National Commerce Corp - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - National Commerce Corp	ex_127816.htm
EX-32.1 - EXHIBIT 32.1 - National Commerce Corp	ex_127815.htm
EX-31.2 - EXHIBIT 31.2 - National Commerce Corp	ex_127814.htm
EX-31.1 - EXHIBIT 31.1 - National Commerce Corp	ex_127813.htm
EX-10.11 - EXHIBIT 10.11 - National Commerce Corp	ex_128843.htm
EX-10.10 - EXHIBIT 10.10 - National Commerce Corp	ex_128842.htm
EX-10.9 - EXHIBIT 10.9 - National Commerce Corp	ex_128841.htm
EX-10.8 - EXHIBIT 10.8 - National Commerce Corp	ex_128840.htm
EX-10.7 - EXHIBIT 10.7 - National Commerce Corp	ex_128839.htm
EX-10.6 - EXHIBIT 10.6 - National Commerce Corp	ex_128620.htm
EX-10.5 - EXHIBIT 10.5 - National Commerce Corp	ex_128619.htm
EX-4.2 - EXHIBIT 4.2 - National Commerce Corp	ex_128838.htm
EX-4.1 - EXHIBIT 4.1 - National Commerce Corp	ex_128618.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2018

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

For the transition period from to .

Commission file number: 001-36878

NATIONAL COMMERCE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	20-8627710
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

600 Luckie Drive, Suite 350 Birmingham, Alabama	35223
(Address of principal executive offices)	(Zip Code)

(205) 313-8100

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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.

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☒

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

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

Yes ☐ No ☒

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

	Class of Common Stock		Outstanding at November 9, 2018
	Common stock, $0.01 par value		20,676,731 shares

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NATIONAL COMMERCE CORPORATION

FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	1

	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1

	Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2018 and 2017	2

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	3

	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosure	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

	Signatures	49

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GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to “National Commerce Corporation,” “NCC,” the “Company,” “we,” “us” and “our” refer to National Commerce Corporation and its consolidated affiliates as of September 30, 2018.

FORWARD-LOOKING STATEMENTS

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

Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based on our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in this Quarterly Report on Form 10-Q under Part II, “Item 1A. Risk Factors” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 under Part I, “Item 1A. Risk Factors.”

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Balance Sheets
(In thousands, except share and per share data)


	September 30, 2018			December 31, 2017
Assets
Cash and due from banks	$	62,364			36,246
Interest-bearing deposits with banks		137,927			199,042
Cash and cash equivalents		200,291			235,288
Investment securities held-to-maturity (fair value of $24,447 and $25,932 at September 30, 2018 and December 31, 2017, respectively)		25,203			25,562
Investment securities available-for-sale		185,979			85,834
Other investments		13,743			11,350
Mortgage loans held-for-sale		15,533			29,191
Loans, net of unearned income		3,230,378			2,138,058
Less: allowance for loan losses		16,759			14,985
Loans, net		3,213,619			2,123,073
Premises and equipment, net		86,811			52,455
Accrued interest receivable		10,494			6,157
Bank-owned life insurance		51,573			31,584
Other real estate		1,339			1,094
Deferred tax assets, net		18,041			12,041
Goodwill		249,459			113,394
Core deposit intangible, net		19,838			4,455
Other assets		11,422			6,198
Total assets	$	4,103,345			2,737,676

Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	932,089			697,144
Interest-bearing demand		663,155			362,266
Savings and money market		1,218,215			951,846
Time		518,223			274,575
Total deposits		3,331,682			2,285,831
Federal Home Loan Bank advances		2,000			7,000
Securities sold under agreements to repurchase		18,340			-
Subordinated debt		37,211			24,553
Accrued interest payable		1,790			900
Other liabilities		27,511			19,434
Total liabilities		3,418,534			2,337,718

Commitments and contingencies

Shareholders’ equity:
Preferred stock, 250,000 shares authorized, no shares issued or outstanding		-			-
Common stock, $0.01 par value, 30,000,000 shares authorized, 20,649,948 and 14,788,436 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		206			148
Additional paid-in capital		604,129			347,999
Retained earnings		75,732			43,989
Accumulated other comprehensive (loss) income		(2,867	)		474
Total shareholders' equity attributable to National Commerce Corporation		677,200			392,610
Noncontrolling interest		7,611			7,348
Total shareholders' equity		684,811			399,958
Total liabilities and shareholders' equity	$	4,103,345			2,737,676

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Statements of Earnings
(In thousands, except per share data)

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Interest and dividend income:
Interest and fees on loans	$	43,691		26,780	$	113,827		75,360
Interest and dividends on taxable investment securities		1,496		694		3,878		1,871
Interest on non-taxable investment securities		190		195		570		592
Interest on interest-bearing deposits and federal funds sold		818		533		1,953		1,744
Total interest income		46,195		28,202		120,228		79,567
Interest expense:
Interest on deposits		5,561		2,101		12,374		6,165
Interest on Federal Home Loan Bank advances		27		72		170		212
Interest on securities sold under agreements to repurchase		49		-		49		1
Interest on subordinated debt		537		388		1,311		1,165
Total interest expense		6,174		2,561		13,904		7,543
Net interest income		40,021		25,641		106,324		72,024
Provision for loan losses		1,001		1,105		3,175		2,416
Net interest income after provision for loan losses		39,020		24,536		103,149		69,608
Noninterest income:
Service charges and fees on deposit accounts		1,166		671		3,207		1,978
Mortgage origination and fee income		1,825		2,780		5,982		9,079
Merchant sponsorship revenue		749		622		2,144		1,968
Income from bank-owned life insurance		323		210		885		645
Wealth management fees		16		12		46		36
Gain on other real estate, net		-		6		139		110
Gain on sale of investment securities available-for-sale		-		-		193		28
Other		689		245		1,555		1,242
Total noninterest income		4,768		4,546		14,151		15,086
Other expense:
Salaries and employee benefits		14,336		9,804		39,294		29,540
Commission-based compensation		1,876		1,748		5,202		5,155
Occupancy and equipment, net		2,439		1,608		6,458		4,560
Core deposit intangible amortization		1,306		366		2,783		1,062
Other operating expense		7,139		4,461		19,953		13,868
Total other expense		27,096		17,987		73,690		54,185
Earnings before income taxes		16,692		11,095		43,610		30,509
Income tax expense		4,040		3,828		10,119		9,950
Net earnings		12,652		7,267		33,491		20,559
Less: Net earnings attributable to noncontrolling interest		676		570		1,748		1,494
Net earnings attributable to National Commerce Corporation	$	11,976		6,697	$	31,743		19,065

Basic earnings per common share	$	0.60		0.47	$	1.75		1.42
Diluted earnings per common share	$	0.59		0.46	$	1.71		1.38

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2018			2017		2018			2017
Net earnings	$	11,976		$	6,697	$	31,743		$	19,065
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities available-for-sale:
Unrealized (losses) gains arising during the period, net of tax of $(301), $28, $(848) and $145, respectively		(1,130	)		52		(3,189	)		268
Reclassification adjustment for gains included in net earnings, net of tax of $41 and $11, during the nine months ended September 30, 2018 and 2017, respectively		-			-		(152	)		(17	)
Other comprehensive (loss) income		(1,130	)		52		(3,341	)		251
Comprehensive income	$	10,846		$	6,749	$	28,402		$	19,316

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)

							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive			Noncontrolling
	Stock		Capital		Earnings		Income			Interest			Total
Balance, December 31, 2017	$	148		347,999		43,989		474			7,348			399,958

Share-based compensation expense		-		1,636		-		-			-			1,636
Net earnings attributable to National Commerce Corporation		-		-		31,743		-			-			31,743
Exercise of stock options, warrants and issuance of performance shares		1		1,771		-		-			-			1,772
Net earnings attributable to noncontrolling interest		-		-		-		-			1,748			1,748
Distributions paid to noncontrolling interest		-		-		-		-			(1,485	)		(1,485	)
Acquisition of FirstAtlantic Financial Holdings, Inc., net of offering expenses of $94		24		97,035		-		-			-			97,059
Acquisition of Premier Community Bank of Florida, net of offering expenses of $53		10		49,080		-		-			-			49,090
Acquisition of Landmark Bancshares, Inc., net of offering expenses of $83		23		106,608		-		-			-			106,631
Change in unrealized gain/loss on securities available-for-sale, net of tax		-		-		-		(3,341	)		-			(3,341	)

Balance, September 30, 2018	$	206		604,129		75,732		(2,867	)		7,611			684,811

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Statements of Cash Flows
(In thousands)

