interest payable		3,616		990		2,626		—		3,616
Derivatives		4,076		—		4,076		—		4,076

			Fair Value
December 31, 2017	Carrying amount		Level 1		Level 2		Level 3		Total
Financial assets:
Cash and cash equivalents	$	119,751	$	119,751	$	—	$	—	$	119,751
Investment securities		543,992		—		540,388		3,604		543,992
Federal Home Loan Bank Stock		11,412	N/A		N/A		N/A		N/A
Loans, net		3,142,870		—		3,064,373		77,027		3,141,400
Loans held for sale		526,185		—		526,185		—		526,185
Interest receivable		13,069		—		13,069		—		13,069
Mortgage servicing rights, net		76,107		—		—		76,107		76,107
Derivatives		9,690		—		9,690		—		9,690
Financial liabilities:
Deposits:
Without stated maturities	$	2,976,066	$	2,976,066	$	—	$	—	$	2,976,066
With stated maturities		688,329		—		682,403		—		682,403
Securities sold under agreement to repurchase and federal funds sold		14,293		14,293		—		—		14,293
Federal Home Loan Bank Stock		302,372		—		302,465		—		302,465
Subordinated debt		30,930		—		36,670				36,670
Interest payable		1,504		575		929		—		1,504
Derivatives		1,699		—		1,699		—		1,699

The balances and levels of the assets measured at fair value on a recurring basis at September 30, 2018 are presented in the following tables:

At September 30, 2018	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Investment securities:
U.S. government agency securities	$	—	$	984	$	—	$	984
Mortgage-backed securities		—		467,714		—		467,714
Municipals, tax-exempt		—		130,672		—		130,672
Treasury securities		—		7,131		—		7,131
Equity securities		—		3,067		—		3,067
Total	$	—	$	609,568		—	$	609,568
Loans held for sale		—		323,486		—		323,486
Mortgage servicing rights		—		—		79,890		79,890
Derivatives		—		13,662		—		13,662
Financial Liabilities:
Derivatives	$	—	$	4,076	$	—	$	4,076

The balances and levels of the assets measured at fair value on a non-recurring basis at September 30, 2018 are presented in the following tables:

The balances and levels of the assets measured at fair value on a recurring basis at December 31, 2017 are presented in the following tables:

At December 31, 2017	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities	$	—	$	986	$	—	$	986
Mortgage-backed securities		—		418,781		—		418,781
Municipals, tax-exempt		—		109,251		—		109,251
Treasury securities		—		7,252		—		7,252
Equity securities		—		4,118		3,604		7,722
Total	$	—	$	540,388	$	3,604	$	543,992
Loans held for sale		—		526,185		—		526,185
Mortgage servicing rights		—		—		76,107		76,107
Derivatives		—		9,690		—		9,690
Financial Liabilities:
Derivatives	$	—	$	1,699	$	—	$	1,699

The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2017 are presented in the following tables:

The following table summarizes changes in fair value on available-for-sale securities measured at fair value on a recurring basis using significant unobservable inputs, or Level 3 inputs, during the three and nine months ended September 30, 2018 and 2017.

As of December 31, 2017, there was no established market for certain other securities, and as such, the Company had estimated that historical costs approximated market value. As of January 1, 2018, the Company adopted ASU 2016-01 (See Note 1) and reclassified $3,604 of these other securities without readily determinable market values to other assets. An impairment of an equity security without a readily determinable fair value was considered to be other-than-temporary and was written down to its fair value resulting in an impairment loss of $975 during the three months ended September 30, 2017.

The following table presents information as of September 30, 2018 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

The following table presents information as of December 31, 2017 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

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

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

Net losses of $3,212 and $7,409 resulting from fair value changes of the mortgage loans were recorded to income during the three and nine months ended September 30, 2018, while net losses of $272 and net gains of $9,198 were recorded to income during the three and nine months ended September 30, 2017. The amount does not reflect changes in fair values

of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both loans held for sale and the related derivative instruments are recorded in Mortgage Banking Income in the Consolidated Statements of Income. Election of the fair value option allows the Company to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value. The fair value option election does not apply to the GNMA optional repurchase loans recorded as of December 31, 2017 which do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. At September 30, 2018, there were $58,435 of delinquent GNMA loans that had previously been sold. The Company determined there not to be a more-than-trivial benefit based on an analysis of interest rates and an assessment of potential reputational risk associated with these loans. As such, the Company had $0 in rebooked GNMA loans included in loans held for sale as of September 30, 2018. GNMA optional repurchase loans totaled $43,035 at December 31, 2017 and are included in loans held for sale on the accompanying Consolidated Balance Sheet. See Note 1, “Basis of presentation” in the Notes to the consolidated financial statements for additional details regarding rebooked GNMA loans.

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

The following table summarizes the differences between the fair value and the principal balance for loans held for sale measured at fair value as of September 30, 2018 and December 31, 2017:

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

The financial performance of the Mortgage segment is assessed based on results of operations reflecting direct revenues and expenses and allocated expenses. This approach gives management a better indication of the operating performance of the segment. When assessing the Banking segment’s financial performance, the CEO utilizes reports with indirect revenues and expenses including but not limited to the investment portfolio, electronic delivery channels and areas that

primarily support the banking segment operations. Therefore, these are included in the results of the Banking segment. Other indirect revenue and expenses related to general administrative areas are also included in the internal financial results reports of the Banking segment utilized by the CEO for analysis and are thus included for Banking segment reporting. The Mortgage segment utilizes funding sources from the Banking segment in order to fund mortgage loans that are ultimately sold on the secondary market. The Mortgage segment uses the proceeds from loan sales to repay obligations due to the Banking segment.

The following tables provides segment financial information for the three and nine months ended September 30, 2018 and 2017 follows:

Our Banking segment provides our Mortgage segment with an intercompany warehouse line of credit that is used to fund mortgage loans held for sale. The warehouse line of credit, which eliminated in consolidation, had a prime interest rate of 5.25% and 4.25% as of September 30, 2018 and 2017, respectively, and further limited based on interest income earned by the Mortgage segment. The amount of interest paid by the Mortgage segment to the Banking segment under this warehouse line of credit is recorded as interest income to the Banking segment and as interest expense to the Mortgage segment, both of which are included in the calculation of net interest income for each segment. The amount of interest paid by the Mortgage segment to the Banking segment under this warehouse line of credit was $3,997 and $13,022 for the three and nine months ended September 30, 2018, respectively, and $4,274 and $11,656 for the three and nine months ended September 30, 2017, respectively.

For more information regarding the Company’s segment reporting, see “Business segment highlights” and Note 21 “Segment reporting” in the notes to the consolidated financial statements in the Company’s Form 10-K filed with SEC on March 16, 2018.

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

Under regulatory guidance for non-advanced approaches institutions, the Bank is required to maintain minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of September 30, 2018 and December 31, 2017, the Bank and Company met all capital adequacy requirements to which it is subject.

Beginning in 2016, an additional conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. As of September 30, 2018 and December 31, 2017, the buffer was 1.75% and 1.25%, respectively. The capital conservative buffer will be fully phased in January 1, 2019 at 2.50%.

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

	Actual					For capital adequacy purposes					Minimum Capital adequacy with capital buffer					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2018
Total Capital (to risk-weighted assets)
FB Financial Corporation	$	567,909		12.8	%	$	354,943		8.0	%	$	432,587		9.8	%	N/A		N/A
FirstBank		542,824		12.3	%		353,056		8.0	%		430,287		9.8	%	$	441,320		10.0	%
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	540,301		12.2	%	$	265,722		6.0	%	$	343,224		7.8	%	N/A		N/A
FirstBank		515,216		11.7	%		264,213		6.0	%		341,276		7.8	%	$	264,213		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	540,301		11.3	%	$	191,257		4.0	%	N/A		N/A			N/A		N/A
FirstBank		515,216		10.7	%		192,604		4.0	%	N/A		N/A			$	240,755		5.0	%
Common Equity Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	510,301		11.5	%	$	199,683		4.5	%	$	277,338		6.3	%	N/A		N/A
FirstBank		515,216		11.7	%		198,160		4.5	%		275,222		6.3	%	$	286,231		6.5	%

	Actual					For capital adequacy purposes					Minimum Capital adequacy with capital buffer					To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2017
Total Capital (to risk-weighted assets)
FB Financial Corporation	$	496,422		12.0	%	$	330,672		8.0	%	$	382,340		9.3	%	N/A		N/A
FirstBank		466,102		11.3	%		329,984		8.0	%		381,544		9.3	%	$	412,480		10.0	%
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	472,381		11.4	%	$	247,969		6.0	%	$	299,629		7.3	%	N/A		N/A
FirstBank		442,061		10.7	%		247,422		6.0	%		298,968		7.3	%	$	247,422		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	472,381		10.5	%	$	180,643		4.0	%	N/A		N/A			N/A		N/A
FirstBank		442,061		9.8	%		180,987		4.0	%	N/A		N/A			$	226,234		5.0	%
Common Equity Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation	$	442,381		10.7	%	$	185,874		4.5	%	$	237,506		5.8	%	N/A		N/A
FirstBank		442,061		10.7	%		185,567		4.5	%		237,113		5.8	%	$	268,041		6.5	%

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

Following the initial public offering, participants in the EBI Plans were given the option to elect conversion of their outstanding cash-settled EBI Units to stock-settled EBI Units. At September 30, 2018 and December 31, 2017, there were 29,172 and 67,470 units valued at $1,143 and $2,833, respectively, outstanding under the equity-based incentive plans for employees who elected cash settlement of EBI units. Expense related to the cash settled EBI was $148 and $367 for the three and nine months ended September 30, 2018, respectively, and $280 and $762 for the three and nine months ended September 30, 2017, respectively. These cash-settled awards will be fully distributed in January 2019.

The following table summarizes information about vested and unvested restricted stock units, excluding cash-settled EBI units discussed above, outstanding at September 30, 2018 and 2017:

The total fair value of restricted stock units vested and released, excluding cash-settled EBI units discussed above, was $490 and $4,508 for the three and nine months ended September 30, 2018, respectively, and $427 and $1,773 for the three and nine months ended September 30, 2017, respectively.

The compensation cost related to stock grants and vesting of restricted stock units, excluding cash-settled EBI units discussed above, was $1,508 and $5,327 for the three and nine months ended September 30, 2018, respectively, and $1,654 and $4,808 for the three and nine months ended September 30, 2017, respectively. The current period included a one-time expense of $249 related to the modification of vesting terms of certain grants during the nine months ended September 30, 2018.

As of September 30, 2018 and December 31, 2017, there were $12,768 and $12,950, respectively, of total unrecognized compensation cost related to nonvested restricted stock units (excluding cash-settled EBI units discussed above) which is expected to be recognized over a weighted-average period of 2.33 years and 2.80 years, respectively. At September 30, 2018, there was $136 accrued in other liabilities related to dividends declared to be paid upon vesting and distribution of the underlying RSUs.

In 2016, the Company adopted an employee stock purchase plan (“ESPP”) under which employees, through payroll deductions, are able to purchase shares of Company common stock. The purchase price is 95% of the lower of the market price on the first or last day of the offering period. The maximum number of shares issuable during any offering period is 200,000 shares, and a participant may not purchase more than 725 shares during any offering period (and, in any event, no more than $25,000 of common stock in any calendar year). There were 12,072 and 28,609 shares issued under the ESPP during the three and nine months ended September 30, 2018, respectively, and 18,658 shares issued during the three or nine months ended September 30, 2017. As of September 30, 2018 and December 31, 2017, there were 2,432,356 shares and 2,460,965 shares, respectively, available for issuance under the ESPP.

The Bank has made and expects to continue to make loans to the directors, certain management and executive officers of the Company and their affiliates in the ordinary course of business.

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

Unfunded commitments to certain executive officers and directors and their associates totaled $10,852 and $4,672 at September 30, 2018 and December 31, 2017, respectively.

The Bank held deposits from related parties totaling $271,983 and $110,465 as of September 30, 2018 and December 31, 2017, respectively.

The Bank leases various office spaces from entities under operating leases related to the former majority shareholder and his son, who is also a Director of the Company, under varying terms. The Company had $121 and $137 in unamortized leasehold improvements related to these leases at September 30, 2018 and December 31, 2017, respectively. These improvements are being amortized over a term not to exceed the length of the lease. Lease expense for these properties totaled $128 and $387 for the three and nine months ended September 30, 2018, respectively, and $127 and $377 for the three and nine months ended September 30, 2017, respectively.

The Company holds an investment in a fund that was issued by an entity owned by one of its directors. The balance of this included in other assets was $127 and $200 as of September 30, 2018 and December 31, 2017, respectively.

The Company has an aviation time sharing agreement with an entity owned by the chairman of the Company’s Board of directors and his son, who is also a Director of the Company. The Company made payments of $36 and $127 during the three and nine months ended September 30, 2018, respectively, and $44 and $267 during the three and nine months ended September 30, 2017, respectively, under these agreements.

The Company is party to a registration rights agreement with its chairman of the Company’s Board of directors (and former majority shareholder) that was entered into in connection with the 2016 IPO, under which the Company is responsible for payment of expenses (other than underwriting discounts and commissions) relating to sales to the public by the shareholder of shares of the Company’s common stock beneficially owned by him. Such expenses include registration fees, legal and accounting fees, and printing costs payable by the Company and expensed when incurred. During the nine months ended September 30, 2018, the Company paid $671 thousand under this agreement related to the secondary offering completed during the second quarter of 2018.

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

The following is a discussion of our financial condition at September 30, 2018 and December 31, 2017 and our results of operations for the three and nine months ended September 30, 2018 and 2017, and should be read in conjunction with our audited consolidated financial statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2018 (our “Annual Report”) and with the accompanying unaudited notes to consolidated financial statements set forth in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 (this “Report”).

Certain statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements relating to the Company’s assets business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, the benefits, cost and synergies of the Clayton Banks acquisition, and the timing, benefits, costs and synergies of future acquisitions, disposition and other growth opportunities. These statements, which are based upon certain assumptions and estimates and describe the Company’s future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. The inclusion of these forward-looking statements should not be regarded as a representation by the Company or any other person that such expectations, estimates and projections will be achieved. Accordingly, the Company cautions investors that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond the Company’s control. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report including, without limitation, the risks and other factors set forth in the Company’s most recent Annual Report on Form 10-K under the captions “Cautionary note regarding forward-looking statements” and “Risk factors” and periodic and current reports on Form 10-Q and 8-K. Many of these factors are beyond the Company’s ability to control or predict. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from the forward-looking statements. Accordingly, investors should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date of this Report, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company.

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

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

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. Within our financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated balance sheet dates and our results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgments necessary to prepare our financial statements. Our critical accounting policies are described in our Annual Report under the captions “Item 7 – Management’s discussion and

analysis of financial condition and results of operations – Critical accounting policies” and “Item 8 – Financial Statement and Supplementary Data – Notes to consolidated financial statements.” Subsequent adoptions are further described in “Part I. Financial Information – Notes to Consolidated Financial Statements” of this Report.

We are a bank holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly owned bank subsidiary, FirstBank, the third largest bank headquartered in Tennessee, based on total assets. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, North Alabama, and North Georgia. At September 30, 2018, our footprint included 56 full-service bank branches serving the following Metropolitan Statistical Areas (“MSAs”): Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, Jackson, and Huntsville, Alabama and 12 community markets throughout Tennessee. FirstBank also provides mortgage banking services utilizing its bank branch network and mortgage banking offices strategically located throughout the southeastern United States and a national internet delivery channel.

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

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

	As of and for the three months ended						As of and for the nine months ended						As of and for the year ended
	September 30,						September 30,						December 31,
	2018			2017			2018			2017			2017
Statement of Income Data
Total interest income	$	62,612		$	48,415		$	176,503		$	114,582		$	169,613
Total interest expense		9,857			4,805			23,802			10,294			16,342
Net interest income		52,755			43,610			152,701			104,288			153,271
Provision for loan losses		1,818			(784	)		3,198			(1,906	)		(950	)
Total noninterest income		34,355			37,820			103,393			104,564			141,581
Total noninterest expense		57,213			69,224			169,722			164,777			222,317
Net income before income taxes		28,079			12,990			83,174			45,981			73,485
Income tax expense		6,702			4,602			19,978			16,601			21,087
Net income		21,377			8,388			63,196			29,380			52,398
Net interest income (tax—equivalent basis)		53,161			44,281			153,869			106,402			156,094
Per Common Share
Basic net income		0.69			0.28			2.05			1.10			1.90
Diluted net income		0.68			0.27			2.01			1.08			1.86
Book value⁽¹⁾		21.12			18.76			21.12			18.76			19.54
Tangible book value⁽⁴⁾		16.25			13.77			16.25			13.77			14.56
Selected Balance Sheet Data
Cash and cash equivalents		181,630			97,165			181,630			97,165			119,751
Loans held for investment		3,538,531			3,114,562			3,538,531			3,114,562			3,166,911
Allowance for loan losses		(27,608	)		(23,482	)		(27,608	)		(23,482	)		(24,041	)
Loans held for sale		323,486			466,369			323,486			466,369			526,185
Investment securities, fair value		609,568			543,282			609,568			543,282			543,992
Other real estate owned, net		13,587			13,812			13,587			13,812			16,442
Total assets		5,058,167			4,581,943			5,058,167			4,581,943			4,727,713
Customer deposits		4,017,391			3,614,220			4,017,391			3,614,220			3,578,694
Brokered and internet time deposits		112,082			104,318			112,082			104,318			85,701
Total deposits		4,129,473			3,718,538			4,129,473			3,718,538			3,664,395
Borrowings		210,968			210,855			210,968			210,855			347,595
Total shareholders' equity		648,731			572,528			648,731			572,528			596,729
Selected Ratios
Return on average:
Assets ⁽²⁾		1.72	%		0.80	%		1.76	%		1.14	%		1.37	%
Shareholders' equity⁽²⁾		13.3	%		6.0	%		13.7	%		9.2	%		11.2	%
Average tangible common equity⁽⁴⁾		17.4	%		7.7	%		18.1	%		12.0	%		14.4	%
Average shareholders' equity to average assets		12.9	%		13.2	%		12.9	%		12.4	%		12.2	%
Net interest margin (tax-equivalent basis)		4.71	%		4.61	%		4.72	%		4.50	%		4.46	%
Efficiency ratio		65.7	%		85.0	%		66.3	%		78.9	%		75.4	%
Adjusted efficiency ratio (tax-equivalent basis)⁽⁴⁾		63.7	%		64.4	%		63.7	%		68.8	%		67.3	%
Loans held for investment to deposit ratio		85.7	%		83.8	%		85.7	%		83.8	%		86.4	%
Yield on interest-earning assets		5.58	%		5.10	%		5.45	%		4.93	%		4.93	%
Cost of interest-bearing liabilities		1.20	%		0.71	%		1.01	%		0.62	%		0.66	%
Cost of total deposits		0.80	%		0.46	%		0.66	%		0.39	%		0.42	%
Credit Quality Ratios
Allowance for loan losses to loans, net of unearned income		0.78	%		0.75	%		0.78	%		0.75	%		0.76	%
Allowance for loan losses to nonperforming loans		257.6	%		261.3	%		257.6	%		261.3	%		238.1	%
Nonperforming loans to loans, net of unearned income		0.30	%		0.29	%		0.30	%		0.29	%		0.32	%
Capital Ratios (Company)
Shareholders' equity to assets		12.8	%		12.5	%		12.8	%		12.5	%		12.6	%
Tier 1 capital (to average assets)		11.3	%		11.4	%		11.3	%		11.4	%		10.5	%
Tier 1 capital (to risk-weighted assets)⁽³⁾		12.2	%		11.6	%		12.2	%		11.6	%		11.4	%
Total capital (to risk-weighted assets)⁽³⁾		12.8	%		12.2	%		12.8	%		12.2	%		12.0	%
Tangible common equity to tangible assets⁽⁴⁾		10.2	%		9.5	%		10.2	%		9.5	%		9.7	%
Common Equity Tier 1 (to risk-weighted assets) (CET1)⁽³⁾		11.5	%		10.8	%		11.5	%		10.8	%		10.7	%
Capital Ratios (Bank)
Shareholders' equity to assets		12.9	%		12.5	%		12.9	%		12.5	%		12.6	%
Tier 1 capital (to average assets)		10.7	%		10.6	%		10.7	%		10.6	%		9.8	%
Tier 1 capital (to risk-weighted assets)⁽³⁾		11.7	%		10.7	%		11.7	%		10.7	%		10.7	%
Total capital to (risk-weighted assets)⁽³⁾		12.3	%		11.3	%		12.3	%		11.3	%		11.3	%
Common Equity Tier 1 (to risk-weighted assets) (CET1)⁽³⁾		11.7	%		10.7	%		11.7	%		10.7	%		10.7	%

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

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

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

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Year ended December 31,
(dollars in thousands, except per share data)	2018			2017			2018			2017			2017
Adjusted efficiency ratio (tax-equivalent basis)
Total noninterest expense	$	57,213		$	69,224		$	169,722		$	164,777		$	222,317
Less variable compensation charge related to cash settled equity awards previously issued		—			—			—			635			635
Less merger and offering-related expenses		—			15,711			1,864			16,965			19,034
Less loss on sale of MSRs		—			—			—			249			249
Adjusted noninterest expense	$	57,213		$	53,513		$	167,858		$	146,928		$	202,399
Net interest income (tax-equivalent basis)	$	53,161		$	44,281		$	153,869		$	106,402		$	156,094
Total noninterest income		34,355			37,820			103,393			104,564			141,581
Less change in fair value on MSRs		(2,701	)		(893	)		(6,192	)		(3,424	)		(3,424	)
Less gain (loss) on sales of other real estate		120			75			(43	)		846			774
Less gain (loss) on other assets		326			(389	)		239			(350	)		(664	)
Less (loss) gain on securities		(27	)		254			(116	)		284			285
Adjusted noninterest income	$	36,637		$	38,773		$	109,505		$	107,208		$	144,610
Adjusted operating revenue	$	89,798		$	83,054		$	263,374		$	213,610		$	300,704
Efficiency ratio (GAAP)		65.7	%		85.0	%		66.3	%		78.9	%		75.4	%
Adjusted efficiency ratio (tax-equivalent basis)		63.7	%		64.4	%		63.7	%		68.8	%		67.3	%

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

Tangible book value per common stock and tangible common equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other

companies. The most directly comparable financial measures calculated in accordance with GAAP are book value per common stock and our total shareholders’ equity to total assets.

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

Return on average tangible common equity is a non-GAAP measure that uses the average shareholders’ equity and excludes the impact of goodwill and other intangibles. This measurement is also used by the Company’s management to evaluate capital adequacy. The following table presents, as of the dates set forth below, a reconciliation of total average tangible common equity and the return on average tangible common equity:

Effective July 31, 2017, the Company and FirstBank completed the previously announced merger with Clayton Bank and Trust (“CBT”) and American City Bank (“ACB” and together with CBT, the “Clayton Banks”), pursuant to the Stock Purchase Agreement dated February 8, 2017, as amended on May 26, 2017, with Clayton HC, Inc., a Tennessee Corporation (“Seller”), and James L. Clayton, the majority shareholder of Seller. The transaction was valued at approximately $236.5 million. The Company issued 1,521,200 shares of common stock and paid approximately $184.2 million to purchase all of the outstanding shares of the Clayton Banks. At closing, the Clayton Banks merged with and into FirstBank, with FirstBank continuing as the surviving banking corporation. After finalizing purchase accounting adjustments, the Clayton Banks merger added approximately $1,215.8 million in total assets, $1,059.7 million in loans, and $979.5 million in deposits. Operating results for the three and nine months ended September 30, 2018 include the operating results of the acquired assets and assumed liabilities of the Clayton Banks. Substantially all of the operations of the Clayton Banks are included in the Banking segment. We incurred merger and conversion expenses connected with this transaction amounting to $0 and $1.2 million during the three and nine months ended September 30, 2018, respectively, and $15.7 million and $17.0 million during the three and nine months ended September 30, 2017, respectively.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law. The Tax Reform Act provides for significant changes to the U.S. tax code that impact businesses. Effective January 1, 2018, the Tax Reform Act reduces the U.S. federal tax rate for corporations from 35% to 21% for U.S. taxable income and requires a one-time remeasurement of deferred taxes to reflect their value at a lower tax rate of 21%. The Tax Reform Act includes other changes, including, but not limited to, immediate deductions for certain new investments instead of deductions for depreciation expense over time, additional limitations on the deductibility of executive compensation and limitations on the deductibility of interest. For more information regarding the impact of the Tax Reform Act on the Company, see Note 15, “Income Taxes” in the notes to our consolidated financial statements on Form 10-K filed with the SEC on March 16, 2018.

For the three months ended September 30, 2018, net income was $21.4 million compared to $8.4 million in the three months ended September 30, 2017. Pre-tax income was $28.1 million in the three months ended September 30, 2018 compared with $13.0 million in the same period in 2017. Diluted earnings per common share was $0.68 and $0.27 for the three months ended September 30, 2018 and 2017, respectively. Our net income represented a return on average assets (“ROAA”) of 1.72% and 0.80% for the three months ended September 30, 2018 and 2017, respectively, and a return on average equity (“ROAE”) of 13.3% and 6.0% for the same periods. Our ratio of return on average tangible common equity (“ROATE”) in the three months ended September 30, 2018 and 2017 was 17.4% and 7.7%, respectively. Our ratio of average shareholders’ equity to average assets in the three months ended September 30, 2018 and 2017 was 12.9% and 13.2%, respectively.

For the nine months ended September 30, 2018, net income was $63.2 million compared to $29.4 million in the nine months ended September 30, 2017. Pre-tax income was $83.2 million in the nine months ended September 30, 2018 compared with $46.0 million in the same period in 2017. Diluted earnings per common share was $2.01 and $1.08 for the nine months ended September 30, 2018 and 2017, respectively. Our net income represented a ROAA of 1.76% and 1.14% for the nine months ended September 30, 2018 and 2017, respectively, and a ROAE of 13.7% and 9.2% for the same periods. Our ratio of ROATE in the nine months ended September 30, 2018 and 2017 was 18.1% and 12.0%, respectively. Our ratio of average shareholders’ equity to average assets in the nine months ended September 30, 2018 and 2017 was 12.9% and 12.4%, respectively.

During the three months ended September 30, 2018, net interest income increased to $52.8 million compared to $43.6 million in the three months ended September 30, 2017, which was attributable to an increase in interest income and expense, primarily driven by loan and deposit growth, including the added loan and deposits resulting from the Clayton Banks merger in addition to increased overall interest rates. Our net interest margin, on a tax-equivalent basis, increased to 4.71% for the three months ended September 30, 2018 as compared to 4.61% for the three months ended September 30, 2017, due primarily to the increase in contractual loan yield earned on our loan portfolio offset by elevated

cost of funds. Noninterest income decreased $3.5 million for the three months ended September 30, 2018, to $34.4 million from $37.8 million for the same period in the previous year. The decrease in noninterest income was largely a result of a decrease in mortgage banking income which was negatively impacted by rising rates and other related market conditions.

Noninterest expense decreased to $57.2 million for the three months ended September 30, 2018 compared to $69.2 million for the three months ended September 30, 2017. The decrease was a result of $15.7 million in merger and conversion costs incurred during the three months ended September 30, 2017 related to our merger with the Clayton Banks, which was completed on July 31, 2017.

During the nine months ended September 30, 2018, net interest income increased to $152.7 million compared to $104.3 million in the nine months ended September 30, 2017, which was attributable to an increase in interest income and expense, primarily driven by loan and deposit growth resulting from the Clayton Banks merger in addition to increased overall interest rates. Our net interest margin, on a tax-equivalent basis, increased to 4.72% for the nine months ended September 30, 2018 as compared to 4.50% for the nine months ended September 30, 2017 due to loan and deposit growth, including the impact of the product mix acquired from the Clayton Banks, in addition to an increase in contractual loan yield during the period offset by elevated costs of funds. Noninterest income for the nine months ended September 30, 2018 decreased by $1.2 million to $103.4 million from $104.6 million in the same period in the previous year. The decrease in noninterest income was largely a result of a decrease in mortgage banking income.

Noninterest expense increased to $169.7 million for the nine months ended September 30, 2018 compared to $164.8 million for the nine months ended September 30, 2017. The increase was a result of our overall growth and added operational costs resulting from the merger with the Clayton Banks offset by the decrease in merger and conversion costs associated with the merger compared during the previous period.

Our total assets increased to $5.06 billion at September 30, 2018 as compared to $4.73 billion at December 31, 2017. Loans held for investment increased $371.6 million to $3.54 billion, offset by a decline in loans held for sale of $202.7 million to $323.5 million at September 30, 2018.

We grew total deposits by $465.1 million to $4.13 billion at September 30, 2018 as compared to $3.66 billion at December 31, 2017. Noninterest bearing deposits as a percentage of total deposits was 23.3% at September 30, 2018 compared to 24.2% at December 31, 2017.

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

Income before taxes increased by $18.6 million, or 205.8%, in the three months ended September 30, 2018 to $27.6 million as compared to $9.0 million in the three months ended September 30, 2017. This increase was a result of an increase in net interest income of $9.0 million in addition to a decrease in noninterest expense of $11.1 million. The increase in net interest income was a result of our loan growth of $752.3 million in average loan balances, including the impact of the merger with the Clayton Banks, combined with increased interest rates and a continuing strong credit environment. The decrease in noninterest expense was associated a reduction in merger and conversion expenses related to our merger with the Clayton Banks, which was completed on July 31, 2017. Noninterest income increased $1.1 million to $15.1 million in the three months ended September 30, 2018 as compared to $14.0 million in the three months ended September 30, 2017. Results of our Banking Segment also include mortgage retail footprint pre-tax net contribution was $1.0 million in the three months ended September 30, 2018 compared to $1.3 million in the three months ended September 30, 2017.

Income before taxes from the Banking segment increased by $43.6 million, or 120.5%, in the nine months ended September 30, 2018 to $79.7 million as compared to $36.1 million in the nine months ended September 30, 2017. The increase reflects an improvement of $49.6 million in net interest income due to an increase of $1.2 billion in average loan balances driven by our growth including the impact of our merger with the Clayton Banks combined with increased interest rates and a continuing strong credit environment. Noninterest income increased $4.0 million to $42.1 million in the nine months ended September 30, 2018 as compared to $38.2 million in the nine months ended September 30, 2017. Noninterest expense also increased $4.9 million, primarily due to increased costs associated with our growth including personnel costs and operational costs resulting from our merger with the Clayton Banks offset by a decrease in merger

and conversion costs during the period. The results of our Banking Segment also include mortgage retail footprint pre-tax net contribution of $3.3 million in the nine months ended September 30, 2018 as compared to $3.9 million in the nine months ended September 30, 2017.

Income before taxes from the Mortgage segment decreased 89.0% to $0.4 million in the three months ended September 30, 2018 as compared to $3.9 million in the three months ended September 30, 2017 primarily due to a decrease in noninterest income. Noninterest income decreased $4.6 million to $19.2 million for the three months ended September 30, 2018 as compared to $23.8 million for the three months ended September 30, 2017, driven by decreased interest rate lock commitment volume. Interest rate lock commitment volume decreased $295.8 million, or 14.8%, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to higher interest rates and competitive pricing pressures. The change in fair value on MSRs and related hedging activities included in mortgage banking income amounted to a loss of $2.7 million mainly due to decay during the three months ended September 30, 2018. Decay exists regardless of MSR hedging activity and is due to the natural aging and paydown of the mortgage servicing portfolio with the payments from customers more than offsetting the decay, resulting in positive gross servicing income of $2.9 million. This compares to a decline in fair value on MSRs and related hedging activities of $0.9 million and gross servicing income of $2.6 million, respectively for the three months ended September 30, 2017. Interest rate lock commitments in the pipeline at September 30, 2018 were $452.8 million compared with $540.7 million at September 30, 2017 and $504.2 million at December 31, 2017. During the three months ended September 30, 2018, we sold $39.4 million of mortgage servicing rights. There was no material gain or loss was recognized in this transaction.

Income before taxes from the Mortgage segment declined $6.4 million in the nine months ended September 30, 2018 to $3.5 million as compared to $9.8 million in the nine months ended September 30, 2017. While interest rate lock commitment volume increased $53.3 million for the nine months ended September 30, 2018 to $5,809.9 million as compared to $5,756.6 million for the nine months ended September 30, 2017, noninterest income decreased $5.1 million to $61.2 million for the nine months ended September 30, 2018 as compared to $66.4 million for the nine months ended September 30, 2017 driven by overall compressing margins experienced across the market. Noninterest income for the nine months ended September 30, 2018 also included a $6.2 million charge related to the change in fair value of the MSRs and related hedging activity. This compares to a $3.2 million charge related to the change in fair value of the MSRs and related hedging activities during the nine months ended September 30, 2017. Noninterest expense for the nine months ended September 30, 2018 and 2017 was $57.3 million and $57.2 million, respectively. This included a loss of $0.2 million on the sale of mortgage servicing rights during the nine months ended September 30, 2017. There was no material gain or loss recognized on the sale of mortgage servicing rights in the nine months ended September 30, 2018.

Throughout the following discussion of our operating results, we present our net interest income, net interest margin and efficiency ratio on a fully tax-equivalent basis. The fully tax-equivalent basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, which enhances comparability of net interest income arising from taxable and tax-exempt sources. The adjustment to convert certain income to a tax-equivalent basis consists of dividing tax-exempt income by one minus the combined federal and blended state statutory income tax rate of 26.06% and 39.23% for the three and nine months ended September 30, 2018 and 2017.