	For the Nine Months Ended
	September 30,
	2018			2017
Cash flows from operating activities:
Net earnings	$	31,743			19,065
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses		3,175			2,416
Net earnings attributable to noncontrolling interest		1,748			1,494
Depreciation, amortization and accretion, net		(274	)		(313	)
Gain on sale of premises and equipment		(4	)		(21	)
Gain on ineffective portion of fair value hedge derivative		(20	)		(41	)
Change in mortgage loan derivative		(117	)		(201	)
Excess tax benefit from share-based compensation		(182	)		(527	)
Gain on sale of investment securities available-for-sale		(193	)		(28	)
Share-based compensation expense		1,636			1,268
Income from bank-owned life insurance		(885	)		(645	)
Net gain on sale of other real estate		(139	)		(110	)
Other real estate write-downs		-			219
Change in (net of effect of business combinations):
Mortgage loans held-for-sale		13,659			24,723
Other assets and accrued interest receivable		698			538
Other liabilities and accrued interest payable		(1,591	)		2,860
Net cash provided by operating activities		49,254			50,697
Cash flows from investing activities (net of effect of business combinations):
Proceeds from calls, maturities, and paydowns of securities available-for-sale		77,767			22,535
Proceeds from calls, maturities, and paydowns of securities held-to-maturity		552			670
Proceeds from sale of securities available-for-sale		134,090			15,055
Purchases of securities available-for-sale		(150,709	)		(34,857	)
Purchases of securities held-to-maturity		(500	)		(250	)
Proceeds from sale of other investments		488			-
Purchases of other investments		(1,133	)		(2,468	)
Net cash received in acquisitions		47,859			12,710
Net change in loans		(154,998	)		(186,571	)
Proceeds from sale of other real estate		748			2,103
Proceeds from the sale of premises and equipment		553			2,184
Purchases of premises and equipment		(7,365	)		(18,058	)
Net cash used by investing activities		(52,648	)		(186,947	)
Cash flows from financing activities (net of effect of business combinations):
Net change in deposits		(13,244	)		13,614
Repayment of Federal Home Loan Bank advances		(18,000	)		-
Net change in other borrowings		(416	)		81
Cash distribution paid to noncontrolling interests		(1,485	)		(1,299	)
Proceeds from stock offering		-			38,806
Stock offering expenses		-			(75	)
Stock offering expenses related to acquisition		(230	)		(222	)
Proceeds from exercise of options and warrants		1,772			2,601
Net cash (used) provided by financing activities		(31,603	)		53,506
Net change in cash and cash equivalents		(34,997	)		(82,744	)
Cash and cash equivalents at beginning of the period		235,288			217,293
Cash and cash equivalents at end of the period	$	200,291			134,549

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION
Unaudited Consolidated Statements of Cash Flows, continued
(In thousands)

	For the Nine Months Ended
	September 30,
Supplemental disclosure of cash flow information:	2018			2017
Cash paid during the period for:
Interest	$	12,768			7,291
Income taxes	$	9,877			9,257
Non-cash investing and financing activities:
Change in unrealized (losses) gains on securities available-for-sale, net of tax	$	(3,341	)		251
Transfer of loans to other real estate	$	616			293
Assets acquired and liabilities assumed in acquisitions:
Assets acquired in acquisitions	$	1,318,959			507,635
Liabilities assumed in acquisitions	$	1,113,817			420,685

See accompanying notes to unaudited consolidated financial statements.

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NATIONAL COMMERCE CORPORATION

Notes to Unaudited Consolidated Financial Statements

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

Note 1 – Basis of Presentation

General

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

NBC provides a full range of commercial and consumer banking services. The Bank currently operates seven full-service banking offices in Alabama, twenty-five full-service banking offices in Florida and five full-service banking offices in the Atlanta, Georgia metro area. NBC conducts business under a number of trade names unique to its local markets, including United Legacy Bank, Reunion Bank of Florida, Private Bank of Buckhead, Private Bank of Decatur, PrivatePlus Mortgage, Patriot Bank, FirstAtlantic Bank, Premier Community Bank of Florida and First Landmark Bank. NBC is primarily regulated by the Office of the Comptroller of Currency (“OCC”) and is subject to periodic examinations by the OCC. NCC is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and is subject to periodic examinations by the Federal Reserve.

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

These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted or abbreviated. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes as of and for the year ended December 31, 2017, which are contained in the Company’s most recent Annual Report on Form 10-K.

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

Note 2 – Reclassifications

Certain prior period amounts have been reclassified to conform to the presentation used in 2018. These reclassifications had no material effect on the operations, financial condition or cash flows of the Company.

Note 3 – Net Earnings per Common Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are computed by dividing net income by the sum of potential common shares that are dilutive plus the weighted-average number of shares of common stock outstanding. Anti-dilutive potential common shares (options) are excluded from the diluted earnings per share computation. There were no anti-dilutive potential common shares during any of the periods presented below.

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017

Net earnings available to common shareholders	$	11,976		6,697	$	31,743		19,065

Weighted average common shares outstanding		19,838,772		14,300,974		18,104,834		13,469,327
Dilutive effect of stock options and warrants		291,475		193,344		226,483		202,021
Dilutive effect of directors' deferred shares		50,185		33,418		50,185		33,418
Dilutive effect of performance share awards		180,338		151,810		180,020		149,308
Diluted common shares		20,360,770		14,679,546		18,561,522		13,854,074

Basic earnings per common share	$	0.60		0.47	$	1.75		1.42
Diluted earnings per common share	$	0.59		0.46	$	1.71		1.38

Note 4 – Securities

The amortized cost and fair value of held-to-maturity and available-for-sale debt securities at September 30, 2018 and December 31, 2017 were as follows.

	Held-to-Maturity Securities

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		Losses		Value
Residential mortgage-backed securities	$	3,488		-		101		3,387
Municipal securities		21,215		-		655		20,560
Other debt securities		500		-		-		500
Total held-to-maturity securities	$	25,203		-		756		24,447

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Residential mortgage-backed securities	$	4,058		-		21		4,037
Municipal securities		21,254		392		1		21,645
Other debt securities		250		-		-		250
Total held-to-maturity securities	$	25,562		392		22		25,932

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	Available-for-Sale Securities

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		Losses		Value
U.S. government agency obligations	$	2,809		-		6		2,803
Residential mortgage-backed securities		146,997		-		3,548		143,449
Other commercial mortgage-backed securities		3,990		-		223		3,767
Other asset-backed securities		33,499		92		23		33,568
Municipal securities		2,313		99		20		2,392
Total available-for-sale securities	$	189,608		191		3,820		185,979

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
U.S. government agency obligations	$	3,261		3		-		3,264
Residential mortgage-backed securities		39,143		298		197		39,244
Other commercial mortgage-backed securities		4,012		-		88		3,924
Other asset-backed securities		35,745		392		-		36,137
Municipal securities		3,074		191		-		3,265
Total available-for-sale securities	$	85,235		884		285		85,834

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

Details concerning the Company’s debt securities with unrealized losses as of September 30, 2018 and December 31, 2017 are as follows.

	Held-to-Maturity Securities
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2018	Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed securities	$	2,264		60		1,123		41		3,387		101
Municipal securities		20,318		654		241		1		20,559		655
Other debt securities		-		-		-		-		-		-
Total held-to-maturity securities	$	22,582		714		1,364		42		23,946	$	756

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		Losses		Value		Losses		Value		Losses
Residential mortgage-backed securities	$	4,037		21		-		-		4,037		21
Municipal securities		-		-		246		1		246		1
Other debt securities		-		-		-		-		-		-
Total held-to-maturity securities	$	4,037		21		246		1		4,283		22

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	Available-for-Sale Securities
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2018	Value		Losses		Value		Losses		Value		Losses
U.S. government agency obligations	$	2,803		6		-		-		2,803		6
Residential mortgage-backed securities		132,703		3,044		10,746		504		143,449		3,548
Other commercial mortgage-backed securities		-		-		3,767		223		3,767		223
Other asset-backed securities		9,977		23		-		-		9,977		23
Municipal securities		463		20		-		-		463		20
Total available-for-sale securities	$	145,946		3,093		14,513		727		160,459		3,820

	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017	Value		Losses		Value		Losses		Value		Losses
U.S. government agency obligations	$	-		-		-		-		-		-
Residential mortgage-backed securities		18,132		119		3,389		78		21,521		197
Other commercial mortgage-backed securities		3,924		88		-		-		3,924		88
Other asset-backed securities		-		-		-		-		-		-
Municipal securities		-		-		-		-		-		-
Total available-for-sale securities	$	22,056		207		3,389		78		25,445		285

As of September 30, 2018, the Company did not consider any securities with unrealized losses to be other-than-temporarily impaired. The unrealized losses in each category occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. The Company has the ability and intent to hold its securities for a period of time sufficient to allow for a recovery in fair value. There were no other-than-temporary impairments charged to earnings during the three-month and nine-month periods ended September 30, 2018 and 2017.

During the nine months ended September 30, 2018, the Company acquired three companies, FirstAtlantic Financial Holdings, Inc. (“FirstAtlantic”), Premier Community Bank of Florida (“Premier”) and Landmark Bancshares, Inc. (“Landmark”). The Company elected to sell all of the securities of these acquired companies resulting in net proceeds of approximately $124,931,000, and did not realize a gain or loss on the sale. In addition to these sales, during January 2018, the Company sold nine debt securities from its legacy portfolio for total proceeds of approximately $8,907,000 and realized a gross gain of $191,000. During May 2018, the Company sold one debt security for total proceeds of $252,000 and realized a gain of $2,000. The Company was required to liquidate this security as a condition of the merger agreement with Landmark.

During the nine months ended September 30, 2017, the Company sold all of the debt securities that it acquired in connection with the purchases of Private Bancshares, Inc. (“Private Bancshares”) and Patriot Bank, resulting in proceeds of $14,489,000, and did not realize a gain or loss on the sale. In addition to these sales during the nine-month period ended September 30, 2017, the Company also sold one debt security from its legacy portfolio for proceeds of $562,000 and realized a gross gain of $28,000.

The amortized cost and estimated fair value of debt securities at September 30, 2018, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale Securities				Held-to-Maturity Securities
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Municipal securities and U.S. government agencies:
0 to 5 years	$	-		-		-		-
5 to 10 years		-		-		750		734
Over 10 years		5,122		5,195		20,465		19,826
Residential and other mortgage-backed securities and other asset-backed securities		184,486		180,784		3,988		3,887
Total	$	189,608		185,979		25,203		24,447

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Note 5 – Loans, Allowance for Loan Losses and Credit Quality

Major classifications of loans at September 30, 2018 and December 31, 2017 are summarized as follows.

	September 30, 2018			December 31, 2017
Commercial, financial and agricultural	$	418,947			287,659
Factored commercial receivables		151,985			118,710
Real estate - mortgage		2,267,552			1,475,004
Real estate - construction		363,561			231,030
Consumer		29,261			26,314
		3,231,306			2,138,717
Less: Unearned fees		(928	)		(659	)
Total loans		3,230,378			2,138,058
Allowance for loan losses		(16,759	)		(14,985	)
Total net loans	$	3,213,619			2,123,073

At September 30, 2018, the outstanding principal balance and carrying value of purchased credit impaired (“PCI”) loans accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $60.9 million and $40.9 million, respectively. At December 31, 2017, the outstanding principal balance and carrying value of PCI loans were $34.7 million and $25.7 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated.

	For the Nine Months Ended September 30,
	2018			2017
Balance at beginning of period	$	703			375
Acquisition of Landmark		3			-
Acquisition of Premier		97			-
Acquisition of FirstAtlantic		236			-
Acquisition of Private Bancshares, Inc.		-			462
Accretion		(2,454	)		(1,180	)
Reclassification from nonaccretable difference		5,756			893
Balance at period end	$	4,341			550

The Company makes loans and extensions of credit to individuals and a variety of businesses located in its market areas. Through Corporate Billing, the Company also purchases receivables predominantly from transportation companies and automotive parts and service providers nationwide and occasionally purchases receivables from manufacturing and other types of companies. Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon prevailing conditions in the real estate market. Portfolio segments utilized by the Company are identified below. Relevant risk characteristics for these portfolio segments generally include (1) debt service coverage, loan-to-value ratios and financial performance, for non-consumer loans, and (2) credit scores, debt-to-income ratios, collateral type and loan-to-value ratios, for consumer loans.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the periods indicated. Loans acquired through bank acquisitions are not included in the allowance for loan losses calculation, as these loans are recorded at fair value at acquisition, and there has been no further indication of credit deterioration that would require an additional provision.

	Commercial,			Factored
	financial and			commercial			Real estate -			Real estate -
Nine Months ended September 30, 2018	agricultural			receivables			mortgage			construction		Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	2,511			600			9,845			1,884		145			14,985
Provisions charged to operating expense		1,265			666			1,074			147		23			3,175
Loans charged off		(762	)		(2,405	)		(411	)		-		(50	)		(3,628	)
Recoveries		42			1,739			270			157		19			2,227
Balance, September 30, 2018	$	3,056			600			10,778			2,188		137			16,759

Ending balance, individually evaluated for impairment	$	-			-			75			-		15			90
Ending balance, collectively evaluated for impairment		3,056			600			10,703			2,188		122			16,669
Total allowance for loan losses	$	3,056			600			10,778			2,188		137			16,759
Loans:
Individually evaluated for impairment	$	-			-			208			-		24			232
Collectively evaluated for impairment		416,156			151,985			2,231,607			361,706		28,697			3,190,151
Acquired loans with deteriorated credit quality		2,791			-			35,737			1,855		540			40,923
Total loans	$	418,947			151,985			2,267,552			363,561		29,261			3,231,306

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	Commercial,			Factored
	financial and			commercial			Real estate -			Real estate -
Nine Months Ended September 30, 2017	agricultural			receivables			mortgage			construction		Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	1,588			500			8,465			1,369		191			12,113
Provisions charged to operating expense		59			512			1,346			544		(45	)		2,416
Loans charged off		(28	)		(1,936	)		(148	)		-		(30	)		(2,142	)
Recoveries		427			1,424			19			-		7			1,877
Balance, September 30, 2017	$	2,046			500			9,682			1,913		123			14,264

Ending balance, individually evaluated for impairment	$	-			-			-			-		-			-
Ending balance, collectively evaluated for impairment		2,046			500			9,682			1,913		123			14,264
Total allowance for loan losses	$	2,046			500			9,682			1,913		123			14,264
Loans:
Individually evaluated for impairment	$	-			-			35			-		35			70
Collectively evaluated for impairment		263,260			119,110			1,404,063			217,978		25,630			2,030,041
Acquired loans with deteriorated credit quality		876			-			24,737			677		634			26,924
Total loans	$	264,136			119,110			1,428,835			218,655		26,299			2,057,035

The Company individually evaluates for impairment all loans that are on non-accrual status. Additionally, any troubled debt restructurings are individually evaluated for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral-dependent. Management may also elect to apply an additional collective reserve to groups of impaired loans based on current economic or market factors. Interest payments received on impaired loans generally are applied as a reduction of the outstanding principal balance. During the nine months ended September 30, 2018 and 2017, the Company did not modify any loans in a manner that would be considered a troubled debt restructuring.

The following tables present impaired loans by class of loans as of September 30, 2018 and December 31, 2017. The purchased credit-impaired loans are not included in these tables because they are recorded at fair value at acquisition and there has been no further indication of credit deterioration that would require an additional provision.

			Unpaid				Average
	Recorded		Principal		Related		Recorded
September 30, 2018	Investment		Balance		Allowance		Investment
Impaired loans without related allowance:
Commercial, financial and agricultural	$	-		-		-		8
Factored commercial receivables		-		-		-		-
Real estate - mortgage		133		137		-		190
Real estate - construction		-		-		-		-
Consumer		-		-		-		19
Total	$	133		137		-		217

Impaired loans with related allowance:
Commercial, financial and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		75		75		75		37
Real estate - construction		-		-		-		-
Consumer		24		27		15		16
Total		99		102		90		53

Total impaired loans:
Commercial, financial and agricultural	$	-		-		-		8
Factored commercial receivables		-		-		-		-
Real estate - mortgage		208		212		75		227
Real estate - construction		-		-		-		-
Consumer		24		27		15		35
Total	$	232		239		90		270

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			Unpaid				Average
	Recorded		Principal		Related		Recorded
December 31, 2017	Investment		Balance		Allowance		Investment
Impaired loans without related allowance:
Commercial, financial and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		142		143		-		131
Real estate - construction		-		-		-		-
Consumer		-		-		-		14
Total	$	142		143		-		145

Impaired loans with related allowance:
Commercial, financial and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		-		-		-		9
Real estate - construction		-		-		-		-
Consumer		41		41		24		8
Total	$	41		41		24		17

Total impaired loans:
Commercial, financial and agricultural	$	-		-		-		-
Factored commercial receivables		-		-		-		-
Real estate - mortgage		142		143		-		140
Real estate - construction		-		-		-		-
Consumer		41		41		24		22
Total	$	183		184		24		162

For the nine months ended September 30, 2018 and 2017, the Company did not recognize a material amount of interest income on impaired loans.