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

Three months ended September 30, 2018 compared to three months ended September 30, 2017

Net interest income increased 21.0% to $52.8 million in the three months ended September 30, 2018 compared to $43.6 million in the three months ended September 30, 2017. On a tax-equivalent basis, net interest income increased $8.9

million to $53.2 million in the three months ended September 30, 2018 as compared to $44.3 million in the three months ended September 30, 2017. The increase in tax-equivalent net interest income in the three months ended September 30, 2018 was primarily driven by increased volume on loans held for investment offset by increased interest expense primarily driven by higher rates on deposits.

Interest income, on a tax-equivalent basis, was $63.0 million for the three months ended September 30, 2018, compared to $49.1 million for the three months ended September 30, 2017, an increase of $13.9 million. The two largest components of interest income are loan income and investment income. Loan income consists primarily of interest earned on our loans held for investment portfolio in addition to loans held for sale. Investment income consists primarily of interest earned on our investment portfolio made up of both taxable and tax-exempt securities. Interest income on loans held for investment, on a tax-equivalent basis, increased $13.7 million to $53.9 million from $40.2 million for the three months ended September 30, 2018 and 2017, respectively, primarily due to volume driven by increased average loan balances of $752.3 million. A secondary driver of the increase in interest income on loans held for investment were increased rates. The tax-equivalent yield on loans held for investment was 6.19%, up 29 basis points from the three months ended September 30, 2017. The increase in yield was primarily due to an increase in contractual interest rates which yielded 5.47% in the three months ended September 30, 2018 compared with 5.08% during the three months ended September 30, 2017. Slightly offsetting this increase were decreases to nonaccrual interest collections of 9 basis points and syndicated fee income of 5 basis points during the same period. Also included in the loan yield is the purchase accounting contribution of accretion which increased slightly to 0.25% from 0.23% for the three months ended September 30, 2018 and 2017, respectively.

The components of our loan yield, a key driver to our NIM for the three months ended September 30, 2018 and 2017, were as follows:

Our NIM, on a tax-equivalent basis, increased to 4.71% during the three months ended September 30, 2018 from 4.61% in the three months ended September 30, 2017, primarily a result of loan growth and increases to contractual loan yields.

Accretion on purchased loans contributed 19 basis points and 16 basis points to the NIM for the three months ended September 30, 2018 and 2017, respectively. Additionally, nonaccrual interest collections and syndicated loan fees contributed 6 and 0 basis points, respectively to the NIM for the three months ended September 30, 2018, compared to 12 and 3 basis points to the NIM for the three months ended September 30, 2017.

For the three months ended September 30, 2018, interest income on loans held for sale decreased $0.1 million to $4.0 million compared to the three months ended September 30, 2017 due to a decrease in volume resulting in a decline of $0.6 million offset by an increase in rates contributing additional income of $0.5 million. The average balance of loans held for sale decreased $57.0 million to $353.5 million for the three months ended September 30, 2018 compared to $410.4 million for the three months ended September 30, 2017.

For the three months ended September 30, 2018, investment income, on a tax-equivalent basis, increased to $4.5 million for the three months ended September 30, 2018 compared to $4.0 million for the three months ended September 30, 2017. The average balance in the investment portfolio for the three months ended September 30, 2018 was $604.4 million compared to $542.7 million in the three months ended September 30, 2017.

Interest expense was $9.9 million for the three months ended September 30, 2018, an increase of $5.1 million compared to the three months ended September 30, 2017. The primary driver for the increase in total interest expense is the increase in interest expense on deposits of $3.9 million to $7.9 million for the three months ended September 30, 2018 compared to $4.0 million for the three months ended September 30, 2017. This increase was largely attributed to money

market and time deposit interest expense, which increased to $3.1 million and $3.0 million, respectively, for the three months ended September 30, 2018 from $1.7 million and $1.1 million, respectively, for the three months ended September 30, 2017. The $1.4 million increase in money market interest expense during the three months ended September 30, 2018 was primarily attributable to increased interest rates, which rose to 1.16%, up 49 basis points from the three months ended September 30, 2017. Average money market balances increased $44.2 million to $1,067.8 million during the three months ended September 30, 2018 from $1,023.6 million for the same period in the previous year. The $1.9 million increase in time deposit interest expense during the three months ended September 30, 2018 was attributable to both increased interest rates and increased volume from the previous year. The rate on total time deposits was 1.46%, up 70 basis points from the three months ended September 30, 2017. Time deposit balances increased $217.9 million to $807.1 million during the three months ended September 30, 2018 from $589.2 million for the same period in the previous year. This aggressive growth was achieved through a time deposit campaign implemented during the three months ended September 30, 2018. Additionally, we purchased $53.9 million of brokered deposits at the end of the current quarter to lower funding costs by swapping FHLB borrowings with lower cost brokered time deposits. This will result in higher time deposit interest expense during the fourth quarter of 2018 and the first quarter in 2019. Interest bearing checking expense also increased $0.7 million to $1.7 million during the three months ended September 30, 2018 from $1.0 million for the same period in the previous year. The overall growth of our deposits came with a higher cost of total deposits of 0.80% for the three months ended September 30, 2018 compared to 0.46% for the three months ended September 30, 2017.

A secondary driver of the increase in total interest expense was interest expense on borrowings, which increased $1.1 million to $2.0 million for the three months ended September 30, 2018 compared to $0.9 million during the three months ended September 30, 2017. This increase was primarily driven by increased volume related to FHLB advances during the three months ended September 30, 2018 as the cost of total borrowings declined to 2.27% from 2.53% for the three months ended September 30, 2017. The average FHLB advances increased $206.2 to $293.0 million for the three months ended September 30, 2018 compared to $86.8 million for the three months ended September 30, 2017. This increase in average FHLB advances was particularly due to the funding strategy implemented with the merger of the Clayton banks. For more information about our borrowings, refer to the discussion in this section under the heading “Financial condition: Borrowed funds.”

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

	Three Months Ended September 30,
	2018								2017
(dollars in thousands on tax-equivalent basis)	Average balances⁽¹⁾			Interest income/ expense		Average yield/ rate			Average balances		⁽¹⁾	Interest income/ expense		Average yield/ rate
Interest-earning assets:
Loans⁽²⁾⁽⁴⁾	$	3,457,526		$	53,928		6.19	%	$	2,705,265		$	40,242		5.90	%
Loans held for sale		353,477			4,019		4.51	%		410,434			4,167		4.03	%
Securities:
Taxable		482,733			3,151		2.59	%		425,281			2,399		2.24	%
Tax-exempt⁽⁴⁾		121,680			1,394		4.55	%		117,429			1,617		5.46	%
Total Securities⁽⁴⁾		604,413			4,545		2.98	%		542,710			4,016		2.94	%
Federal funds sold		18,014			97		2.14	%		39,363			76		0.77	%
Interest-bearing deposits with other financial institutions		33,184			214		2.56	%		108,185			448		1.64	%
FHLB stock		13,179			215		6.47	%		8,892			137		6.11	%
Total interest earning assets⁽⁴⁾		4,479,793			63,018		5.58	%		3,814,849			49,086		5.10	%
Noninterest Earning Assets:
Cash and due from banks		52,980								55,485
Allowance for loan losses		(26,487	)							(23,875	)
Other assets⁽³⁾		425,911								316,019
Total noninterest earning assets		452,404								347,629
Total assets	$	4,932,197							$	4,162,478
Interest-bearing liabilities:
Interest bearing deposits:
Interest bearing checking	$	870,964		$	1,690		0.77	%	$	788,238		$	1,040		0.52	%
Money market		1,067,754			3,126		1.16	%		1,023,612			1,722		0.67	%
Savings deposits		177,698			68		0.15	%		166,184			67		0.16	%
Customer time deposits		745,616			2,699		1.44	%		493,992			825		0.66	%
Brokered and internet time deposits		61,478			281		1.81	%		95,207			300		1.25	%
Time deposits		807,094			2,980		1.46	%		589,199			1,125		0.76	%
Total interest bearing deposits		2,923,510			7,864		1.07	%		2,567,233			3,954		0.61	%
Other interest-bearing liabilities:
Securities sold under agreements to repurchase and federal funds purchased		24,484			51		0.83	%		15,828			9		0.23	%
Federal Home Loan Bank advances		293,020			1,524		2.06	%		86,795			428		1.96	%
Subordinated debt		30,930			418		5.36	%		30,930			414		5.31	%
Total other interest-bearing liabilities		348,434			1,993		2.27	%		133,553			851		2.53	%
Total Interest-bearing liabilities		3,271,944			9,857		1.20	%		2,700,786			4,805		0.71	%
Noninterest bearing liabilities:
Demand deposits		980,296								871,973
Other liabilities		41,569								39,310
Total noninterest-bearing liabilities		1,021,865								911,283
Total liabilities		4,293,809								3,612,069
Shareholders' equity		638,388								550,409
Total liabilities and shareholders' equity	$	4,932,197							$	4,162,478
Net interest income (tax-equivalent basis)				$	53,161							$	44,281
Interest rate spread (tax-equivalent basis)							4.39	%							4.40	%
Net interest margin (tax-equivalent basis) ⁽⁵⁾							4.71	%							4.61	%
Cost of total deposits							0.80	%							0.46	%
Average interest-earning assets to average interesting-bearing liabilities							136.9	%							141.2	%

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Net interest income increased 46.4% to $152.7 million in the nine months ended September 30, 2018 compared to $104.3 million in the nine months ended September 30, 2017. On a tax-equivalent basis, net interest income increased $47.5 million to $153.9 million in the nine months ended September 30, 2018 as compared to $106.4 million in the nine months ended September 30, 2017. The increase in tax-equivalent net interest income in the nine months ended September 30, 2018 was primarily driven by increased volume on loans held for investment, which was slightly offset by increased volume and rates for deposits and increased volume on Federal Home Loan Bank advances.

Interest income, on a tax-equivalent basis, was $177.7 million for the nine months ended September 30, 2018, compared to $116.7 million for the nine months ended September 30, 2017, an increase of $61.0 million. The two largest components of interest income are loan income and investment income. Loan income consists primarily of interest earned on our loans held for investment portfolio in addition to loans held for sale. Investment income consists primarily of interest earned on our investment portfolio made up of both taxable and tax-exempt securities. Interest income on loans held for investment, on a tax-equivalent basis, increased $60.2 million to $150.7 million from $90.4 million for the nine months ended September 30, 2018 and 2017, respectively, primarily due to volume driven by increased average loan balances of $1,219.0 million. A secondary driver of the increase in interest income on loans held for investment were increased rates. The tax-equivalent yield on loans held for investment was 6.08%, up 31 basis points from the nine months ended September 30, 2017. The increase in yield was primarily due to increases in contractual interest rates and loan fees which yielded 5.38% and 0.41%, respectively, in the nine months ended September 30, 2018 compared with 5.01% and 0.35% during the nine months ended September 30, 2017, respectively. Slightly offsetting this increase was a decrease in nonaccrual interest collections of 8 basis points and syndicated fee income of 4 basis points during the nine months ended September 30, 2018 compared to the same period in the previous year. Also included in the loan yield is the purchase accounting contribution of accretion which remained flat yielding 0.23% for the nine months ended September 30, 2018 and 2017.

The components of our loan yield, a key driver to our NIM for the nine months ended September 30, 2018 and 2017, were as follows:

Our NIM, on a tax-equivalent basis, increased to 4.72% during the nine months ended September 30, 2018 from 4.50% in the nine months ended September 30, 2017, primarily a result of loan growth and increases to contractual loan yields partly offset by increased cost of funds.

Accretion on purchased loans contributed 18 and 15 basis points to the NIM for the nine months ended September 30, 2018 and 2017, respectively. Additionally, nonaccrual interest collections and syndicated loan fees contributed 4 and 1 basis points, respectively, to the NIM for the nine months ended September 30, 2018 compared to 9 and 3 basis points, respectively, to the NIM for the nine months ended September 30, 2017.

For the nine months ended September 30, 2018, interest income on loans held for sale increased $0.2 million to $12.6 million compared to $12.4 million for the nine months ended September 30, 2017 due to a decrease in volume resulting in a decline of $0.4 million offset by an increase in rates contributing additional income of $0.5 million. The average balance of loans held for sale decreased $11.2 million to $383.2 million for the nine months ended September 30, 2018 compared to $394.4 million for the nine months ended September 30, 2017.

For the nine months ended September 30, 2018 investment income, on a tax-equivalent basis, increased to $13.1 million from $12.6 for the nine months ended September 30, 2018 and 2017, respectively. The average balance in the investment portfolio in the nine months ended September 30, 2018 was $590.2 million compared to $560.0 million in the nine months ended September 30, 2017.

Interest expense was $23.8 million for the nine months ended September 30, 2018, an increase of $13.5 million as compared to the nine months ended September 30, 2017. The primary driver for the increase in total interest expense is the increase in interest expense on deposits of $10.5 million to $18.8 million for the nine months ended September 30, 2018, compared to $8.4 million for the nine months ended September 30, 2017. The increase was largely attributed to interest bearing checking, money market and time deposits which each increased to $4.6 million, $7.3 million, and $5.8 million, respectively, for the nine months ended September 30, 2018 from $2.5 million, $3.4 million, and $2.0 million, respectively, for the nine months ended September 30, 2017. The $2.1 million increase in interest bearing checking interest expense during the nine months ended September 30, 2018 was attributed to both increases in rates and volume. The interest rates on interest bearing checking rose to 0.67%, up 21 basis points from the nine months ended September 30, 2017. Average interest bearing checking balances increased $189.7 million to $916.4 million during the nine months ended September 30, 2018 from $726.7 million for the same period in the previous year. The $3.9 million increase in money market interest expense during the nine months ended September 30, 2018 was attributed to increased rates with a secondary driver of increased volume. The interest rates on money markets rose to 0.96%, up 40 basis points from the nine months ended September 30, 2017. Average money market balances increased $210.5 million to $1,016.6 million during the nine months ended September 30, 2018 from $806.0 million for the same period in the previous year. The $4.4 million increase in time deposit interest expense during the nine months ended September 30, 2018 was attributed to increased volume, with average customer time deposits increasing $250.8 million during the nine months ended September 30, 2018 and average brokered and internet time deposits increasing $51.3 million during the same period. The growth in volume in the respective deposit categories was largely attributed to our merger with the Clayton Banks, which was completed on July 31, 2017. A secondary driver of the cost of time deposits was the 2018 increase in rates of 50 basis points to 1.21% during the nine months ended September 30, 2018. The growth of our total deposits came with a higher overall cost of total deposits of 0.66% for the nine months ended September 30, 2018 compared to 0.39% for the nine months ended September 30, 2017.

A secondary driver of the increase in total interest expense was interest expense on total borrowings, which increased $3.1 million to $5.0 million during the nine months ended September 30, 2018 compared to $1.9 million during the nine months ended September 30, 2017. This increase was primarily driven by increased volume related to FHLB advances during the nine months ended September 30, 2018 as the cost of total borrowing declined to 2.19% from 2.24% for the nine months ended September 30, 2017. Average FHLB advances increased $186.8 million to $252.9 million for the nine months ended September 30, 2018 compared to $66.1 million for the nine months ended September 30, 2017. This increase in average FHLB advances was particularly due to the funding strategy implemented with the merger of the Clayton banks. For more information about our borrowings, refer to the discussion in this section under the heading “Financial condition: Borrowed funds.”

	Nine Months Ended September 30,
	2018								2017
(dollars in thousands on tax-equivalent basis)	Average balances⁽¹⁾			Interest income/ expense		Average yield/ rate			Average balances⁽¹⁾			Interest income/ expense		Average yield/ rate
Interest-earning assets:
Loans⁽²⁾⁽⁴⁾	$	3,314,403		$	150,685		6.08	%	$	2,095,419		$	90,447		5.77	%
Loans held for sale		383,242			12,574		4.39	%		394,425			12,400		4.20	%
Securities:
Taxable		474,729			9,137		2.57	%		441,063			7,555		2.29	%
Tax-exempt⁽⁴⁾		115,452			3,972		4.60	%		118,982			5,086		5.72	%
Total Securities⁽⁴⁾		590,181			13,109		2.97	%		560,045			12,641		3.02	%
Federal funds sold		19,320			252		1.74	%		18,127			126		0.93	%
Interest-bearing deposits with other financial institutions		37,124			534		1.92	%		85,398			777		1.22	%
FHLB stock		12,510			517		5.53	%		8,130			305		5.02	%
Total interest earning assets⁽⁴⁾		4,356,780			177,671		5.45	%		3,161,544			116,696		4.93	%
Noninterest Earning Assets:
Cash and due from banks		48,177								51,695
Allowance for loan losses		(25,201	)							(22,953	)
Other assets⁽³⁾		411,709								260,517
Total noninterest earning assets		434,685								289,259
Total assets	$	4,791,465							$	3,450,803
Interest-bearing liabilities:
Interest bearing deposits:
Interest bearing checking	$	916,407		$	4,618		0.67	%	$	726,667		$	2,494		0.46	%
Money market		1,016,559			7,327		0.96	%		806,036			3,396		0.56	%
Savings deposits		179,686			205		0.15	%		146,291			173		0.16	%
Customer time deposits		664,505			5,760		1.16	%		413,739			2,010		0.65	%
Broker and internet time deposits		73,683			923		1.67	%		22,400		302			1.80	%
Time deposits		738,188			6,683		1.21	%		436,139			2,312		0.71	%
Total interest bearing deposits		2,850,840			18,833		0.88	%		2,115,133			8,375		0.53	%
Other interest-bearing liabilities:
Securities sold under agreements to repurchase and federal funds purchased		19,916			121		0.81	%		17,296			31		0.24	%
Federal Home Loan Bank advances		252,927			3,612		1.91	%		66,101			811		1.64	%
Subordinated debt		30,930			1,236		5.34	%		30,930			1,077		4.66	%
Total other interest-bearing liabilities		303,773			4,969		2.19	%		114,327			1,919		2.24	%
Total Interest-bearing liabilities		3,154,613			23,802		1.01	%		2,229,460			10,294		0.62	%
Noninterest bearing liabilities:
Demand deposits		961,583								754,819
Other liabilities		57,223								38,264
Total noninterest-bearing liabilities		1,018,806								793,083
Total liabilities		4,173,419								3,022,543
Shareholders' equity		618,046								428,260
Total liabilities and shareholders' equity	$	4,791,465							$	3,450,803
Net interest income (tax-equivalent basis)				$	153,869							$	106,402
Interest rate spread (tax-equivalent basis)							4.44	%							4.32	%
Net interest margin (tax-equivalent basis)⁽⁵⁾							4.72	%							4.50	%
Cost of total deposits							0.66	%							0.39	%
Average interest-earning assets to average interest-bearing liabilities							138.1	%							141.81	%

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

The tables below present the components of the changes in net interest income for the three and nine months ended September 30, 2018 and 2017. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

Three months ended September 30, 2018 compared to three months ended September 30, 2017

	Three months ended September 30, 2018 compared to three months ended September 30, 2017 due to changes in
(in thousands on a tax-equivalent basis)	Volume			Rate			Net increase (decrease)
Interest-earning assets:
Loans⁽¹⁾⁽²⁾	$	11,733		$	1,953		$	13,686
Loans held for sale		(648	)		500			(148	)
Securities available for sale and other securities:
Taxable		375			377			752
Tax Exempt⁽²⁾		49			(272	)		(223	)
Federal funds sold and balances at Federal Reserve Bank		(115	)		136			21
Time deposits in other financial institutions		(484	)		250			(234	)
FHLB stock		70			8			78
Total interest income⁽²⁾		10,980			2,952			13,932
Interest-bearing liabilities:
Interest bearing checking		161			489			650
Money market		129			1,275			1,404
Savings deposits		4			(3	)		1
Time deposits		805			1,050			1,855
Securities sold under agreements to repurchase and federal funds purchased		18			24			42
Federal Home Loan Bank advances		1,073			23			1,096
Subordinated debt		—			4			4
Total interest expense		2,190			2,862			5,052
Change in net interest income⁽²⁾	$	8,790		$	90		$	8,880

As discussed above, the $13.7 million increase in tax-equivalent interest income on loans held for investment during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was the primary driver of the $8.9 million increase in tax-equivalent net interest income. The increase in loan interest income on loans held for investment of $13.7 million was driven by an increase in average loans held for investment of $752.3 million to $3.5 billion as of September 30, 2018, as compared to $2.7 billion as of September 30, 2017, which was largely attributable to loan growth in our metropolitan markets in addition to our merger with the Clayton Banks, which was completed on July 31, 2017. The increase in loan interest income was partially offset by an increase of $5.1 million in interest expense due to increases in deposit rates, time deposit volume, and to a lesser extent, FHLB advances volume.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

	Nine months ended September 30, 2018 compared to nine months ended September 30, 2017 due to changes in
(dollars in thousands on a tax-equivalent basis)	Volume			Rate			Net increase (decrease)
Interest-earning assets:
Loans⁽¹⁾⁽²⁾	$	55,420		$	4,818		$	60,238
Loans held for sale		(367	)		541			174
Securities available for sale and other securities:
Taxable		648			934			1,582
Tax Exempt⁽²⁾		(121	)		(993	)		(1,114	)
Federal funds sold and balances at Federal Reserve Bank		16			110			126
Time deposits in other financial institutions		(694	)		451			(243	)
FHLB stock		181			31			212
Total interest income⁽²⁾		55,083			5,892			60,975
Interest-bearing liabilities:
Interest bearing checking		956			1,168			2,124
Money market		1,517			2,414			3,931
Savings deposits		38			(6	)		32
Time deposits		2,735			1,636			4,371
Securities sold under agreements to repurchase and federal funds purchased		16			74			90
Federal Home Loan Bank advances		2,668			133			2,801
Subordinated debt		(8	)		167			159
Total interest expense		7,922			5,586			13,508
Change in net interest income⁽²⁾	$	47,161		$	306		$	47,467

As discussed above, the $60.2 million increase in loans held for investment tax-equivalent interest income during the nine months ended September 30, 2018 compared to September 30, 2017 was the primary driver of the $47.5 million increase in net interest income. The increase in loan interest income was primarily driven by an increase in average loans held for investment of $1.2 billion, or 58.2%, to $3.3 billion for the nine months ended September 30, 2018, as compared to $2.1 billion for the nine months ended September 30, 2017, which was largely attributable to our merger with the Clayton Banks in addition to loan growth in our metropolitan markets. The increase in loan income was partially offset by an increase in interest expense of $13.5 million due to increases in rates and volume of interest-bearing deposits and to a lesser extent, FHLB advances volume.

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

Three months ended September 30, 2018 compared to three months ended September 30, 2017

Our provision for loan losses for the three months ended September 30, 2018 was $1.8 million as compared to a reversal of $0.8 million for the three months ended September 30, 2017, is primarily attributable to our loan growth.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Our provision for loan losses for the nine months ended September 30, 2018 was $3.2 million as compared to a reversal of $1.9 million in the same period in the previous year, is primarily attributable to our loan growth and a couple of large

recoveries during the nine months ended September 30, 2017. This increase in provision expense also included $0.8 million of subsequent deterioration on PCI loans during the nine months ended September 30, 2018.

Our noninterest income includes gains on sales of mortgage loans, fees on mortgage loan originations, loan servicing fees, hedging results, fees generated from deposit services, investment services and trust income, gains and losses on securities, other real estate owned and other assets and other miscellaneous noninterest income.

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

Three months ended September 30, 2018 compared to three months ended September 30, 2017

Noninterest income was $34.4 million for the three months ended September 30, 2018, a decrease of $3.5 million, or 9.2%, as compared to $37.8 million for the three months ended September 30, 2017. Noninterest income to average assets (excluding any gains or losses from sale of securities) was 2.8% in the three months ended September 30, 2018 as compared to 3.6% in the three months ended September 30, 2017.

Mortgage banking income primarily includes origination fees on mortgage loans including fees and realized gains and losses on the sale of mortgage loans, unrealized change in fair value of mortgage loans and derivatives, and mortgage servicing fees. Mortgage banking income is initially driven by the recognition of interest rate lock commitments (IRLCs) at fair value at inception of the IRLCs. This is subsequently adjusted for changes in the overall interest rate environment offset by derivative contracts entered into to offset the interest rate exposure. Upon the sale of the loan, the net fair value gain is reclassified as a realized gain on sale of loan. Mortgage banking income was $26.6 million and $31.3 million for the three months ended September 30, 2018 and 2017, respectively.

During the three months ended September 30, 2018, the Bank’s mortgage operations had sales of $1,534.0 million which generated a sales margin of 1.70%. This compares to $1,637.8 million and a sales margin of 1.81% for the three months ended September 30, 2017. Mortgage banking income from gains on sale and related fair value changes amounted to $23.8 million during the three months ended September 30, 2018 compared to $28.8 million for the same period in the previous year. This activity was driven by a decrease in interest rate lock volume of $295.8 million, or 14.8%, to $1,704.9 million for the three months ended September 30, 2018 due to overcapacity and slow down of the mortgage market and overall compressing margins. Changes in market conditions have also shifted the mix of interest rate lock commitments by purpose to 69% purchase for the three months ended September 30, 2018 from 55% purchase for the same period in the prior year. Income from mortgage servicing was $5.6 million and $3.5 million for the three months ended September 30, 2018 and 2017, respectively, offset by a decline in fair value on MSRs and related hedging activity of $2.7 million and $0.9 million in the three months ended September 30, 2018 and 2017, respectively.

The components of mortgage banking income for the three months ended September 30, 2018 and 2017 were as follows:

Mortgage banking income attributable to our Mortgage segment was $19.2 million and $23.8 million for the three months ended September 30, 2018 and 2017, respectively, and mortgage banking income attributable to our Banking segment was $7.4 million and $7.5 million for the three months ended September 30, 2018 and 2017, respectively.

Service charges on deposit accounts include analysis and maintenance fees on accounts, per item charges, non-sufficient funds and overdraft fees. Service charges on deposit accounts were $2.2 million and $2.0 million for the three months ended September 30, 2018 and 2017, respectively. The $0.2 million increase is attributable to our growth in deposits, including contributed deposits of the Clayton Banks.

ATM and interchange fees include debit card interchange, ATM and other consumer fees. These fees increased by $0.2 million to $2.4 million during the three months ended September 30, 2018 from $2.2 million for the three months ended September 30, 2017, also primarily due to increased deposit growth.

Investment services and trust income for the three months ended September 30, 2018 was $1.4 million compared to $1.1 million for the three months ended September 30, 2017. This increase is primarily related to increased trust operations connected with our merger with Clayton Banks. We recognized a full quarter of income in the third quarter of 2018 versus two months of income in the third quarter of 2017 due to the timing of the merger with the Clayton Banks.

Loss on securities for the three months ended September 30, 2018 was $27 thousand compared to gains on securities for the three months ended September 30, 2017 of $0.3 million. Activity is typically driven by sales activity within our available-for-sale securities portfolio in addition to change in fair value of equity securities with readily determinable market values. Sales activity is attributable to management taking advantage of portfolio structuring opportunities to maintain comparable interest rates and maturities and to fund current loan growth in addition to overall asset liability management. The loss in the three months ended September 30, 2018 is related to a decline in fair value on equity securities. There were no sales of securities during the three months ended September 30, 2018 while there were $82.6 million of securities sold during the three months ended September 30, 2017.

Net gain on sales or write-downs of other real estate owned for the three months ended September 30, 2018 was $120 thousand compared to a net gain of $75 thousand for the three months ended September 30, 2017. This activity was the result of specific sales and valuation transactions of other real estate.

Net gain on other assets for the three months ended September 30, 2018 was $0.3 million compared to a net loss of $0.4 million for the three months ended September 30, 2017. The Company sold restricted marketable securities received in satisfaction of a previously charged-off loan and recognized a gain of $0.3 million during the three months ended September 30, 2018.

Other noninterest income for the three months ended September 30, 2018 increased to $1.3 million as compared to $1.2 million for the three months ended September 30, 2017, primarily due to an increase in loan servicing income from our manufactured housing portfolio in addition to other miscellaneous items.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Noninterest income was $103.4 million for the nine months ended September 30, 2018, decrease of $1.2 million, or 1.1%, as compared to $104.6 million for the nine months ended September 30, 2017. Noninterest income to average assets (excluding any gains or losses from sale of securities) was 2.9% in the nine months ended September 30, 2018 as compared to 4.0% in the nine months ended September 30, 2017.

Mortgage banking income was $81.7 million and $86.7 million for the nine months ended September 30, 2018 and 2017, respectively. Sales of mortgage loans totaled $4,923.8 million, generating a sales margin of 1.56% for the nine months ended September 30, 2018 as compared to $4,664.3 million, generating a sales margin of 1.74% for the nine months ended September 30, 2017. Mortgage banking income from gains on sale and related fair value changes amounted to $71.9 million for the nine months ended September 30, 2018 compared to $80.9 million for the nine months ended September 30, 2017. The decrease in gain was due to rising interest rates and compressing margins due to competitive pressures experienced across the mortgage industry. While interest rate lock commitment volume increased $53.3 million, or 0.9%, to $5,809.9 million for the nine months ended September 30, 2018 from the same period in the previous year, overall compressing margins led to the decline in income from origination and sales activity. Income from mortgage servicing was $16.0 million for the nine months ended September 30, 2018 compared with $9.0 million for the same period in 2017. This income was partially offset by a $6.2 million charge during the nine months ended September 30, 2018 related to changes in fair value of MSRs and related hedges compared to a $3.2 million charge for the same period in the previous year.

The components of mortgage banking income for the nine months ended September 30, 2018 and 2017 were as follows:

Mortgage banking income attributable to our Banking segment was $20.4 million and $20.3 million for the nine months ended September 30, 2018 and 2017, respectively, and mortgage banking income attributable to our Mortgage segment was $61.2 million and $66.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Service charges on deposit accounts were $6.2 million, an increase of $0.6 million, or 10.9%, for the nine months ended September 30, 2018, compared to $5.6 million for the nine months ended September 30, 2017. The increase is primarily due to continued deposit growth including those contributed from our merger with Clayton Banks.

ATM and interchange fees include debit card interchange, ATM and other consumer fees. These fees increased 15.7% to $7.4 million during the nine months ended September 30, 2018 as compared to $6.4 million for the nine months ended September 30, 2017 due to increased deposit growth and increased debit card fees from continued growth in client usage of debit cards experienced by most financial institutions.

Investment services and trust income for the nine months ended September 30, 2018 was $3.8 million compared to $2.8 million for the nine months ended September 30, 2017. This increase is due to increased trust operations in connection with our merger with the Clayton Banks.

Loss from securities for the nine months ended September 30, 2018 were $116 thousand, resulting from the sale of approximately $0.2 million in available-for-sale debt securities and a net loss of $108 thousand related to changes in fair value of equity securities with readily determinable market values. This compares to a gain from securities for the nine months ended September 30, 2017 of $0.3 million, resulting from the sale of approximately $94.7 million in securities.

Net loss on sales or write-downs of other real estate owned for the nine months ended September 30, 2018 was $43 thousand compared to a net gain of $0.8 million for the nine months ended September 30, 2017. This change was the result of specific sales and valuation transactions of other real estate.

Net gain on other assets for the nine months ended September 30, 2018 was $0.2 million compared to a net loss of $0.4 million for the nine months ended September 30, 2017. This gain is primarily related to the sale of restricted marketable securities received in satisfaction of a previously charged-off loan as the Company recognized a gain on this transaction of $0.3 million in 2018.

Other noninterest income for the nine months ended September 30, 2018 was $4.3 million as compared to other noninterest income of $2.4 million for the nine months ended September 30, 2017. This $1.9 million increase in other noninterest income was due to increased loan servicing income from our manufactured housing portfolio in addition to other miscellaneous income items associated with our overall growth, including our merger with the Clayton Banks.

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

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

Three months ended September 30, 2018 compared to three months ended September 30, 2017

Noninterest expense decreased by $12.0 million during the three months ended September 30, 2018 to $57.2 million as compared to $69.2 million in the three months ended September 30, 2017. This decrease resulted primarily from the $15.7 million decrease in merger and conversion expense in relation to our merger with the Clayton Banks completed on July 31, 2017, which was offset by various other increases associated with our overall growth.

Salaries and employee benefits expense is the largest component of noninterest expenses representing 61.5% and 50.3% of total noninterest expense in the three months ended September 30, 2018 and 2017, respectively. During the three months ended September 30, 2018, salaries and employee benefits expense increased $0.4 million, or 1.2%, to $35.2 million as compared to $34.8 million for the three months ended September 30, 2017. The increase in the three months ended September 30, 2018 was primarily due to increased costs associated with our growth, including the addition of several of the 12-15 total anticipated revenue producers to be added in the second half of 2018 across our

community and metropolitan markets. The Company headcount increased 3.0% to 1,428 employees at September 30, 2018 from 1,386 employees at December 31, 2017 and 1,414 employees at September 30, 2017.

Salaries and employee benefits also reflects $1.5 million and $1.7 million accrued for equity compensation grants during the three months ended September 30, 2018 and 2017, respectively. These grants comprise restricted stock units that were granted in conjunction with our 2016 IPO to all full-time associates and extended to new associates and retained former Clayton employees at the end of 2017, in addition to an accrual related to annual stock-based performance grants.

Occupancy and equipment expense in the three months ended September 30, 2018 was $3.5 million, which remained flat compared to the same period in 2017.

Legal and professional fees increased slightly to $1.9 million for the three months ended September 30, 2018 as compared to $1.5 million for the three months ended September 30, 2017. The increase in legal and professional fees is attributable to our growth and volume of business.

Data processing costs increased $0.8 million to $2.6 million for the three months ended September 30, 2018 from $1.8 million for the three months ended September 30, 2017. The increase for the three months ended September 30, 2018 was attributable to our growth and increased volume of transaction processing.