The following tables present the aging of the recorded investment in past due loans and non-accrual loan balances as of September 30, 2018 and December 31, 2017, by class of loans. All loans greater than 90 days past due are placed on non-accrual status, excluding factored receivables. For Corporate Billing’s factored receivables, which are commercial trade credits rather than promissory notes, our practice, in most cases, is to charge off unpaid recourse receivables when they become 90 days past due from the invoice due date and the non-recourse receivables when they become 120 days past due from the statement billing date. For the recourse receivables, the invoice is charged against the client reserve account established for such purposes, unless the client reserve is insufficient, in which case the invoice is charged against the allowance for loan losses. PCI loans are excluded from the past due balances in the table below and are presented in the table below in total by class of loan. All non-accrual loans, whether acquired or non-acquired, are included in the non-accrual balances.

	30-59 Days		60-89 Days		> 90 Days		Total								Non-
September 30, 2018	Past Due		Past Due		Past Due		Past Due		Current		PCI Loans		Total		accrual
Commercial, financial and agricultural	$	1,843		-		1,484		3,327		412,829		2,791		418,947		1,464
Factored commercial receivables		14,826		3,716		484		19,026		132,959		-		151,985		-
Real estate - mortgage		4,655		1,588		215		6,458		2,225,357		35,737		2,267,552		2,495
Real estate - construction		90		-		13		103		361,603		1,855		363,561		284
Consumer		5		5		9		19		28,702		540		29,261		38
Total	$	21,419		5,309		2,205		28,933		3,161,450		40,923		3,231,306		4,281

	30-59 Days		60-89 Days		> 90 Days		Total								Non-
December 31, 2017	Past Due		Past Due		Past Due		Past Due		Current		PCI Loans		Total		accrual
Commercial, financial and agricultural	$	137		29		-		166		286,693		800		287,659		-
Factored commercial receivables		10,035		1,779		677		12,491		106,219		-		118,710		-
Real estate - mortgage		1,342		546		103		1,991		1,449,328		23,685		1,475,004		2,594
Real estate - construction		-		-		-		-		230,385		645		231,030		76
Consumer		13		40		9		62		25,686		566		26,314		52
Total	$	11,527		2,394		789		14,710		2,098,311		25,696		2,138,717		2,722

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The Company groups loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Loans are analyzed individually and classified according to credit risk. This analysis is performed on a continuous basis. The Bank uses the following definitions for its risk ratings:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are assigned a “Pass” rating. As of September 30, 2018 and December 31, 2017, based on the most recent analysis performed, the risk category of loans by class of loans was as presented in the following table. This table includes all loans, whether acquired or non-acquired.

September 30, 2018	Pass		OAEM		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	404,905		5,669		8,373		-		418,947
Factored commercial receivables		151,985		-		-		-		151,985
Real estate - mortgage		2,229,520		16,145		21,725		162		2,267,552
Real estate - construction		358,195		2,678		2,688		-		363,561
Consumer		29,035		82		139		5		29,261
Total	$	3,173,640		24,574		32,925		167		3,231,306

December 31, 2017	Pass		OAEM		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	279,592		1,278		6,789		-		287,659
Factored commercial receivables		118,710		-		-		-		118,710
Real estate - mortgage		1,460,112		5,465		8,580		847		1,475,004
Real estate - construction		229,711		102		710		507		231,030
Consumer		26,213		2		99		-		26,314
Total	$	2,114,338		6,847		16,178		1,354		2,138,717

The following tables present a rollforward of the acquired loans and a summary of the changes in the accretable discount and non-accretable difference, by acquisition, for the nine months ended September 30, 2018 and 2017.

September 30, 2018	United			Reunion			Private Bancshares			Patriot Bank			FirstAtlantic			Premier			Landmark
Acquired Loan Balance	(2014 Acquisition)			(2015 Acquisition)			(2017 Acquisition)			(2017 Acquisition)			(2018 Acquisition)			(2018 Acquisition)			(2018 Acquisition)			Total
Balance, beginning of period	$	73,254			189,811			181,780			119,127			-			-			-		$	563,972
Additions due to acquisitions		-			-			-			-			303,831			168,810			460,823			933,464
Charge-offs		(357	)		-			-			-			(30	)		-			-			(387	)
Accretion		579			1,178			1,524			441			1,734			294			368			6,118
Other net change in balances		(14,743	)		(32,708	)		(66,593	)		(17,851	)		(57,576	)		(1,305	)		(8,833	)		(199,609	)
Balance, end of period	$	58,733			158,281			116,711			101,717			247,959			167,799			452,358		$	1,303,558

Accretable Discount
Balance, beginning of period	$	703			961			1,921			1,519			-			-			-		$	5,104
Additions due to acquisitions		-			-			-			-			5,734			2,170			5,202			13,106
Charge-offs and other net changes in balance		-			-			-			-			1			-			-			1
Accretion		(579	)		(1,178	)		(1,524	)		(441	)		(1,734	)		(294	)		(368	)		(6,118	)
Reclassifications from non-accretable		596			2,332			1,631			291			827			79			-			5,756
Balance, end of period	$	720			2,115			2,028			1,369			4,828			1,955			4,834		$	17,849

Non-accretable difference
Balance, beginning of period	$	1,153			3,394			2,289			1,512			-			-			-		$	8,348
Additions due to acquisitions		-			-			-			-			2,953			3,191			7,138			13,282
Charge-offs and other net changes in balance		(155	)		-			-			-			(81	)		-			-			(236	)
Reclassifications to accretable		(596	)		(2,332	)		(1,631	)		(291	)		(827	)		(79	)		-			(5,756	)
Balance, end of period	$	402			1,062			658			1,221			2,045			3,112			7,138		$	15,638

Total discount on acquired loans at end of period	$	1,122		$	3,177		$	2,686		$	2,590		$	6,873		$	5,067		$	11,972		$	33,487

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September 30, 2017	United			Reunion			Private Bancshares			Patriot Bank
Acquired Loan Balance	(2014 Acquisition)			(2015 Acquisition)			(2017 Acquisition)			(2017 Acquisition)			Total
Balance, beginning of period	$	97,945			227,429			-			-		$	325,374
Additions due to acquisitions		-			-			260,034			121,715			381,749
Charge-offs		(49	)		-			-			-			(49	)
Accretion		492			676			2,125			17			3,310
Other net change in balances		(21,099	)		(32,582	)		(70,240	)		1,579			(122,342	)
Balance, end of period	$	77,289			195,523			191,919			123,311		$	588,042

Accretable Discount
Balance, beginning of period	$	1,237			1,699			-			-		$	2,936
Additions due to acquisitions		-			-			3,588			1,721			5,309
Charge-offs and other net changes in balance		-			-			-			(90	)		(90	)
Accretion		(492	)		(676	)		(2,125	)		(17	)		(3,310	)
Reclassifications from non-accretable		64			106			723			-			893
Balance, end of period	$	809			1,129			2,186			1,614		$	5,738

Non-accretable difference
Balance, beginning of period	$	1,452			3,516			-			-		$	4,968
Additions due to acquisitions		-			-			3,637			1,328			4,965
Charge-offs and other net changes in balance		-			-			-			228			228
Reclassifications to accretable		(64	)		(106	)		(723	)		-			(893	)
Balance, end of period	$	1,388			3,410			2,914			1,556		$	9,268

Total discount on acquired loans at end of period	$	2,197		$	4,539		$	5,100		$	3,170		$	15,006

Note 6 – Fair Value Measurements and Disclosures

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Cash Equivalents

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

Investment Securities

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

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

Other Investments

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

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Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired, and a specific reserve in the allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2018 and December 31, 2017, impaired loans were evaluated based on the fair value of the collateral. Impaired loans for which an allowance is established based on the fair value of collateral, or loans that are charged down according to the fair value of collateral, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on an appraised value, the Company records the impaired loan as nonrecurring Level 3.

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

Mortgage Loans Held-for-Sale

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

Bank-Owned Life Insurance

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

Other Real Estate

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

Deposits

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

Federal Home Loan Bank Advances

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

Subordinated Debt

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

Derivative Financial Instruments

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

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

Although the Company has determined that a majority of the inputs used to value its derivatives falls within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company or the counterparty. However, as of September 30, 2018 and December 31, 2017, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustment was not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

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Commitments to Extend Credit and Standby Letters of Credit

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

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.