Merger and conversion expenses of $15.7 million for the three months ended September 30, 2017 were related to our merger with the Clayton Banks, which closed on July 31, 2017. There were no such expenses for the three months ended September 30, 2018.

Amortization of core deposits and other intangibles totaled $0.8 million for the three months ended September 30, 2018 compared to $0.6 million for the three months ended September 30, 2017. The increase is due to the additional core deposit intangible and other intangibles recognized in our merger with the Clayton Banks.

Regulatory fees and deposit insurance assessments increased $0.2 million during the three months ended September 30, 2018 to $0.7 million from $0.5 for the three months ended September 30, 2017.

Other real estate owned expense was $0.6 million and $0.3 million for the three months ended September 30, 2018 and 2017. Legal costs associated with the sale of other real estate owned amounting to $1.5 million and $1.2 million was the primary driver for the expense during the three months ended September 30, 2018 and 2017, respectively.

Software license and maintenance fees for the three months ended September 30, 2018 were $0.6 million compared to $0.5 million for the three months ended September 30, 2017.

Advertising costs for the three months ended September 30, 2018 were $3.8 million, compared to $3.5 million for the three months ended September 30, 2017. This increase was largely attributable to an increase in overall volume of business and costs associated with a time deposit advertising campaign completed during the three months ended September 30, 2018 in addition to increased cost of lead generation from our mortgage operations.

Other noninterest expense for three months ended September 30, 2018 was $7.5 million, an increase of $1.0 million from the three months ended September 30, 2017. This increase reflects our growth, including the impact of the merger with the Clayton Banks.

Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Noninterest expense increased by $4.9 million during the nine months ended September 30, 2018 to $169.7 million as compared to $164.8 million in the nine months ended September 30, 2017. This increase resulted primarily from the $9.0 million increase in salaries and employee benefits expense and overall increases associated with our growth, including the impact of our merger with the Clayton Banks offset by a decline in merger and conversion expenses.

Salaries and employee benefits expense is the largest component of noninterest expenses representing 61.0% and 57.4% of total noninterest expense in the nine months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, salaries and employee benefits expense increased $9.0 million, or 9.5%, to $103.6 million as compared to $94.6 million for the nine months ended September 30, 2017. The increase in the nine months ended September 30, 2018 was primarily due to our continued growth, including the addition of several of the 12-15 total anticipated revenue producers to be added in the second half of 2018 across our community and metropolitan markets during the period.

Salaries and employee benefits expense also reflects $5.3 million accrued for equity compensation grants during the nine months ended September 30, 2018 in conjunction with the 2016 IPO to all full-time associates and extended to new associates and retained former Clayton employees at the end of 2017, in addition to accrual of annual stock-based performance grants. This compares to $4.8 million of expense during the nine months ended September 30, 2017.

Occupancy and fixed asset expense in the nine months ended September 30, 2018 increased $0.5 million to $10.5 million from $10.0 million for the nine months ended September 30, 2017 due to expansion of our footprint resulting from our merger with the Clayton Banks.

Legal and professional fees were $5.9 million for the nine months ended September 30, 2018 as compared to $4.0 million for the nine months ended September 30, 2017. The increase in legal and professional fees is attributable to additional professional services related to our growth and volume of business.

Data processing costs increased $2.0 million to $6.7 million for the nine months ended September 30, 2018 from $4.7 million for the nine months ended September 30, 2017. The increase for the nine months ended September 30, 2018 was attributable to our growth and volume of transaction processing.

Merger and conversion expenses related to the acquisition of Clayton Banks that closed on July 31, 2017 were $1.2 million for the nine months ended September 30, 2018 as compared to $17.0 million for the nine months ended September 30, 2017.

Amortization of core deposit and other intangible assets totaled $2.4 million for the nine months ended September 30, 2018 compared to $1.1 million for the nine months ended September 30, 2017. The increase is due to the additional core deposit and other intangibles recognized in our merger with the Clayton Banks.

Regulatory fees and deposit insurance assessments were $2.0 million for the nine months ended September 30, 2018 compared with $1.5 million for same period in 2017.

During the nine months ended September 30, 2018, the Company sold $39.4 million of mortgage servicing rights on $3,181.5 million of serviced mortgage loans. No material gain or loss was recognized in connection with this transaction. During the nine months ended September 30, 2017, the Company sold $11.9 million of mortgage servicing rights on $1,085.5 million of serviced mortgage loans and recognized a loss of $0.2 million in connection with this transaction.

Expenses related to other real estate owned for the nine months ended September 30, 2018 were $1.4 million and $0.7 million for the nine months ended September 30, 2018 and 2017, respectively. Legal costs resulting from the sale of other real estate amounting to $3.7 million and $4.1 million was the primary driver for the expense during the nine months ended September 30, 2018 and 2017, respectively.

Software license and maintenance fees for the nine months ended September 30, 2018 increased $0.6 million to $1.9 million compared to $1.3 million for the nine months ended September 30, 2017.

Advertising costs for the nine months ended September 30, 2018 were $10.5 million, an increase of $0.7 million compared to $9.8 million for the nine months ended September 30, 2017. This increase was largely driven by our mortgage internet delivery channel as the price of lead generation increased in 2018 and costs associated with a time deposit advertising campaign completed during the nine months ended September 30, 2018.

Other noninterest expense for nine months ended September 30, 2018 was $23.6 million, an increase of $3.6 million from the nine months ended September 30, 2017. This increase includes $0.7 million in expenses related to the completion of a $151.8 million follow-on secondary offering completed during the second quarter of 2018 in addition to costs associated with our continued overall growth, including the impact of our merger with the Clayton Banks.

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

Our efficiency ratio was 65.7% and 85.0% for the three months ended September 30, 2018 and 2017, respectively, and 66.3% and 78.9% for the nine months ended September 30, 2018 and 2017, respectively. Our adjusted efficiently ratio, on a tax-equivalent basis, was 63.7% and 64.4% for the three months ended September 30, 2018 and 2017, respectively, and 63.7% and 68.8% for the nine months ended September 30, 2018 and 2017, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of the adjusted efficiency ratio.

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

Income tax expense was $6.7 million and $4.6 million for the three months ended September 30, 2018 and 2017, respectively, and $20.0 million and $16.6 million for the nine months ended September 30, 2018 and 2017, respectively. This reflects the federal rate change enacted by the Tax Reform Act on December 22, 2017. As such, our effective tax rates were 23.87% and 35.43% for the three months ended September 30, 2018 and 2017, respectively, and 24.02% and 36.10% for the nine months ended September 30, 2018 and 2017, respectively. The primary differences from the enacted rates are applicable state income taxes reduced for non-taxable income and additional deductions for equity-based compensation upon the distribution of RSUs in addition to nondeductible stock offering costs related to the follow-on secondary offering completed during the second quarter of 2018.

The following discussion of our financial condition compares the nine months ended September 30, 2018 with the year ended December 31, 2017.

Our total assets were $5.06 billion at September 30, 2018, an increase of $330.5 million from total assets of $4.73 billion at December 31, 2017. This increase was largely attributable an increase of $371.6 million in loans held for investment, driven by strong demand for our loan products in our markets and the success of our growth initiatives. This growth was partially offset by a $202.7 million decrease in loans held for sale, reflecting the decline in the mortgage market and derecognition of rebooked GNMA delinquent loans, which made up $43.0 million of total loans held for sale as of December 31, 2017.

Our loan portfolio is our most significant earning asset, comprising 70.0% and 67.0% of our total assets as of September 30, 2018 and December 31, 2017, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly rather than purchasing loan syndications and loan participations from other banks (collectively, “Participated loans”). At September 30, 2018 and December 31, 2017, loans held for investment included approximately $98.8 million and $62.9 million, respectively, related to Participated loans. Currently, our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories. At September 30, 2018 and December 31, 2017, our outstanding loans to the broader healthcare industry made up less than 5% of our total outstanding loans and are spread across nursing homes, assisted living facilities, outpatient mental health and substance abuse centers, home health care services, and medical practices within our geographic markets. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans increased $371.6 million, or 11.7%, to $3.54 billion as of September 30, 2018 as compared to $3.17 billion as of December 31, 2017. Our loan growth during the nine months ended September 30, 2018 has been comprised of increases of $125.4 million, or 17.5%, in commercial and industrial, $42.8 million, or 9.6%, in construction loans, $76.7 million, or 13.9%, in non-owner occupied commercial real estate, $116.4 million, or 15.8%, in residential real estate, $8.3 million, or 1.7%, in owner occupied commercial real estate and $2.0 million, or 0.9%, in consumer and other, respectively. The increase in loans during the nine months ended September 30, 2018 is attributable to continued strong demand in

our metropolitan markets, building customer relationships and continued favorable economic conditions throughout much of our geographic footprint.

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

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At September 30, 2018 and December 31, 2017, there were no concentrations of loans exceeding 10% of loans other than the categories of loans disclosed in the table above.

Banking regulators have established thresholds of less than 100% for concentrations in construction lending and less than 300% for concentrations in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total risk-based capital. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to total risk-based capital. Management strives to operate within the thresholds set forth above. When a company’s ratios are in excess of one or both of these guidelines, banking regulators generally require an increased level of monitoring in these lending areas by management. The table below shows concentration ratios for the Bank and Company as of September 30, 2018 and December 31, 2017, which both were within the stated thresholds.

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

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

As of September 30, 2018, our commercial and industrial loans comprised of $840.4 million, or 24% of loans, compared to $715.1 million, or 23%, of loans as of December 31, 2017.

Commercial real estate owner-occupied loans. Our commercial real estate owner-occupied loans include loans to finance commercial real estate owner occupied properties for various purposes including use as offices, warehouses, production facilities, health care facilities, retail centers, restaurants, churches and agricultural based facilities. Commercial real estate owner-occupied loans are typically repaid through the ongoing business operations of the borrower, and hence are dependent on the success of the underlying business for repayment and are more exposed to general economic conditions. As of September 30, 2018, our owner occupied commercial real estate loans comprised $504.1 million, or 14% of loans, compared to $495.9 million, or 16%, of loans as of December 31, 2017.

Commercial real estate non-owner occupied loans. Our commercial real estate non-owner occupied loans include loans to finance commercial real estate non-owner occupied investment properties for various purposes including use as offices, warehouses, health care facilities, hotels, mixed-use residential/commercial, manufactured housing communities, retail centers, assisted living facilities and agricultural based facilities. Commercial real estate non-owner occupied loans are typically repaid with the funds received from the sale of the completed property or rental proceeds from such property, and are therefore more sensitive to adverse conditions in the real estate market, which can also be affected by general economic conditions. As of September 30, 2018, our non-owner occupied commercial real estate loans comprised $628.3 million, or 18% of loans, compared to $551.6 million, or 17%, of loans as of December 31, 2017.

Residential real estate 1-4 family mortgage loans. Our residential real estate 1-4 family mortgage loans are primarily made with respect to and secured by single family homes, including manufactured homes with real estate, which are both owner-occupied and investor owned. We intend to continue to make residential 1-4 family housing loans at a similar pace, so long as housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. First lien residential 1-4 family mortgages may be affected by unemployment or underemployment and deteriorating market values of real estate. As of September 30, 2018, our residential real estate mortgage loans comprised $553.7 million, or 16% of loans, compared to $481.0 million, or 15%, of loans as of December 31, 2017.

Residential line of credit loans. Our residential line of credit loans are primarily revolving, open-end lines of credit secured by 1-4 family residential properties. We intend to continue to make residential line of credit loans if housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. Residential line of credit loans may be affected by unemployment or underemployment and deteriorating market values of real estate. Our home equity loans as of September 30, 2018 comprised $214.7 million, or 6% of loans, compared to $195.0 million, or 6%, of loans as of December 31, 2017.

Multi-family residential loans. Our multi-family residential loans are primarily secured by multi-family properties, such as apartments and condominium buildings. These loans may be affected by unemployment or underemployment and deteriorating market values of real estate. Our multifamily loans as of September 30, 2018, comprised $86.3 million, or 2% of loans, compared to $62.4 million, or 2%, of loans as of December 31, 2017.

Construction loans. Our construction loans include commercial construction, land acquisition and land development loans and single-family interim construction loans to small- and medium-sized businesses and individuals. These loans are generally secured by the land or the real property being built and are made based on our assessment of the value of the property on an as-completed basis. We expect to continue to make construction loans at a similar pace so long as demand continues and the market for and values of such properties remain stable or continue to improve in our markets subject to regulatory guidance thresholds. These loans can carry risk of repayment when projects incur cost overruns, have an increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate. As of September 30, 2018, our construction loans comprised $491.2 million, or 14% of loans, compared to $448.3 million, or 14%, of loans as of December 31, 2017.

Consumer and other loans. Consumer and other loans include consumer loans made to individuals for personal, family and household purposes, including car, boat and other recreational vehicle loans, manufactured homes without real estate and personal lines of credit. Consumer loans are generally secured by vehicles, manufactured homes, or other household goods. The collateral securing consumer loans may depreciate over time. The Company seeks to minimize these risks through its underwriting standards. Other loans also include loans to states and political subdivisions in the U.S. These loans are generally subject to the risk that the borrowing municipality or political subdivision may lose a significant portion of its tax base or that the project for which the loan was made may produce inadequate revenue. None of these categories of loans represents a significant portion of our loan portfolio. As of September 30, 2018, our consumer

and other loans comprised $219.7 million, or 6% of loans, compared to $217.7 million, or 7%, of loans as of December 31, 2017.

The following tables present the contractual maturities of our loan portfolio as of September 30, 2018 and December 31, 2017. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment or scheduled repayments.

For loans due after one year or more, the following tables present the sensitivities to changes in interest rates as of September 30, 2018 and December 31, 2017:

The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of September 30, 2018 and December 31, 2017:

Of the loans shown above with floating interest rates totaling $1,653.5 million as of September 30, 2018, many of such have interest rate floors as follows:

Loans with interest rate floors (dollars in thousands)	Maturing in one year or less		Weighted average level of support (bps)		Maturing in one to five years		Weighted average level of support (bps)		Maturing after five years		Weighted average level of support (bps)
As of September 30, 2018
Loans with current rates above floors	$	23,691		—	$	361,661		—	$	331,021		—
Loans with current rates below floors:
1-25 bps		52		25.00		5,214		24.16		33,695		24.26
26-50 bps		—		—		20		50.00		1,166		47.78
51-75 bps		599		75.00		5,060		74.97		5,346		70.86
76-100 bps		—		—		6,890		97.08		15,091		85.14
101-125 bps		—		—		39		125.00		1,631		101.37
126-150 bps		—		—		37		137.01		—		—
151-200 bps		49		175.00		54		184.37		245		182.67
200-250 bps		—		—		—		—		61		237.89
251 bps and above		—		—		454		860.09		—		—
Total loans with current rates below floors	$	700		2.25	$	17,768		4.18	$	57,235		7.11

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions, including extensions or interest rate modifications, to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. Furthermore, we are committed to collecting on all of our loans which can result in us carrying higher nonperforming assets. We believe this practice leads to higher recoveries in the long term.

Our nonperforming assets consist of nonperforming loans, other real estate owned and other miscellaneous non-earning assets. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. In our loan review process, we seek to identify and proactively address nonperforming loans.

Purchased credit impaired (“PCI”) loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at September 30, 2018 or December 31, 2017 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

As of September 30, 2018 and December 31, 2017, we had $25.9 million and $72.3 million, respectively, in nonperforming assets. As of September 30, 2018 and December 31, 2017, other real estate owned included $5.4 million and $5.9 million, respectively, of excess land and facilities resulting from the merger with the Clayton Banks that is held for sale. Other nonperforming assets, including other repossessed non-real estate, as of September 30, 2018 and December 31, 2017 included $1.6 million and $2.4 million, respectively, in other repossessed assets. Additionally, during the third quarter of 2018, we sold restricted marketable equity securities received in satisfaction of a previously charged off loan that represented $0.7 million of other nonperforming assets at December 31, 2017.

As of December 31, 2017, the amount of loans held for sale that are 90 days or more past due includes government guaranteed GNMA mortgage loans that the Bank, as the original transferor and servicer, has the right, but not obligation, to repurchase totaling $43.0 million at December 31, 2017 with an offsetting liability in the same amount. This option was not exercised and the rebooked GNMA loans were derecognized in 2018. At September 30, 2018, there were $58.4 million of delinquent GNMA loans that had previously been sold; however, we determined there not to be a more-than-trivial benefit of rebooking based on an analysis of interest rates and an assessment of potential reputational risk associated with these loans. As such, we did not rebook the delinquent GNMA loans as of September 30, 2018; however, we continue to assess quarterly going forward.

If our nonperforming assets would have been current during the three and nine months ended September 30, 2018, we would have recorded additional income of $0.1 million and $0.4 million, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2017, respectively. We had net interest recoveries of $0.6 million and $1.3 million for the three and nine months ended September 30, 2018, respectively, recognized on loans that had previously been charged off or classified as nonperforming in previous periods. This compares to $1.1 million and $2.1 million for the three and nine months ended September 30, 2017, respectively.

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

	As of September 30,						As of December 31,
(dollars in thousands)	2018			2017			2017
Loan Type
Commercial and industrial	$	2,278		$	506		$	623
Construction		287			283			541
Residential real estate:
1-to-4 family mortgage		2,508			2,777			3,504
Residential line of credit		1,323			779			833
Multi-family mortgage		—			87			—
Commercial real estate:
Owner occupied		2,314			2,442			2,940
Non-owner occupied		1,206			1,916			1,371
Consumer and other		803			197			285
Total nonperforming loans held for investment		10,719			8,987			10,097
Loans held for sale⁽¹⁾		—			13,575			43,355
Other real estate owned		13,587			13,812			16,442
Other		1,564			3,967			2,369
Total nonperforming assets	$	25,870		$	40,341		$	72,263
Total nonperforming loans held for investment as a percentage of total loans held for investment		0.30	%		0.29	%		0.32	%
Total nonperforming assets as a percentage of total assets		0.51	%		0.88	%		1.53	%
Total accruing loans over 90 days delinquent as a percentage of total assets		0.05	%		0.03	%		0.04	%
Loans restructured as troubled debt restructurings	$	7,679		$	8,095		$	8,604
Troubled debt restructurings as a percentage of loans		0.22	%		0.26	%		0.27	%

Total nonperforming loans as a percentage of total loans were 0.30% as of September 30, 2018 as compared to 0.32% as of December 31, 2017. Our coverage ratio, or our allowance for loan losses as a percentage of our nonperforming loans, was 257.6% as of September 30, 2018 as compared to 238.1% as of December 31, 2017.

Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at September 30, 2018. Management also continually monitors past due loans for potential credit quality deterioration. Loans 30-89 days past due were $12.3 million at September 30, 2018, as compared to $15.1 million for the year ended December 31, 2017.

Under acquisition accounting rules, acquired loans were recorded at their estimated fair value. We recorded the loan portfolio acquired from the Clayton Banks at fair value as of the July 31, 2017 acquisition date, which resulted in a

discount to the loan portfolio’s previous carrying value. Neither the credit portion nor any other portion of the fair value mark is reflected in the reported allowance for loan and lease losses; however, as of September 30, 2018, the allowance included $0.6 million in reserves related to subsequent deterioration since the acquisition date.

Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure in addition to excess facilities held for sale. These properties are carried at the lower of cost or fair market value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for loan losses. Reductions in the carrying value subsequent to acquisition are charged to earnings and are included in “Gain/(loss) on sales or write-downs of other real estate owned” in the accompanying consolidated statements of income. During the three and nine months ended September 30, 2018, other real estate owned with a cost basis of $1.6 million and $4.3 million, respectively, was sold resulting in a net gain of $120 thousand and net loss of $43.0 thousand, respectively. For the same periods in the previous year, other real estate owned with a cost basis of $1.3 million and $4.3 million, respectively, was sold resulting in a net gain of $75 thousand and $0.8 million, respectively.

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

Loans totaling $60.3 million and $55.5 million were classified as substandard under our policy at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, $22.4 million and $32.0 million of substandard loans were acquired with deteriorated credit quality in connection with our mergers and acquisitions. The following table sets forth information related to the credit quality of our loan portfolio at September 30, 2018 and December 31, 2017.

Loan type (dollars in thousands)	Pass		Watch		Substandard		Total
As of September 30, 2018
Loans, excluding purchased credit impaired loans
Commercial and industrial	$	781,698	$	50,230	$	6,908	$	838,836
Construction		479,035		3,926		1,387		484,348
Residential real estate:
1-to-4 family mortgage		517,598		9,119		6,914		533,631
Residential line of credit		211,114		1,328		2,299		214,741
Multi-family mortgage		86,000		78		186		86,264
Commercial real estate:
Owner occupied		465,223		17,022		14,421		496,666
Non-owner occupied		593,771		16,720		1,282		611,773
Consumer and other		191,140		2,978		4,503		198,621
Total loans, excluding purchased credit impaired loans	$	3,325,579	$	101,401	$	37,900	$	3,464,880

Purchased credit impaired loans
Commercial and industrial	$	—	$	1,068	$	535	$	1,603
Construction		—		3,276		3,547		6,823
Residential real estate:
1-to-4 family mortgage		—		15,666		4,423		20,089
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		—		—
Commercial real estate:
Owner occupied		—		4,311		3,172		7,483
Non-owner occupied		—		8,433		8,130		16,563
Consumer and other		—		18,451		2,639		21,090
Total purchased credit impaired loans	$	—	$	51,205	$	22,446	$	73,651
Total loans	$	3,325,579	$	152,606	$	60,346	$	3,538,531

Loan type (dollars in thousands)	Pass		Watch		Substandard		Total
As of December 31, 2017
Loans, excluding purchased credit impaired loans
Commercial and industrial	$	657,595	$	50,946	$	4,390	$	712,931
Construction		431,242		7,388		1,968		440,598
Residential real estate:
1-to-4 family mortgage		440,202		9,522		7,767		457,491
Residential line of credit		192,427		1,184		1,375		194,986
Multi-family mortgage		61,234		142		978		62,354
Commercial real estate:
Owner occupied		451,140		28,308		4,462		483,910
Non-owner occupied		517,253		14,199		1,972		533,424
Consumer and other		189,081		2,712		589		192,382
Total loans, excluding purchased credit impaired loans	$	2,940,174	$	114,401	$	23,501	$	3,078,076

Purchased credit impaired loans
Commercial and industrial	$	—	$	1,499	$	645	$	2,144
Construction		—		3,324		4,404		7,728
Residential real estate:
1-to-4 family mortgage		—		20,284		3,214		23,498
Residential line of credit		—		—		—		—
Multi-family mortgage		—		—		20		20
Commercial real estate:
Owner occupied		—		4,631		7,331		11,962
Non-owner occupied		—		7,359		10,805		18,164
Consumer and other		—		19,751		5,568		25,319
Total purchased credit impaired loans	$	—	$	56,848	$	31,987	$	88,835
Total loans	$	2,940,174	$	171,249	$	55,488	$	3,166,911

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

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

The appropriate level of the allowance is established on a quarterly basis after input from management and our loan review staff and is based on an ongoing analysis of the credit risk of our loan portfolio. In making our evaluation of the credit risk of the loan portfolio, we consider factors such as the volume, growth and composition of our loan portfolio, the diversification by industry of our commercial loan portfolio, the effect of changes in the local real estate market on collateral values, trends in past dues, our experience as a lender, changes in lending policies, the effects on our loan portfolio of current economic indicators and their probable impact on borrowers, historical loan loss experience, industry loan loss experience, the amount of nonperforming loans and related collateral and the evaluation of our loan portfolio by our loan review function.

In addition, on a regular basis, management and the Company’s Board of Directors review loan ratios. These ratios include the allowance for loan losses as a percentage of loans, net charge-offs as a percentage of average loans, the provision for loan losses as a percentage of average loans, nonperforming loans as a percentage of loans and the allowance coverage on nonperforming loans. Also, management reviews past due ratios by relationship manager, individual markets and the Bank as a whole. The allowance for loan losses was $27.6 million and $24.0 million at September 30, 2018 and December 31, 2017, respectively.

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Year ended December 31,
(dollars in thousands)	2018			2017			2018			2017			2017
Allowance for loan loss at beginning of period	$	26,347		$	23,247		$	24,041		$	21,747		$	21,747
Charge-offs:
Commercial and industrial		(333	)		(221	)		(558	)		(521	)		(584	)
Construction		(14	)		—			(29	)		(6	)		(27	)
Residential real estate:
1-to-4 family mortgage		(4	)		(32	)		(69	)		(155	)		(200	)
Residential line of credit		(13	)		(9	)		(33	)		(204	)		(276	)
Multi-family mortgage		—			—			—			—			—
Commercial real estate:
Owner occupied		(55	)		(64	)		(55	)		(64	)		(288	)
Non-owner occupied		—			—			—			—			—
Consumer and other		(498	)		(249	)		(1,255	)		(858	)		(1,152	)
Total charge-offs		(917	)		(575	)		(1,999	)		(1,808	)		(2,527	)
Recoveries:
Commercial and industrial		104			200			374			1,794			1,894
Construction		13			1,022			1,127			1,080			1,084
Residential real estate:
1-to-4 family mortgage		99			86			157			126			159
Residential line of credit		31			157			102			368			395
Multi-family mortgage		—			—			—			—			—
Commercial real estate:
Owner occupied		10			24			141			39			61
Non-owner occupied		—			1			51			1,642			1,646
Consumer and other		103			104			416			400			532
Total recoveries		360			1,594			2,368			5,449			5,771
Net recoveries (charge offs)		(557	)		1,019			369			3,641			3,244
Provision (reversal of provision) for loan loss		1,818			(784	)		3,198			(1,906	)		(950	)
Allowance for loan loss at the end of period	$	27,608		$	23,482		$	27,608		$	23,482		$	24,041
Ratio of net recoveries (charge-offs) during the period to average loans outstanding during the period		-0.06	%		0.15	%		0.02	%		0.23	%		0.13	%
Allowance for loan loss as a percentage of loans at end of period		0.78	%		0.75	%		0.78	%		0.75	%		0.76	%
Allowance of loan loss as a percentage of nonperforming loans		257.6	%		261.3	%		257.6	%		261.3	%		238.1	%

Mortgage loans held for sale were $323.5 million at September 30, 2018 compared to $526.2 million at December 31, 2017. Interest rate lock volume for the three months ended September 30, 2018 and 2017 totaled $1,704.9 million and $2,000.8 million, respectively, and amounted to $5,809.9 million and $5,756.6 million for the nine months ended September 30, 2018 and 2017, respectively. Generally, mortgage volume increases in lower interest rate environments and robust housing markets and decreases in rising interest rate environments and slower housing markets. Rising interest rates during the three and nine months ended September 30, 2018 resulted in slow down of interest rate lock volume which is expected to persist through the remainder of 2018. Interest rate lock commitments in the pipeline at September 30, 2018 and December 31, 2017 were $452.8 million and $504.2 million, respectively.

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

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

Total deposits were $4.13 billion and $3.66 billion as of September 30, 2018 and December 31, 2017, respectively. Noninterest-bearing deposits at September 30, 2018 and December 31, 2017 were $962.9 million and $888.2 million, respectively, while interest-bearing deposits were $3,166.5 million and $2,776.2 million at September 30, 2018 and December 31, 2017, respectively. The 12.7% increase in total deposits is mainly attributable to continued focus on deposit growth, other movements in customer activity including additional deposits from certain large depositors, and the purchase of $53.9 million of brokered deposits at the end of the current quarter.

Brokered and internet time deposits at September 30, 2018 and December 31, 2017 were $112.1 million and $85.7 million, respectively. The increase of $26.4 million was due to expected run-off of brokered and internet time deposits acquired through the merger with the Clayton Banks offset by a purchase of $53.9 million brokered deposits during the third quarter of 2018. The larger purchase of brokered deposits was an opportunity to lower our funding costs by swapping short-term FHLB borrowing with brokered time deposits due to lower rates available in the market. This decision does not reflect a change in philosophy of growing customer loans funded by core customer deposits.

Included in noninterest-bearing deposits are certain mortgage escrow deposits that our third party servicing provider, Cenlar, transfers to the Bank which totaled $78.0 million and $53.7 million at September 30, 2018 and December 31, 2017, respectively. This balance decreased $10.4 million in the current quarter upon the closing of the sale of mortgage servicing rights. See Note 6, “Mortgage Servicing Rights” in these Notes to the consolidated unaudited financial statements for further details regarding this sale.

Additionally, our deposits from municipal and governmental entities (i.e.,“public deposits”) totaled $425.1 million at September 30, 2018 compared to $368.5 million at December 31, 2017. The increase in public deposits is mainly attributed to a notable increase concentrated in a few large customers.

In connection with the merger of the Clayton Banks, a significant amount of the $184.2 million cash portion of the purchase price together with pre-acquisition dividends were deposited in interest bearing accounts with our Bank. Since that time, as expected, these deposits balances have declined and should continue to decline over the remainder of 2018 and 2019.

Our deposit base also includes certain commercial and high net worth individuals that periodically place deposits with the Bank for short periods of time and can from period to period cause fluctuations in the overall level of customer deposits outstanding. These fluctuations may include certain deposits from related parties as disclosed in Note 14 to the consolidated unaudited financial statements included in this Report. The mix between noninterest bearing and interest bearing as of September 30, 2018 shifted slightly due to rising rates of interest bearing deposits when compared to December 31, 2018. Management continues to focus on strategic pricing to grow noninterest bearing deposits while

allowing more costly funding sources, including brokered deposit and internet time deposits acquired through the merger with the Clayton Banks, to mature.

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

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

	September 30, 2018								December 31, 2017
(dollars in thousands)	Amount		% of total deposits			Average rate			Amount		% of total deposits			Average rate
Deposit Type
Noninterest bearing demand	$	962,948		23	%		—	%	$	888,200		25	%		—	%
Interest bearing checking		876,991		21	%		0.67	%		895,140		24	%		0.48	%
Money market		1,062,077		26	%		0.96	%		1,014,406		28	%		0.61	%
Savings deposits		174,774		4	%		0.15	%		178,320		5	%		0.16	%
Customer time deposits		940,601		23	%		1.16	%		602,628		16	%		0.66	%
Brokered and internet time deposits		112,082		3	%		1.67	%		85,701		2	%		1.54	%
Total deposits	$	4,129,473		100	%		0.66	%	$	3,664,395		100	%		0.42	%
Total Time Deposits
0.00-0.50%	$	53,761		5	%				$	113,661		16	%
0.51-1.00%		206,002		20	%					259,294		38	%
1.01-1.50%		173,062		16	%					186,510		27	%
1.51-2.00%		83,260		8	%					107,960		16	%
2.01-2.50%		255,849		24	%					15,409		2	%
Above 2.50%		280,749		27	%					5,495		1	%
Total time deposits	$	1,052,683		100	%				$	688,329		100	%

The following table sets forth our time deposits segmented by months to maturity and deposit amount as of September 30, 2018 and December 31, 2017:

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

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

The balance of our available for sale debt securities portfolio at September 30, 2018 was $606.5 million compared to $536.3 million at December 31, 2017. During the three and nine months ended September 30, 2018, we purchased $16.8 million and $137.9 million investment securities, respectively. This compares to purchases of $34.6 million and $57.4 million during the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2018, mortgage-backed securities and collateralized mortgage obligations, or CMOs, in the aggregate, comprised 75.6% and 84.6% of these purchases, respectively. This compares to purchases of mortgage-backed securities and CMOs, in the aggregate, comprising of 75.5% and 66.9% during the three and nine months ended September 30, 2017. CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and CMOs held in our investment portfolio are primarily issued by government sponsored entities. U.S. Government agency securities and municipal securities accounted for 24.4% and 15.4% of total securities purchased in the three and nine months ended September 30, 2018, respectively, and made up 24.5% and 33.1% of total securities purchased during the same periods in 2017. The carrying value of securities sold during the three and nine months ended September 30, 2018, totaled $0.0 and $0.2 million, respectively. This compares to the carrying value of total securities sold during the three and nine months ended September 30, 2017 totaling $82.5 million and $94.7 million, respectively. Maturities and calls of securities during the three and nine months ended September 30, 2018 totaled $20.1 million and $54.6 million, respectively, while totaling $21.3 million and $63.2 million during the same periods in 2017. As of September 30, 2018 and December 31, 2017, net unrealized losses of $22.4 million and $4.9 million, respectively, were recorded on investment securities.

As of September 30, 2018 and December 31, 2017, the Company had $3.1 million and $7.7 million, respectively, in equity securities recorded at fair value. Net losses of $27 thousand and $108 thousand were recognized due to the changes in fair value of these equity securities during the three and nine months ended September 30, 2018. As of January 1, 2018, the Company adopted ASU 2016-01 and reclassified $3.6 million of other securities without readily determinable market values to other assets. The provisions of this update require that equity securities be carried at fair market value on the balance sheet with any periodic changes in value as adjustments to the income statement.