September 30, 2018	Level 1		Level 2		Level 3		Total
U.S. government agency obligations	$	-		2,803		-		2,803
Residential mortgage-backed securities		-		143,449		-		143,449
Other commercial mortgage-backed securities		-		3,767		-		3,767
Municipal securities		-		2,392		-		2,392
Other asset-backed securities		-		33,568		-		33,568
Total investment securities available-for-sale	$	-		185,979		-		185,979
Mortgage loans held-for-sale	$	-		15,533		-		15,533
Derivative assets	$	-		2,100		-		2,100
Derivative liabilities	$	-		1,352		-		1,352

December 31, 2017	Level 1		Level 2		Level 3		Total
U.S. government agency obligations	$	-		3,264		-		3,264
Residential mortgage-backed securities		-		39,244		-		39,244
Other commercial mortgage-backed securities		-		3,924		-		3,924
Municipal securities		-		3,265		-		3,265
Other asset-backed securities		-		36,137		-		36,137
Total investment securities available-for-sale		-		85,834		-		85,834
Mortgage loans held-for-sale	$	-		29,191		-		29,191
Derivative assets	$	-		720		-		720
Derivative liabilities	$	-		352		-		352

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2018 and December 31, 2017.

September 30, 2018	Level 1		Level 2		Level 3		Total
Other real estate	$	-		-		1,339		1,339
Non-accrual loans		-		-		4,281		4,281

December 31, 2017	Level 1		Level 2		Level 3		Total
Other real estate	$	-		-		1,094		1,094
Non-accrual loans		-		-		2,698		2,698

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The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2018 and December 31, 2017 were as follows:

	Carrying		Estimated Fair Value
September 30, 2018	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	200,291		200,291		-		-
Investment securities held-to-maturity		25,203		-		24,447		-
Investment securities available-for-sale		185,979		-		185,979		-
Other investments		13,743		-		13,743		-
Loans, net		3,213,619		-		3,182,731		4,281
Mortgage loans held-for-sale		15,533		-		15,533		-
Bank-owned life insurance		51,573		-		51,573		-
Derivative assets		2,100		-		2,100		-

Liabilities:
Deposits		3,331,682		-		3,078,008		-
Federal Home Loan Bank advances and other borrowings		20,340		-		19,562		-
Subordinated debt		37,211		-		36,681		-
Derivative liabilities		1,352		-		1,352		-

	Carrying		Estimated Fair Value
December 31, 2017	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	235,288		235,288		-		-
Investment securities held-to-maturity		25,562		-		25,932		-
Investment securities available-for-sale		85,834		-		85,834		-
Other investments		11,350		-		11,350		-
Loans, net		2,123,073		-		2,117,065		2,698
Mortgage loans held-for-sale		29,191		-		29,191		-
Bank-owned life insurance		31,584		-		31,584		-
Derivative assets		720		-		720		-

Liabilities:
Deposits		2,285,831		-		2,156,600		-
Federal Home Loan Bank advances		7,000		-		7,089		-
Subordinated debt		24,553		-		23,709		-
Derivative liabilities		352		-		352		-

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

For the nine months ended September 30, 2018, there were no changes in the methods and significant inputs used to estimate fair value.

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

September 30, 2018	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts			Weighted Average Discounts
Other real estate	$	1,339	Third party appraisals, sales contracts, broker price opinions	Collateral discounts and estimated costs to sell	26%	-	57%		48	%
Non-accrual loans		4,281	Third party appraisals and discounted cash flows	Collateral discounts and discount rates	0%	-	100%		34	%

December 31, 2017
Other real estate	$	1,094	Third party appraisals, sales contracts, broker price opinions	Collateral discounts and estimated costs to sell	9%	-	57%		48	%
Non-accrual loans		2,698	Third party appraisals and discounted cash flows	Collateral discounts and discount rates	0%	-	100%		33	%

Limitations

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

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

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Note 7 – Segment Reporting

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

	Retail and
	Commercial		Mortgage		Receivables			Elimination
	Banking		Division (1)		Factoring			Entries (2)			Total
For the Three Months Ended September 30, 2018
Interest income	$	42,423		236		4,975			(1,439	)		46,195
Interest expense		6,046		128		1,439			(1,439	)		6,174
Net interest income		36,377		108		3,536			-			40,021
Provision for loan and lease losses		920		-		81			-			1,001
Noninterest income		1,759		2,950		59			-			4,768
Noninterest expense		22,297		2,826		1,973			-			27,096
Net earnings before tax and noncontrolling interest		14,919		232		1,541			-			16,692
Income tax expense		3,755		60		225			-			4,040
Noncontrolling interest		-		-		(676	)		-			(676	)
Net earnings attributable to National Commerce Corporation	$	11,164		172		640			-			11,976

For the Nine Months Ended September 30, 2018
Interest income	$	109,179		658		14,226			(3,835	)		120,228
Interest expense		13,535		369		3,835			(3,835	)		13,904
Net interest income		95,644		289		10,391			-			106,324
Provision for loan and lease losses		2,509		-		666			-			3,175
Noninterest income		5,111		8,962		78			-			14,151
Noninterest expense		58,853		8,873		5,964			-			73,690
Net earnings before tax and noncontrolling interest		39,393		378		3,839			-			43,610
Income tax expense		9,477		98		544			-			10,119
Noncontrolling interest		-		-		(1,748	)		-			(1,748	)
Net earnings attributable to National Commerce Corporation	$	29,916		280		1,547			-			31,743

Total assets as of September 30, 2018	$	4,048,430		15,533		172,322			(132,940	)		4,103,345

For the Three Months Ended September 30, 2017
Interest income	$	25,021		151		3,969			(939	)		28,202
Interest expense		2,487		74		939			(939	)		2,561
Net interest income		22,534		77		3,030			-			25,641
Provision for loan and lease losses		980		-		125			-			1,105
Noninterest income		1,201		3,296		49			-			4,546
Noninterest expense		13,020		3,352		1,615			-			17,987
Net earnings before tax and noncontrolling interest		9,735		21		1,339			-			11,095
Income tax expense		3,528		8		292			-			3,828
Noncontrolling interest		-		-		(570	)		-			(570	)
Net earnings attributable to National Commerce Corporation	$	6,207		13		477			-			6,697

For the Nine Months Ended September 30, 2017
Interest income	$	70,528		543		10,945			(2,449	)		79,567
Interest expense		7,283		260		2,449			(2,449	)		7,543
Net interest income		63,245		283		8,496			-			72,024
Provision for loan and lease losses		1,904		-		512			-			2,416
Noninterest income		4,599		10,379		108			-			15,086
Noninterest expense		39,030		10,515		4,640			-			54,185
Net earnings before tax and noncontrolling interest		26,910		147		3,452			-			30,509
Income tax expense		9,150		56		744			-			9,950
Noncontrolling interest		-		-		(1,494	)		-			(1,494	)
Net earnings attributable to National Commerce Corporation	$	17,760		91		1,214			-			19,065

Total assets as of September 30, 2017	$	2,498,085		15,278		140,285			(104,514	)		2,549,134

(1)	Noninterest income for the mortgage division segment includes intercompany income allocation.
(2)	Entry to remove intercompany interest allocated to the receivables factoring segment. For segment reporting purposes, the Company allocates funding costs to the receivables factoring segment at the federal funds rate plus 2.50%.

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Note 8 – Goodwill and Intangibles

Changes to the carrying amount of goodwill for the nine months ended September 30, 2018 are provided in the following table.

Balance, December 31, 2017	$	113,394
Adjustments to goodwill		37
Acquisition of FirstAtlantic Financial Holdings, Inc.		50,842
Acquisition of Premier Community Bank of Florida		28,549
Acquisition of Landmark Bancshares, Inc.		56,637
Balance, September 30, 2018	$	249,459

The adjustments to goodwill made during the nine months ended September 30, 2018 resulted from the acquisitions of FirstAtlantic, Premier and Landmark and a $37,000 adjustment related to the Patriot Bank acquisition that occurred in 2017. For additional information on the FirstAtlantic, Premier and Landmark acquisitions, see Note 10 to the Unaudited Consolidated Financial Statements.

In addition to the goodwill recorded for FirstAtlantic, Premier and Landmark, the Company recorded a core deposit intangible asset of $6,251,000, $3,500,000 and $8,414,000, respectively. The core deposit intangible asset will be amortized using an accelerated method over seven years. The aggregate amount of amortization expense for intangible assets during the nine months ended September 30, 2018 and 2017 was $2,783,000 and $1,062,000, respectively.

A summary of core deposit intangible assets as of September 30, 2018 and December 31, 2017 is as follows.

	September 30, 2018			December 31, 2017
Gross carrying amount	$	25,358			7,193
Less: accumulated amortization		(5,520	)		(2,738	)
Net carrying amount	$	19,838			4,455

Note 9 – Cash and Cash Equivalents

Cash equivalents include amounts due from banks, interest-bearing deposits with the Federal Reserve Bank of Atlanta (“FRB”), the FHLB and correspondent banks, and federal funds sold. Generally, federal funds are sold for one-day periods. The Company is required to maintain average reserve balances with the FRB or in cash. At September 30, 2018 and December 31, 2017, the Company’s reserve requirements (net of vault cash) were approximately $20,691,000 and $16,452,000, respectively.

Note 10 – Acquisitions

FirstAtlantic Financial Holdings, Inc.

Effective January 1, 2018, the Company completed its merger with FirstAtlantic Holdings, Inc. (“FirstAtlantic”). FirstAtlantic was the parent company of FirstAtlantic Bank, headquartered in Jacksonville, Florida, and was merged with and into NCC. Immediately following the holding company merger, FirstAtlantic Bank merged with and into NBC, but NBC continues to operate the former offices of FirstAtlantic Bank under the trade name “FirstAtlantic Bank, a division of National Bank of Commerce.”

At the effective time of the merger, each share of common stock of FirstAtlantic issued and outstanding was converted into the right to receive 0.44 shares of NCC common stock and cash in the amount of $17.25. The Company paid approximately $12,802,000 in cash and issued 2,393,382 shares of NCC common stock for the issued and outstanding shares of FirstAtlantic common stock.

At the effective time of the merger, each outstanding and unexercised option to purchase shares of FirstAtlantic common stock converted into the right receive a cash payment equal to the excess, if any, of $17.25 over the exercise price per share of FirstAtlantic common stock subject to such option, less any required withholding tax. The Company paid approximately $425,000 in cash to cancel the outstanding and unexercised stock options.

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

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The following table presents the assets acquired and liabilities assumed of FirstAtlantic as of January 1, 2018 at their initial fair value estimates:

	As Recorded By		Fair Value				As Recorded
	FirstAtlantic		Adjustments				By the Company
Cash and cash equivalents	$	16,264		-				16,264
Investment securities		83,761		(2,491	)	a		81,270
Other investments		393		-				393
Loans		310,636		(8,687	)	b		303,831
				1,882		c
Allowance for loan losses		2,614		(2,614	)	d		-
Net loans		308,022		(4,191	)			303,831
Premises and equipment, net		13,688		(46	)	e		13,642
Core deposit intangible		-		6,251		f		6,251
Existing intangible assets		2,188		(2,188	)	g		-
Bank-owned life insurance		10,273		-				10,273
Other real estate and repossessions		365		(127	)	h		238
Other assets		5,738		842		i		6,580
Total assets	$	440,692		(1,950	)			438,742

Noninterest-bearing deposits	$	113,964		-				113,964
Interest-bearing deposits		259,864		457		j		260,321
Total deposits		373,828		457				374,285

Other liabilities		4,557		788		k		5,345
Total liabilities		378,385		1,245				379,630

Net identifiable assets acquired over liabilities assumed		62,307		(3,195	)			59,112

Goodwill		-		50,842				50,842

Net assets acquired over liabilities assumed	$	62,307		47,647				109,954


Consideration:

Shares of common stock issued				2,393,382
Estimated value per share of the Company's stock			$	40.25

Fair value of Company stock issued				96,334
Cash paid for shares and in lieu of fractional shares				12,802
Cash paid for stock options				425
Value of assumed stock warrants				393

Fair value of total consideration transferred			$	109,954

Explanation of fair value adjustments

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

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

Adjustment to remove loan marks from prior acquisition and existing deferred fees and costs.

Adjustment reflects the elimination of FirstAtlantic’s allowance for loan losses.

Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property.

Adjustment reflects the recording of core deposit intangible asset.

Adjustment to remove intangible assets from FirstAtlantic’s balance sheet from prior acquisition.

Adjustment reflects the fair value adjustments of other real estate.

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

Adjustment reflects the fair value adjustment to time deposit accounts.

Adjustment to reflect unrecorded liabilities.

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

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Premier Community Bank of Florida

Effective July 1, 2018, the Company completed its merger with Premier Community Bank of Florida (“Premier”), headquartered in Bradenton, Florida. Premier was merged with and into NBC, but NBC continues to operate the former offices of Premier under the trade name “Premier Bank, a division of National Bank of Commerce.”

At the effective time of the merger, each share of common stock of Premier issued and outstanding was converted into the right to receive 0.4218 shares of NCC common stock and cash in the amount of $0.93. The Company paid approximately $2,275,000 in cash and issued 1,028,092 shares of NCC common stock for the issued and outstanding shares of Premier common stock.

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

The following table presents the assets acquired and liabilities assumed of Premier as of July 1, 2018 at their initial fair value estimates:

	As Recorded By		Fair Value				As Recorded
	Premier		Adjustments				By the Company
Cash and cash equivalents	$	41,317		-				41,317
Investment securities		20,175		(9	)	a		20,166
Other investments		181		-				181
Loans		174,102		(5,361	)	b		168,810
				69		c
Allowance for loan losses		1,219		(1,219	)	d		-
Net loans		172,883		(4,073	)			168,810
Premises and equipment, net		7,170		(16	)	e		7,154
Core deposit intangible		-		3,500		f		3,500
Bank-owned life insurance		3,050		-				3,050
Other assets		2,114		482		g		2,596
Total assets	$	246,890		(116	)			246,774

Noninterest-bearing deposits	$	24,470		-				24,470
Interest-bearing deposits		179,949		661		h		180,610
Total deposits		204,419		661				205,080

Repurchase liability		18,108		-				18,108
Other liabilities		717		-				717
Total liabilities		223,244		661				223,905

Net identifiable assets acquired over liabilities assumed		23,646		(777	)			22,869

Goodwill		-		28,549				28,549

Net assets acquired over liabilities assumed	$	23,646		27,772				51,418


Consideration:

Shares of common stock issued				1,028,092
Estimated value per share of the Company's stock			$	46.30

Fair value of Company stock issued				47,601
Cash paid for shares and in lieu of fractional shares				2,275
Value of assumed stock options				1,542

Fair value of total consideration transferred			$	51,418

Explanation of fair value adjustments

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

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

Adjustment to remove deferred fees and costs.

Adjustment reflects the elimination of Premier’s allowance for loan losses.

Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property.

Adjustment reflects the recording of core deposit intangible asset.

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

Adjustment reflects the fair value adjustment to time deposit accounts.

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Landmark Bancshares, Inc.

Effective August 1, 2018, the Company completed its merger with Landmark Bancshares, Inc. (“Landmark”). Landmark was the parent company of First Landmark Bank, headquartered in Marietta, Georgia, and was merged with and into NCC. Immediately following the holding company merger, First Landmark Bank merged with and into NBC, but NBC continues to operate the former offices of First Landmark Bank under the trade name “First Landmark Bank, a division of National Bank of Commerce.”

At the effective time of the merger, each share of common stock of Landmark issued and outstanding was converted into the right to receive 0.5961 shares of NCC common stock and cash in the amount of $1.33. The Company paid approximately $5,218,000 in cash and issued 2,334,385 shares of NCC common stock for the issued and outstanding shares of Landmark common stock.

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

The following table presents the assets acquired and liabilities assumed of Landmark as of August 1, 2018 at their initial fair value estimates:

	As Recorded By		Fair Value				As Recorded
	Landmark		Adjustments				By the Company
Cash and cash equivalents	$	10,572		-				10,572
Investment securities		66,561		(2,282	)	a		64,279
Other investments		1,172		-				1,172
Mortgage loans held-for-sale		1		-				1
Loans		469,931		(12,340	)	b		460,823
				3,232		c
Allowance for loan losses		5,155		(5,155	)	d		-
Net loans		464,776		(3,953	)			460,823
Premises and equipment, net		7,626		1,940		e		9,566
Core deposit intangible		-		8,414		f		8,414
Existing intangible assets		6,433		(6,433	)	g		-
Bank-owned life insurance		5,782		-				5,782
Other assets		5,371		(412	)	h		4,959
Total assets	$	568,294		(2,726	)			565,568

Noninterest-bearing deposits	$	137,875		-				137,875
Interest-bearing deposits		341,187		1,099		i		342,286
Total deposits		479,062		1,099				480,161

Other borrowings		26,258		-				26,258
Other liabilities		3,924		(61	)	j		3,863
Total liabilities		509,244		1,038				510,282

Net identifiable assets acquired over liabilities assumed		59,050		(3,764	)			55,286

Goodwill		-		56,637				56,637

Net assets acquired over liabilities assumed	$	59,050		52,873				111,923


Consideration:

Shares of common stock issued				2,334,385
Estimated value per share of the Company's stock			$	43.60

Fair value of Company stock issued				101,779
Cash paid for shares and in lieu of fractional shares				5,218
Value of assumed stock options				4,926

Fair value of total consideration transferred			$	111,923

Explanation of fair value adjustments

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

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

Adjustment to remove loan marks from prior acquisition and existing deferred fees and costs.

Adjustment reflects the elimination of Landmark’s allowance for loan losses.

Adjustment reflects the write-off of certain fixed assets and fair value adjustments of real property.

Adjustment reflects the recording of core deposit intangible asset.