The following table sets forth the fair value, scheduled maturities and weighted average yields for our available-for-sale debt securities investment portfolio as of September 30, 2018 and December 31, 2017:

	As of September 30, 2018								As of December 31, 2017
(dollars in thousands)	Fair value		% of total investment securities			Weighted average yield⁽¹⁾			Fair value		% of total investment securities			Weighted average yield⁽¹⁾
Treasury securities
Maturing within one year	$	—		—			—		$	—		—			—
Maturing in one to five years		7,131		1.2	%		1.76	%		7,252		1.4	%		1.76	%
Maturing in five to ten years		—		—			—			—		—			—
Maturing after ten years		—		—			—			—		—			—
Total Treasury securities		7,131		1.2	%		1.76	%		7,252		1.4	%		1.76	%
Government agency securities:
Maturing within one year		—		—			—			—		—			—
Maturing in one to five years		984		0.2	%		1.43	%		986		0.2	%		1.43	%
Maturing in five to ten years		—		—			—			—		—			—
Maturing after ten years		—		—						—		—			—
Total government agency securities		984		0.2	%		1.43	%		986		0.2	%		1.43	%
Obligations of state and municipal subdivisions:
Maturing within one year		13,683		2.3	%		6.13	%		925		0.2	%		3.86	%
Maturing in one to five years		10,201		1.7	%		5.23	%		20,640		3.8	%		4.18	%
Maturing in five to ten years		19,209		3.2	%		4.73	%		19,588		3.7	%		3.84	%
Maturing after ten years		87,579		14.4	%		4.09	%		68,098		12.7	%		3.07	%
Total obligations of state and municipal subdivisions		130,672		21.6	%		4.50	%		109,251		20.4	%		3.42	%
Residential mortgage backed securities guaranteed by FNMA, GNMA and FHLMC:
Maturing within one year		—		—			—			—		—			—
Maturing in one to five years		—		—			—			—		—			—
Maturing in five to ten years		6,587		1.1	%		2.71	%		23		0.0	%		3.94	%
Maturing after ten years		461,127		76.0	%		2.52	%		418,758		78.0	%		2.32	%
Total residential mortgage backed securities guaranteed by FNMA, GNMA and FHLMC		467,714		77.1	%		2.53	%		418,781		78.0	%		2.32	%
Total debt securities available-for-sale	$	606,501		100.0	%		2.97	%	$	536,270		100.0	%		2.99	%

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

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

The following table sets forth our total borrowings segmented by years to maturity as of September 30, 2018 and December 31, 2017:

We enter into agreements with certain customers to sell certain securities under agreements to repurchase the security the following day. These agreements are made to provide customers with comprehensive treasury management programs a short-term return for their excess funds. Securities sold under agreements to repurchase totaled $15.9 million at September 30, 2018 and $14.3 million at December 31, 2017.

The Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal funds purchased in the aggregate amount of $240.0 million as of September 30, 2018 and $165.0 million as of December 31, 2017. Borrowings against the lines were $34.2 million and $0 as of September 30, 2018 and December 31, 2017, respectively.

As a member of the FHLB Cincinnati, the Bank receives advances from the FHLB pursuant to the terms of various agreements that assist in funding its mortgage and loan portfolio balance sheet. Under the agreements, we pledge qualifying residential mortgages of $700.6 million and qualifying commercial mortgages of $580.7 million as collateral securing a line of credit with a total borrowing capacity of $841.0 million as of September 30, 2018. As of December 31, 2017 we pledge qualifying residential mortgages of $761.2 million and qualifying commercial mortgages of $207.4 million as collateral securing a line of credit with a total borrowing capacity of $671.5 million as of December 31, 2017.

Borrowings against our line totaled $129.9 million and $302.4 million as of September 30, 2018 and December 31, 2017, respectively. Total borrowings comprised $6.1 million and $12.4 million in long term advances as of September 30, 2018 and December 31, 2017, respectively, and $22.0 million and $190.0 million in overnight cash management advances (CMAs) as of September 30, 2018 and December 31, 2017, respectively. In addition, a letter of credit with the FHLB of $50.0 million was pledged at September 30, 2018 to secure public funds that required collateral. Overnight borrowings include $100.0 million in variable rate advances borrowed during the third quarter of 2017 as part of the funding strategy for the Clayton Banks merger. These advances have 90 day fixed rate repricing terms. An additional line of $800.0 million has been secured with the FHLB for overnight borrowing; however, additional collateral may be needed to draw on the line. The maximum amount of FHLB borrowing outstanding at any month end was $388.1 million for the three and nine months ended September 30, 2018 and $302.4 million for the twelve months ended December 31, 2018. The weighted average interest rate on FHLB borrowings was 2.22% and 1.49% as of September 30, 2018 and December 31, 2017.

Additionally, the Bank maintained a line with the Federal Reserve Bank through the Borrower-in-Custody program. As of September 30, 2018 and December 31, 2017, $1,313.8 million and $724.3 million of qualifying loans and $12.1 million and $13.5 million of investment securities were pledged to the Federal Reserve Bank, securing a line of credit of $926.0 million and $529.5 million.

We have two wholly owned subsidiaries that are statutory business trusts (“Trusts”). The Trusts were created for the sole purpose of issuing 30-year capital trust preferred securities to fund the purchase of junior subordinated debentures issued by the Company. As of September 30, 2018 and December 31, 2017, our $0.9 million investment in the Trusts was included in other assets in the accompanying consolidated balance sheets, and our $30.0 million obligation is reflected as junior subordinated debt, respectively. The junior subordinated debt bears interest at floating interest rates based on a spread over 3-month LIBOR plus 315 basis points (5.52% and 4.82% at September 30, 2018 and December 31, 2017, respectively) for the $21.7 million debenture and 3-month LIBOR plus 325 basis points (5.59% and 4.59% at September 30, 2018 and December 31, 2017, respectively) for the remaining $9.3 million. The $9.3 million debenture may be redeemed prior to the 2033 maturity date upon the occurrence of a special event, and the $21.7 million debenture may be redeemed prior to 2033 at our option.

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

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

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

Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At September 30, 2018 and December 31, 2017, securities with a carrying value of $358.2 million and $337.6 million, respectively, were pledged to secure government, public, trust and other deposits and as collateral for short-term borrowings, letters of credit and derivative instruments.

Additional sources of liquidity include federal funds purchased and lines of credit. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. Funds and advances obtained from the FHLB are used primarily to match-fund fixed rate loans in order to minimize interest rate risk and also used to meet day to day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. The balance of outstanding overnight CMAs at September 30, 2018 and December 31, 2017 were $22.0 million and $190.0 million, respectively. During the third quarter of 2017, $100.0 million of 90 day fixed-rate advances were borrowed as part of the funding strategy of merger with the Clayton Banks as described in management’s discussion and analysis on lines of credit and other borrowings. At September 30, 2018 and December 31, 2017, the balance of our outstanding additional long-term advances with the FHLB were $6.1 million and $12.4 million, respectively. The remaining balance available with the FHLB was $661.1 million and $369.1 million at September 30, 2018 and December 31, 2017. We also maintain lines of credit with other commercial banks in the form of fed funds purchased totaling $240.0 million and $165.0 million September 30, 2018 and December 31, 2017. These are unsecured, uncommitted lines of credit typically maturing at various times within the next twelve months. Borrowings against the lines were $34.2 million and $0 as of September 30, 2018 and December 31, 2017, respectively.

See discussion of deposit composition and seasonality in management’s discussion and analysis of deposits.

The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not

impact the Company’s ability to meet its ongoing short-term cash obligations. For additional information regarding dividend restrictions, see “Item 1. Business — Supervision and regulation,” “Item 1A. Risk Factors — Risks related to our business,” and “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy,” each of which is set forth in our Annual Report.

Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount exceeding the total of its net income for that year combined with its retained net income of the preceding two years, without the prior approval of the Tennessee Department of Financial Institutions (“TDFI”). Based upon this regulation, as of September 30, 2018 and December 31, 2017, $81.6 million and $105.5 million of the Bank’s retained earnings were available for the payment of dividends without such prior approval. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

During the three and nine months ended September 30, 2018, the Company declared a quarterly dividend of $0.06 per share, or $1.9 million, and $0.12 per share, or $3.8 million, respectively. Subsequent to September 30, 2018, the Company declared its fourth quarter dividend in the amount of $0.08 per share, or $2.5 million payable to stockholders of record as of November 1, 2018 on November 15, 2018.

The Company had cash balances on deposit totaling $20.0 million and $25.8 million at September 30, 2018 and December 31, 2017, respectively, for ongoing corporate needs.

The Company is party to a registration rights agreement with its former majority shareholder entered into in connection with the 2016 IPO, under which the Company is responsible for payment of expenses (other than underwriting discounts and commissions) relating to sales to the public by the shareholder of shares of the Company’s common stock beneficially owned by him. Such expenses include registration fees, legal and accounting fees, and printing costs payable by the Company and expensed when incurred. During the nine months ended September 30, 2018, the Company paid expenses totaling $0.7 million related to the completion of a follow-on secondary offering whereby the former majority shareholder was the seller.

Our capital management consists of providing adequate equity to support our current and future operations. We are subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDFI, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

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

The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the classifications set forth

in the following table. As of September 30, 2018 and December 31, 2017, we exceeded all regulatory requirements for capital ratios, as detailed in the table below:

	Actual						Required for capital adequacy purposes							To be well capitalized under prompt corrective action provision
(dollars in thousands)	Amount		Ratio (%)				Amount			Ratio (%)				Amount			Ratio (%)
September 30, 2018
Common Equity Tier 1 (CET1)
FB Financial Corporation	$	510,301		11.5	%	>	$	199,683	>		4.5	%		N/A			N/A
FirstBank	$	515,216		11.7	%	>	$	198,160	>		4.5	%	>	$	286,231	>		6.5	%
Total capital (to risk weighted assets)
FB Financial Corporation	$	567,909		12.8	%	>	$	354,943	>		8.0	%		N/A			N/A
FirstBank	$	542,824		12.3	%	>	$	353,056	>		8.0	%	>	$	441,320	>		10.0	%
Tier 1 capital (to risk weighted assets)
FB Financial Corporation	$	540,301		12.2	%	>	$	265,722	>		6.0	%		N/A			N/A
FirstBank	$	515,216		11.7	%	>	$	264,213	>		6.0	%	>	$	264,213	>		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	540,301		11.3	%	>	$	191,257	>		4.0	%		N/A			N/A
FirstBank	$	515,216		10.7	%	>	$	192,604	>		4.0	%	>	$	240,755	>		5.0	%
December 31, 2017
Common Equity Tier 1 (CET1)
FB Financial Corporation	$	442,381		10.7	%	>	$	185,874	>		4.5	%		N/A			N/A
FirstBank	$	442,061		10.7	%	>	$	185,567	>		4.5	%	>	$	268,041	>		6.5	%
Total capital (to risk weighted assets)
FB Financial Corporation	$	496,422		12.0	%	>	$	330,672	>		8.0	%		N/A			N/A
FirstBank	$	466,102		11.3	%	>	$	329,984	>		8.0	%	>	$	412,480	>		10.0	%
Tier 1 capital (to risk weighted assets)
FB Financial Corporation	$	472,381		11.4	%	>	$	247,969	>		6.0	%		N/A			N/A
FirstBank	$	442,061		10.7	%	>	$	247,422	>		6.0	%	>	$	247,422	>		6.0	%
Tier 1 Capital (to average assets)
FB Financial Corporation	$	472,381		10.5	%	>	$	180,643	>		4.0	%		N/A			N/A
FirstBank	$	442,061		9.8	%	>	$	180,987	>		4.0	%	>	$	226,234	>		5.0	%

We also have outstanding junior subordinated debentures with a carrying value of $30.9 million at September 30, 2018 and December 31, 2017, of which $30.0 million are included in our Tier 1 capital. The Federal Reserve Board issued rules in March 2005 providing stricter quantitative limits on the amount of securities that, similar to our junior subordinated debentures, are includable in Tier 1 capital. This guidance, which became fully effective in March 2009, did not impact the amount of debentures we include in Tier 1 capital. While our existing junior subordinated debentures are unaffected and are included in our Tier 1 capital, the Dodd-Frank Act specifies that any such securities issued after May 19, 2010 may not be included in Tier 1 capital.

In July 2013, the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency approved the implementation of the Basel III regulatory capital reforms and issued rules affecting certain changes required by the Dodd-Frank Act, which we refer to as the Basel III Rules, that call for broad and comprehensive revision of regulatory capital standards for U.S. banking organizations. The Basel III Rules implement a new common equity Tier 1 minimum capital requirement, a higher minimum Tier 1 capital requirement and other items that will affect the calculation of the numerator of a banking organization’s risk-based capital ratios. Additionally, the Basel III Rules apply limits to a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.

The new common equity Tier 1 capital ratio includes common equity as defined under GAAP and does not include any type of non-common equity. When the Basel III Rules are fully effective in 2019, banks will be required to have common equity Tier 1 capital of 4.5% of average assets, Tier 1 capital of 6% of average assets, as compared to the current 4%, and total capital of 8% of risk-weighted assets to be categorized as adequately capitalized.

The Basel III Rules do not require the phase-out of trust preferred securities as Tier 1 capital of bank holding companies whose asset size is under $15 billion.

Further, the Basel III Rules changed the agencies’ general risk-based capital requirements for determining risk-weighted assets, which will affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The Basel

III Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity and incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”.

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

Certain calculations under the rules related to deductions from capital have phase-in periods through 2018. Specifically, the capital treatment of MSRs is phased in through the transition periods. Under the prior rules, the Bank deducted 10% of the value of MSRs (net of deferred tax) from Tier 1 capital ratios. However, under Basel III, the Bank and the Company must deduct a much larger portion of the value of MSRs from Tier 1 capital.

Generally, the new Basel III rules became effective on January 1, 2015, although parts of the Basel III Rules will be phased in through 2019.

On November 21, 2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the Rule for certain banks including FirstBank. The final rules had provided for a number of adjustments to deductions from Tier 1 capital. Deductions included, for example, the requirement that MSRs, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from Tier 1 Capital to the extent that any one such category exceeds 10% of Tier 1 capital or all such categories in the aggregate exceed 15% of Tier 1 capital. Effective on January 1, 2018, the 2017 rule paused the full transition to the Basel III treatment.

As of September 30, 2018 and December 31, 2017, the Bank and Company met all capital adequacy requirements to which they are subject. Also, as of June 30, 2017, the date of the most recent notification from the FDIC, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. As part of our ongoing balance sheet and capital management during the quarter, the Company sold $39.4 million of mortgage servicing rights on $3.18 billion of serviced mortgages. There was not a material gain or loss recognized in this transaction; however, the sale provided approximately $20.0 million in regulatory capital relief to support continued growth in the Banking segment of our business.

On May 24, 2018, The Economic Growth, Regulatory Relief, and Consumer Protection Act, also known as the Crapo Bill, was into law and will exempt banks with less than $10 billion in assets from certain regulatory requirements. For those banks, it establishes a Community Bank Leverage Ratio (“CBLR”), which is calculated as tangible equity capital divided by the average total assets. The CBLR minimum requirement would be set between 8% and 10%, and if an exempt bank maintains CBLR above the threshold, it can opt out of reporting or complying with other regulatory capital ratios. We will continue to monitor this new regulatory capital framework and evaluate as further details and guidance of the Crapo Bill are released.

Currently, we have not entered into any capital commitments exceeding $1 million; however, over the next twelve months we plan on investing approximately $5.8 million in branch improvements and expansion across our markets.

Our total shareholders’ equity was $648.7 million at September 30, 2018 and $596.7 million, at December 31, 2017. Book value per share was $21.12 at September 30, 2018 and $19.54 at December 31, 2017. The growth in shareholders’ equity was attributable to earnings retention offset by declared dividends, changes in accumulated other comprehensive income and activity related to equity-based compensation.

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

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

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

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

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

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

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

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

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

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

The results for the net interest income simulations for September 30, 2018 and December 31, 2017 resulted in an asset sensitive position. The primary influence of our asset sensitivity is the variability in our loans held for sale and time deposit balances. As our mortgage loans held for sale increase, we become more asset sensitive. Conversely, as mortgage rates continue to rise, we expect our mortgage originations and mortgage loans held for sale to decline, which contribute to decreased asset sensitivity. As of September 30, 2018 the decrease in mortgage loans held for sale was offset by the increase in time deposits, which resulted in an overall asset sensitive position. Beta assumptions on loans and deposits were consistent for both time periods. The ALMC also reviewed beta assumptions for time deposits and loans with industry standards and revised them accordingly.

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

We utilize derivative financial instruments as part of an ongoing effort to mitigate interest rate risk exposure to interest rate fluctuations and facilitate the needs of our customers.

The Company has entered into interest rate swap contracts to hedge interest rate exposure on short term liabilities, as well as interest rate swap contracts to hedge interest rate exposure on subordinated debentures. These interest rate swaps are all accounted for as cash flow hedges, with the Company receiving a variable rate of interest and paying a fixed rate of interest.

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

Additionally, the Company enters into forward commitments, options and futures contracts that are not designated as hedging instruments, which serve as economic hedges of the change in fair value of its MSRs.

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

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that occurred during the the fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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

The discussion of the Company’s business and operations should be read together with the risk factor described below and the risk factors contained in Item 1A of the Company’s most recent Annual Report on Form 10-K previously filed with the SEC, which describes various risks and uncertainties to which the Company is or may be subject. These risks and uncertainties have the potential to affect the Company’s assets, business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations, and the trading price of the Company’s common stock in a materially adverse manner.

Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.