Adjustment to remove intangible assets from Landmark’s balance sheet from prior acquisition.

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

Adjustment reflects the fair value adjustment to time deposit accounts.

Adjustment to adjust liabilities.

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The following unaudited supplemental pro forma information is presented to show estimated results assuming FirstAtlantic, Patriot Bank, Premier and Landmark were acquired as of January 1, 2017. These unaudited pro forma results are not necessarily indicative of the operating results that the Company would have achieved had it completed the acquisitions as of January 1, 2017 and should not be considered as representative of future operating results. The pro forma information for 2018 is presented to show estimated results assuming Premier and Landmark were included for the entire periods presented for 2018. Pro forma information for FirstAtlantic and Patriot Bank are not needed for 2018, as each are included in the Company’s results for the entire three-month and nine-month periods ended September 30, 2018.

	For the Three Months Ended				For the Nine Months Ended
Performance Measures (pro forma, unaudited)	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Net interest income	$	42,277	$	39,820	$	126,435	$	114,285
Net earnings	$	12,970	$	10,058	$	34,962	$	28,371
Diluted earnings per common share	$	0.61	$	0.48	$	1.66	$	1.40

Note 11 – Derivative Financial Instruments and Hedging Transactions

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

ASC 815, Derivatives and Hedging, requires companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. As of September 30, 2018 and December 31, 2017, the approximate fair values and notional amounts of the Company’s derivative instruments, as well as their location on the consolidated balance sheet, were as follows.

	Balance Sheet				Notional
September 30, 2018	Location	Fair Value			Amount
Interest rate swaps designated as fair value hedges	Other Assets	$	155			8,050
Interest rate swaps with customers	Other Assets	$	1,352			45,578
Reciprocal interest rate swaps	Other Liabilities	$	(1,352	)		45,578
Forward commitment to sell mortgage-backed securities	Other Assets	$	105			24,000
Interest rate lock commitments on residential mortgages	Other Assets	$	488			31,801

	Balance Sheet				Notional
December 31, 2017	Location	Fair Value			Amount
Interest rate swaps designated as fair value hedges	Other Liabilities	$	(108	)		15,121
Interest rate swaps with customers	Other Assets	$	192			42,832
Reciprocal interest rate swaps	Other Liabilities	$	(192	)		42,832
Forward commitment to sell mortgage-backed securities	Other Liabilities	$	(52	)		24,500
Interest rate lock commitments on residential mortgages	Other Assets	$	528			30,146

During the nine months ended September 30, 2018, the Company recognized a gain of approximately $20,000 related to the ineffective portion of derivatives designated as fair value hedges. The gains and losses are included in other income in the consolidated statements of earnings.

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Note 12 – Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, however, entities will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective for years beginning after December 15, 2018, and interim periods within those years. The Company does not expect the impact of adoption of this ASU to be material.

In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (Topic 606). The amendments in this ASU affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company’s revenue has been more significantly weighted towards net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income has not been as significant. The Company is continuing to assess its revenue streams and reviewing its contracts with customers that are potentially affected by the new guidance, including fees on deposits, gains and losses on the sale of other real estate owned, credit and debit card interchange fees, and credit card revenue, to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. However, the Company’s revenue recognition pattern for these revenue streams is not expected to change materially from prior practice. In addition, the Company continues to follow implementation issues specific to financial institutions, which are still under discussion by the FASB’s Transition Resource Group. The Company adopted the ASU on January 1, 2018 utilizing the modified retrospective approach, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company leases some of its banking offices under lease agreements that it classifies as operating leases. The Company is currently evaluating the impact that the new guidance will have on its consolidated financial statements, and, based on preliminary estimates, expects to record a right-of-use lease asset and a lease liability of approximately $9.3 million. Additionally, the inclusion of these right-of-use lease assets in the Company’s balance sheet is expected to impact total risk-weighted assets.

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

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto for the year ended December 31, 2017, which are contained in our Annual Report on Form 10-K for the year ended December 31, 2017. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those contained in forward-looking statements as a result of many factors, including those discussed in our 2017 Annual Report on Form 10-K under “Part I, Item 1A. – Risk Factors,” as well as other unknown risks and uncertainties.

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

Our Business

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

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

Overview of Third Quarter 2018 Results

Several important measures from the 2018 third quarter include:

●

Net income of $12.0 million, compared to $6.7 million during the third quarter of 2017.

●

Net interest margin (taxable equivalent) of 4.69%, compared to 4.58% for the third quarter of 2017.

●

Return on average assets of 1.23%, compared to 1.08% for the third quarter of 2017.

●

Loan growth (excluding the acquired loans of Landmark and Premier) of $103.0 million, representing a 16.4% annualized growth rate.

●

Deposits growth (excluding the acquired deposits of Landmark and Premier) of $2.7 million, representing a 0.4% annualized growth rate.

●

$116.5 million in mortgage production, compared to $122.7 million for the third quarter of 2017.

●

$315.3 million in purchased volume in the factoring division, compared to $259.5 million for the third quarter of 2017.

●

Annualized net charge-offs of 0.03%, compared to 0.05% in net charge-offs for the third quarter of 2017.

●

A provision for loan losses of $1.0 million, compared to $1.1 million for the third quarter of 2017.

●

Ending book value per share of $33.16.

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2018 Acquisition Activity

FirstAtlantic Financial Holdings, Inc.

On January 1, 2018, the Company closed the previously announced merger of FirstAtlantic Financial Holdings, Inc. (“FirstAtlantic”), the parent company of FirstAtlantic Bank, headquartered in Jacksonville, Florida, with and into NCC. Immediately following the holding company merger, FirstAtlantic Bank merged with and into NBC. NBC continues to operate the former offices of FirstAtlantic Bank as branch offices of NBC under the trade name “FirstAtlantic Bank, a division of National Bank of Commerce.”

In connection with the merger, each share of common stock of FirstAtlantic issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.44 shares of NCC common stock and cash in the amount of $17.25. NCC paid approximately $12,802,000 in cash and issued 2,393,382 shares of common stock in exchange for all of the issued and outstanding shares of FirstAtlantic common stock at the effective time of the merger. Because the FirstAtlantic merger became effective on January 1, 2018, the results of operations attributable to FirstAtlantic are included in the Company’s consolidated 2018 results but not in the corresponding periods of 2017. See Note 10 to the Unaudited Consolidated Financial Statements for more information on the acquisition.

Premier Community Bank of Florida

On July 1, 2018, the Company closed the previously announced merger of Premier Community Bank of Florida (“Premier”) with and into NBC. NBC continues to operate the former offices of Premier under the trade name “Premier Community Bank of Florida, a division of National Bank of Commerce.”

In connection with the merger, each share of common stock of Premier issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.4218 shares of NCC common stock and $0.93 in cash. NCC paid approximately $2,275,000 in cash and issued 1,028,092 shares of NCC common stock for all of the issued and outstanding shares of Premier common stock. The Premier merger became effective on July 1, 2018, and, accordingly, the results of operations attributable to Premier are included in the Company’s 2018 results since July 1, 2018 but not in the corresponding periods of 2017. See Note 10 to the Unaudited Consolidated Financial Statements for more information on the acquisition.

Landmark Bancshares, Inc.

On August 1, 2018, the Company closed the previously announced merger with Landmark Bancshares, Inc. (“Landmark”). Landmark, the parent company of First Landmark Bank, headquartered in Marietta, Georgia, merged with and into NCC. Immediately following the holding company merger, First Landmark Bank merged with and into NBC. NBC continues to operate the former offices of First Landmark Bank as branch offices of NBC under the trade name “First Landmark Bank, a division of National Bank of Commerce.”

In connection with the merger, each share of Landmark common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.5961 shares of NCC common stock and $1.33 in cash. NCC paid approximately $5,218,000 in cash and issued 2,334,385 shares of NCC common stock for all the issued and outstanding shares of Landmark common stock. The Landmark merger became effective on August 1, 2018, and, accordingly, the results of operations attributable to Landmark are included in the Company’s results since August 1, 2018 but not the results for the corresponding periods of 2017. See Note 10 to the Unaudited Consolidated Financial Statements for more information on the acquisition.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to NCC’s audited consolidated financial statements as of and for the year ended December 31, 2017, which are contained in our most recent Annual Report on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or future periods. The use of estimates, assumptions and judgments is necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.

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

Allowance for Loan Losses

We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management. Some of the more critical judgments supporting our allowance for loan losses include judgments about the creditworthiness of borrowers and the estimated value of underlying collateral, assumptions about cash flow, determinations of loss factors for estimating credit losses and judgments regarding the impact of current events, conditions and other factors affecting the level of inherent losses. Under different conditions or using different assumptions, the actual or estimated credit losses that we ultimately realize may be different from our estimates. In determining the allowance, we estimate losses on individual impaired loans, or groups of loans that are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional, national and global economic factors on the quality of the loan portfolio. Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see Note 1 to NCC’s consolidated financial statements as of and for the year ended December 31, 2017, which is contained in our most recent Annual Report on Form 10-K and see elsewhere in this report under the section “Allowance for Loan Losses and Provision for Loan Losses.”