As a commercial bank, we provide services to a number of clients whose deposit levels may vary considerably and have seasonality based on their nature. At September 30, 2018, 6 commercial and individual clients, maintained balances (aggregating all related accounts, including multiple business entities and personal funds of business owners) in excess of $25.0 million, which amounted to $446.2 million in total deposits at September 30, 2018. These clients are not concentrated in any particular industry or business but include certain related parties of the Company. In addition, mortgage escrow deposits that our third-party servicing provider, Cenlar, transfer to the Bank totaled $78.0 million at September 30, 2018. Further, our deposits from municipal and governmental entities (i.e., “public deposits”) totaled $425.1 million at September 30, 2018. Of these public deposits, 3 public entities maintained balances in excess of $25.0 million at September 30, 2018 totaling $195.8 million. These deposits can and do fluctuate substantially. The loss of any combination of these depositors, or a significant decline in the deposit balances due to unexpected fluctuations related to these customers’ businesses, would adversely affect our liquidity and may require us to raise deposit rates to quickly attract new customer deposits, purchase brokered deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. Depending on the interest rate environment and competitive factors, lower cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. While these events could have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business, that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of these depositors, through additional liquidity, and business generation in the future. However, should a significant number of these customers leave the Bank, it could have a material adverse impact on the Bank.

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

The offering commenced on September 15, 2016 and closed on September 21, 2016. All of the shares registered pursuant to the registration statement were sold at an aggregate offering price of $128.5 million. We received net proceeds of approximately $115.5 million after deducting underwriting discounts and commissions of $9.0 million and other offering expenses of $4.0 million. No payments with respect to expenses were made by us to directors, officers or persons owning ten percent or more of either class of our common stock or to their associates, or to our affiliates. However, $55 million of the net proceeds from the offering were used to fund a cash distribution to James W. Ayers, our former majority shareholder and executive chairman, which cash distribution was intended to be non-taxable to Mr. Ayers, and $10.1 million of the net proceeds from the offering were used to fund the repayment of all amounts outstanding under our subordinated notes held by Mr. Ayers. During the third quarter of 2017, a portion was used to fund the merger with the Clayton Banks. Approximately $20.0 million of proceeds from the offering remain in interest bearing deposits in other financial institutions and may be used for general business purposes or to fund future acquisitions.

The Company recently revised its Non-Employee Director Compensation Policy (the “Policy”). A copy of the Policy is filed as Exhibit 10.1 to this Report.

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

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

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

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

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	2
	Consolidated Statements of Income (Loss)(Unaudited) for the three and nine months ended September 30, 2018 and 2017	3
	Consolidated Statements of Comprehensive Income (Loss)(Unaudited) for the three and nine months ended September 30, 2018 and 2017	4
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2018 and 2017	5
	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	84
Item 4.	Controls and Procedures	86
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	87
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 6.	Exhibits	88
Signatures		89

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Basic earnings per share calculation:
Net income	$	21,377		$	8,388	$	63,196		$	29,380
Dividends paid on and undistributed earnings allocated to participating securities		(114	)		—		(337	)		—
Earnings attributable to common shareholders	$	21,263		$	8,388	$	62,859		$	29,380
Weighted-average basic shares outstanding		30,692,668			30,004,952		30,661,852			26,649,942
Basic earnings per share	$	0.69		$	0.28	$	2.05		$	1.10
Diluted earnings per share calculation:
Earnings attributable to common shareholders	$	21,263		$	8,388	$	62,859		$	29,380
Weighted-average basic shares outstanding		30,692,668			30,004,952		30,661,852			26,649,942
Weighted-average diluted shares contingently issuable		646,960			599,585		636,802			548,431
Weighted-average diluted shares outstanding		31,339,628			30,604,537		31,298,654			27,198,373
Diluted earnings per share	$	0.68		$	0.27	$	2.01		$	1.08

	As of July 31, 2017
	As Recorded by FB Financial Corporation⁽¹⁾
Assets
Cash and cash equivalents	$	49,059
Investment securities		59,493
FHLB stock		3,409
Loans		1,059,728
Allowance for loan losses		—
Premises and equipment		18,866
Other real estate owned		6,888
Intangibles, net		12,334
Other assets		5,978
Total assets	$	1,215,755
Liabilities
Interest-bearing deposits	$	670,054
Non-interest bearing deposits		309,464
Borrowings		84,831
Accrued expenses and other liabilities		5,245
Total liabilities	$	1,069,594
Net assets acquired	$	146,161

Purchase price:
Equity consideration
Common stock issued		1,521,200
Price per share as of July 31, 2017	$	34.37
Total equity consideration			$	52,284
Cash consideration				184,200	⁽²⁾
Total consideration paid			$	236,484
Preliminary allocation of consideration paid:
Fair value of net assets acquired including identifiable intangible assets			$	146,161
Goodwill				90,323
Total consideration paid			$	236,484

	September 30, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair Value
Investment Securities
Available-for-sale debt securities
U.S. government agency securities	$	999	$	—	$	(15	)	$	984
Mortgage-backed securities - residential		488,087		58		(20,431	)		467,714
Municipals, tax exempt		132,450		950		(2,728	)		130,672
Treasury securities		7,374		—		(243	)		7,131
Total	$	628,910	$	1,008	$	(23,417	)	$	606,501

	September 30, 2018				December 31, 2017
	Available-for-sale				Available-for-sale
	Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	$	13,523	$	13,683	$	905	$	925
Due in one to five years		18,420		18,316		28,332		28,878
Due in five to ten years		19,463		19,209		19,218		19,588
Due in over ten years		89,417		87,579		67,016		68,098
		140,823		138,787		115,471		117,489
Mortgage-backed securities - residential		488,087		467,714		425,557		418,781
Total debt securities	$	628,910	$	606,501	$	541,028	$	536,270

	September 30, 2018
	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized loss
U.S. government agency securities	$	—	$	—	$	984	$	15	$	984	$	15
Mortgage-backed securities - residential		137,314		2,925		322,378		17,506		459,692		20,431
Municipals, tax exempt		49,234		976		24,410		1,752		73,644		2,728
Treasury securities		—		—		7,131		243		7,131	$	243
Total debt securities	$	186,548	$	3,901	$	354,903	$	19,516	$	541,451	$	23,417

Three Months Ended September 30, 2018	Number of loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Charge offs and specific reserves
Commercial real estate:
Owner occupied		1	$	143	$	143	$	—
Consumer and other		4		55		55		—
Total		5	$	198	$	198	$	—

	For the Three Months Ended
	September 30,
	2018			2017
Current	$	13,367		$	4,328
Deferred		(6,665	)		274
Total	$	6,702		$	4,602

	For the Nine Months Ended
				September 30,
	2018			2017
Current	$	15,562		$	8,375
Deferred		4,416			8,226
Total	$	19,978		$	16,601

	September 30, 2018
	Notional Amount		Asset		Liability
Not designated as hedging:
Interest rate contracts	$	270,205	$	3,791	$	3,791
Forward commitments		587,976		2,242		—
Interest rate-lock commitments		452,820		6,079		—
Futures contracts		216,000		—		285
Option contracts		6,000		31		—
Total	$	1,533,001	$	12,143	$	4,076

At December 31, 2017	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Non-recurring valuations:
Financial assets:
Other real estate owned	$	—	$	—	$	13,174	$	13,174
Impaired Loans⁽¹⁾:
Commercial and industrial		—		—		1,971		1,971
Construction		—		—		4,211		4,211
Residential real estate:
1-4 family mortgage		—		—		21,902		21,902
Commercial real estate:
Owner occupied		—		—		10,030		10,030
Non-owner occupied		—		—		13,593		13,593
Consumer and other		—		—		25,320		25,320
Total	$	—	$	—	$	77,027	$	77,027

						Available-for-sale securities
	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
Balance at beginning of period		—	$	4,549		$	3,604		$	4,549
Reclassification of equity securities without a readily determinable fair value to other assets ⁽¹⁾		—		—			(3,604	)		—
Impairment of equity securities				(945	)					(945	)
Balance at end of period	$	—	$	3,604		$	—		$	3,604

September 30, 2018	Aggregate fair value		Aggregate Unpaid Principal Balance		Difference
Mortgage loans held for sale measured at fair value	$	323,486	$	315,845	$	7,641
Past due loans of 90 days or more		—		—		—
Nonaccrual loans		—		—		—

December 31, 2017
Mortgage loans held for sale measured at fair value	$	482,089	$	467,039	$	15,050
Past due loans of 90 days or more		320		320		—
Nonaccrual loans		741		741		—

Three Months Ended September 30, 2018	Banking		Mortgage			Consolidated
Net interest income	$	52,733	$	22		$	52,755
Provision for loan loss		1,818		—			1,818
Mortgage banking income		7,417		21,933			29,350
Change in fair value of mortgage servicing rights⁽¹⁾		—		(2,701	)		(2,701	)
Other noninterest income		7,706		—			7,706
Depreciation		896		117			1,013
Amortization of intangibles		777		—			777
Other noninterest mortgage banking expense		6,383		18,704			25,087
Other noninterest expense		30,336		—			30,336
Income before income taxes		27,646		433			28,079
Income tax expense							6,702
Net income							21,377
Total assets	$	4,637,097	$	421,070		$	5,058,167
Goodwill		137,090		100			137,190
(1) Included in mortgage banking income on the Consolidated Unaudited Statements of Income.

Loans outstanding at January 1, 2018	$	21,012
New loans and advances		2,289
Repayments		(6,503	)
Loans outstanding at September 30, 2018	$	16,798

	As of September 30,						As of December 31,
(dollars in thousands, except per share data)	2018			2017			2017
Tangible Assets
Total assets	$	5,058,167		$	4,581,943		$	4,727,713
Adjustments:
Goodwill		(137,190	)		(138,910	)		(137,190	)
Core deposit and other intangibles		(12,403	)		(13,122	)		(14,902	)
Tangible assets	$	4,908,574		$	4,429,911		$	4,575,621
Tangible Common Equity
Total shareholders' equity	$	648,731		$	572,528		$	596,729
Adjustments:
Goodwill		(137,190	)		(138,910	)		(137,190	)
Core deposit and other intangibles		(12,403	)		(13,122	)		(14,902	)
Tangible common equity	$	499,138		$	420,496		$	444,637
Common shares outstanding		30,715,792			30,526,592			30,535,517
Book value per common share	$	21.12		$	18.76		$	19.54
Tangible book value per common share	$	16.25		$	13.77		$	14.56
Total shareholders' equity to total assets		12.8	%		12.5	%		12.6	%
Tangible common equity to tangible assets		10.2	%		9.5	%		9.7	%

	Three Months Ended September 30,
(in thousands)	2018			2017
Mortgage banking income:
Origination and sales of mortgage loans	$	26,094		$	29,570
Net change in fair value of loans held for sale and derivatives		(2,320	)		(806	)
Change in fair value on MSRs and derivatives		(2,701	)		(893	)
Mortgage servicing income		5,576			3,463
Total mortgage banking income	$	26,649		$	31,334

Interest rate lock commitment volume by line of business:
Consumer direct	$	715,739		$	786,034
Third party origination (TPO)		206,651			269,473
Retail		319,073			325,294
Correspondent		463,473			619,953
Total	$	1,704,936		$	2,000,754
Interest rate lock commitment volume by purpose (%):
Purchase		68.5	%		55.4	%
Refinance		31.5	%		44.6	%
Mortgage sales	$	1,534,028		$	1,637,762
Mortgage sale margin		1.70	%		1.81	%
Closing volume	$	1,490,559		$	1,668,264
Outstanding principal balance of mortgage loans serviced	$	5,964,642		$	5,549,662

	As a percentage (%) of risk-based
	capital
				FB Financial
	FirstBank			Corporation
September 30, 2018
Construction		90.5	%		86.5	%
Commercial real estate		222.4	%		212.5	%
December 31, 2017
Construction		96.2	%		90.3	%
Commercial real estate		228.3	%		214.4	%

Loan type (dollars in thousands)	Maturing in one year or less			Maturing in one to five years			Maturing after five years			Total
As of September 30, 2018
Commercial and industrial	$	303,595		$	417,810		$	119,034		$	840,439
Commercial real estate:
Owner occupied		91,329			292,406			120,414			504,149
Non-owner occupied		89,868			301,293			237,175			628,336
Residential real estate:
1-to-4 family		57,733			221,904			274,083			553,720
Line of credit		33,940			39,592			141,209			214,741
Multi-family		3,559			31,482			51,223			86,264
Construction		218,225			206,933			66,013			491,171
Consumer and other		33,843			55,874			129,994			219,711
Total ($)	$	832,092		$	1,567,294		$	1,139,145		$	3,538,531
Total (%)		24	%		44	%		32	%		100	%

Loan type (dollars in thousands)	Fixed interest rate⁽¹⁾			Floating interest rate			Total
As of September 30, 2018
Commercial and industrial	$	183,690		$	353,154		$	536,844
Commercial real estate:
Owner occupied		326,236			86,584			412,820
Non-owner occupied		259,081			279,387			538,468
Residential real estate:
1-to-4 family		438,872			57,115			495,987
Line of credit		956			179,845			180,801
Multi-family		68,124			14,581			82,705
Construction		82,699			190,247			272,946
Consumer and other		180,448			5,420			185,868
Total ($)	$	1,540,106		$	1,166,333		$	2,706,439
Total (%)		57	%		43	%		100	%

	As of September 30, 2018
(dollars in thousands)	Time deposits of $100 and greater		Time deposits of less than $100		Total
Months to maturity:
Three or less	$	91,817	$	42,863	$	134,680
Over Three to Six		166,912		48,978		215,890
Over Six to Twelve		227,931		112,547		340,478
Over Twelve		247,111		114,524		361,635
Total	$	733,771	$	318,912	$	1,052,683

(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Securities available for sale
As of September 30, 2018
US Government agency securities	$	999	$	—	$	(15	)	$	984
Mortgage-backed securities		488,087		58		(20,431	)		467,714
Municipals, tax exempt		132,450		950		(2,728	)		130,672
Treasury securities		7,374		—		(243	)		7,131
	$	628,910	$	1,008	$	(23,417	)	$	606,501
As of December 31, 2017
US Government agency securities	$	999	$	—	$	(13	)	$	986
Mortgage-backed securities		425,557		374		(7,150	)		418,781
Municipals, tax exempt		107,127		2,692		(568	)		109,251
Treasury securities		7,345		—		(93	)		7,252
	$	541,028	$	3,066	$	(7,824	)	$	536,270

	Percentage change in:
Change in interest rates	Net interest income⁽¹⁾
	Year 1						Year 2
	September 30,			December 31,			September 30,			December 31,
(in basis points)	2018			2017			2018			2017
+400		11.9	%		8.8	%		14.2	%		13.9	%
+300		8.9	%		6.6	%		10.7	%		10.6	%
+200		6.0	%		4.4	%		7.3	%		7.3	%
+100		2.9	%		2.0	%		3.6	%		3.6	%
-100		(5.7	)%		(6.7	)%		(7.2	)%		(9.2	)%
-200		(14.5	)%		(13.4	)%		(18.3	)%		17.5	%

	Percentage change in:
Change in interest rates	Economic value of equity⁽²⁾
	September 30,			December 31,
(in basis points)	2018			2017
+400		(3.9	)%		(8.8	)%
+300		(2.5	)%		(6.2	)%
+200		(1.0	)%		(3.5	)%
+100		(0.6	)%		(1.6	)%
-100		(2.9	)%		(3.3	)%
-200		(12.7	)%		(15.1	)%

Exhibit Number	Description
2.1	Stock Purchase Agreement by and among FB Financial Corporation, FirstBank, Clayton HC, Inc., Clayton Bank and Trust, American City Bank, and James L. Clayton, dated as of February 8, 2017 (incorporated by reference as Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-37875) filed on February 9, 2017)
2.2	First Amendment to Stock Purchase Agreement, dated May 26, 2017, by and among FB Financial Corporation, FirstBank, Clayton HC, Inc., Clayton Bank and Trust, American City Bank, and James L. Clayton (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 001-37875) filed on May 26, 2017)
3.1	Amended and Restated Charter of FB Financial Corporation (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 333-213210), filed on September 6, 2016)
3.2	Amended and Restated Bylaws of FB Financial Corporation (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-Q (File No. 001-37875) for the quarter ended September 30, 2016)
4.1	Registration Rights Agreement dated September 15, 2016 by and between FB Financial Corporation and James W. Ayers (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q (File No. 001-37875) for the quarter ended September 30, 2016)
10.1	FB Financial Non-Employee Director Compensation Policy†
31.1	Rule 13a-14(a) Certification of Chief Executive Officer*
31.2	Rules 13a-14(a) Certification of Chief Financial Officer*
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
101 INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document


**	Furnished herewith.
†	Represents a management contract or compensation plan or arrangement.


	FB Financial Corporation

	/s/ James R. Gordon
November 8, 2018	James R. Gordon Chief Financial Officer (duly authorized officer and principal financial officer)