Investment Securities Impairment

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

Income Taxes

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

Business Combinations

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

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Mortgage Loans Held-for-Sale

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

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2018 and September 30, 2017

The following is a narrative discussion and analysis of significant changes in our results of operations for the three and nine months ended September 30, 2018, compared to the three and nine months ended September 30, 2017.

Net Income

During the three months ended September 30, 2018, our net income was $12.0 million, compared to $6.7 million for the three months ended September 30, 2017, an increase of 78.8%. During the nine months ended September 30, 2018, our net income was $31.7 million, compared to $19.1 million for the nine months ended September 30, 2017, an increase of 66.5%. Our results of operations for the three-month and nine-month periods ended September 30, 2018, included the results of Landmark (acquired August 1, 2018), Premier (acquired July 1, 2018), FirstAtlantic (acquired January 1, 2018) and Patriot Bank (acquired August 31, 2017). Given the effective dates of these acquisitions, these results are not included in our results of operations for the three-month or nine-month periods ended September 30, 2017, except the 2017 periods include one month of Patriot Bank results.

The primary reason for the increase in net income for the three and nine months ended September 30, 2018, compared to the same period of 2017 was an increase in net interest income. During the three months ended September 30, 2018, net interest income was $40.0 million, an increase of $14.4 million, or 56.1%, compared to the three months ended September 30, 2017. During the nine months ended September 30, 2018, net interest income was $106.3 million, an increase of $34.3 million, or 47.6%, compared to the nine months ended September 30, 2017. This increase was a result of higher levels of loan volume and other earning assets from organic growth and the acquisitions of Landmark, Premier, FirstAtlantic and Patriot Bank.

The increase in net interest income was partially offset by an increase in noninterest expenses during the three and nine months ended September 30, 2018, compared to the same periods of 2017. Total noninterest income during the three months ended September 30, 2018, was $4.8 million, an increase of $222 thousand, or 4.9%, compared to the three months ended September 30, 2017. Total noninterest income during the nine months ended September 30, 2018 was $14.2 million, a decrease of $935 thousand, or 6.2%, compared to the nine months ended September 30, 2017. The primary reason for the overall decrease in noninterest income was a reduction in revenue from the mortgage division. During the three months ended September 30, 2018, mortgage origination and fee income was $1.8 million, a decrease of $955 thousand compared to the three months ended September 30, 2017. During the nine months ended September 30, 2018, mortgage origination and fee income was $6.0 million, a decrease of $3.1 million compared to the nine months ended September 30, 2017.

Total noninterest expense during the three months ended September 30, 2018, was $27.1 million, an increase of $9.1 million, or 50.6%, compared to the three months ended September 30, 2017. Total noninterest expense during the nine months ended September 30, 2018, was $73.7 million, an increase of $19.5 million, or 36.0%, compared to the nine months ended September 30, 2017. This increase was primarily a result of the addition of the operating expenses of Landmark, Premier, FirstAtlantic and Patriot Bank and costs associated with the growth of the Company. Landmark, Premier and FirstAtlantic were not included in our results of operations for the three or nine months ended September 30, 2017. The 2017 periods include one month of Patriot Bank operating expenses.

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The largest contributors to the changes in our net interest income, noninterest income and noninterest expense for the three and nine months ended September 30, 2018 compared to the same periods of 2017 were the additional revenues and expenses of Landmark, Premier, FirstAtlantic and Patriot Bank. The following table details the contributions of each acquired bank to selected consolidated totals for the three and nine months ended September 30, 2018.

	For The Three Months Ended September 30, 2018
	FirstAtlantic		Patriot Bank		Premier		Landmark		Total
Net interest income	$	4,137		1,673		2,390		4,734		12,934
Noninterest income	$	425		33		86		329		873
Noninterest expense	$	2,653		892		1,835		2,700		8,080

	For The Nine Months Ended September 30, 2018
	FirstAtlantic		Patriot Bank		Premier		Landmark		Total
Net interest income	$	12,386		5,240		2,390		4,734		24,750
Noninterest income	$	1,300		124		86		329		1,839
Noninterest expense (1)	$	8,363		2,406		1,835		2,700		15,304

(1) Excludes merger-related expense of $2.4 million attributable to FirstAtlantic during the nine months ended September 30, 2018.

Net Interest Income and Net Interest Margin Analysis

Comparison of Net Interest Income for the Three Months Ended September 30, 2018 and 2017

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

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

AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS

	For the Three Months Ended
(Dollars in thousands)	September 30, 2018							September 30, 2017
Assets	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Loans (1)	$	3,002,640	$	43,459		5.74	%	$	1,937,115	$	26,634		5.45	%
Mortgage loans held-for-sale		18,935		235		4.92			16,811		151		3.56
Securities:
Taxable securities		191,157		1,496		3.10			90,969		694		3.03
Tax-exempt securities (1)		25,102		254		4.01			25,286		310		4.86
Cash balances in other banks		152,715		818		2.13			159,973		533		1.32
Total interest-earning assets		3,390,549	$	46,262		5.41			2,230,154	$	28,322		5.04
Noninterest-earning assets		475,094							228,231
Total assets	$	3,865,643						$	2,458,385

Liabilities and shareholders' equity
Interest-bearing transaction accounts	$	644,863	$	877		0.54	%	$	314,925	$	207		0.26	%
Savings and money market deposits		1,162,707		3,114		1.06			827,526		1,233		0.59
Time deposits		470,211		1,570		1.32			273,630		661		0.96
Federal Home Loan Bank advances		3,467		27		3.09			7,000		72		4.08
Securities sold under agreements to repurchase		18,457		49		1.05			228		-		0.00
Subordinated debt		32,950		537		6.47			24,533		388		6.27
Total interest-bearing liabilities		2,332,655	$	6,174		1.05			1,447,842	$	2,561		0.70
Noninterest-bearing deposits		866,974							615,130
Total funding sources		3,199,629							2,062,972
Noninterest-bearing liabilities		23,647							19,284
Shareholders' equity		642,367							376,129
Total liabilities and shareholders' equity	$	3,865,643						$	2,458,385
Net interest rate spread						4.36	%						4.34	%
Net interest income/margin (taxable equivalent)				40,088		4.69	%				25,761		4.58	%
Tax equivalent adjustment				67							120
Net interest income/margin			$	40,021		4.68	%			$	25,641		4.56	%

(1) Yields on tax-exempt loans and securities have been computed on a tax-equivalent basis using an income tax rate of 25.25% and 37.00% for the three-month periods ended September 30, 2018 and 2017, respectively.

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Net interest income increased $14.4 million, or 56.1%, to $40.0 million for the three months ended September 30, 2018, compared to $25.6 million for the same period of 2017. The increase was due to an increase in interest income of $18.0 million, resulting from higher levels of loan volume and securities from organic growth and the acquisitions of Landmark, Premier, FirstAtlantic and Patriot Bank. This increase in interest income was partially offset by a $3.6 million increase in interest expense. The increase in interest income was primarily due to a 55.0% increase in average loans outstanding for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. Our average investment in taxable securities increased $100.2 million, or 110.1%, to $191.2 million for the three months ended September 30, 2018, compared to $91.0 million for the three months ended September 30, 2017. The resulting net interest margin for the three months ended September 30, 2018, rose to 4.68%, from 4.56% during the three months September 30, 2017.

Interest-earning assets averaged $3.4 billion for the three months ended September 30, 2018, compared to $2.2 billion for the three months ended September 30, 2017, an increase of $1.2 billion, or 52.0%. Additional information on growth in our loan portfolio for these periods is presented below. The yield on average interest-earning assets increased 0.37%, to 5.41% for the three months ended September 30, 2018, compared to 5.04% for the three months ended September 30, 2017. During the three months ended September 30, 2018, the loan yield was 5.74%, compared to 5.45% during the three months ended September 30, 2017. The increase in loan yield was attributable to recent increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR and increased accretion on our acquired loan portfolios due to early pay-offs and higher balances of acquired loans with associated accretable discounts due to the Landmark, Premier, FirstAtlantic and Patriot Bank acquisitions. These acquisitions contributed average loan balances of $768.8 million during the three months ended September 30, 2018.

Interest-bearing liabilities averaged $2.3 billion for the three months ended September 30, 2018, compared to $1.4 billion for the three months ended September 30, 2017, an increase of $884.8 million, or 61.1%. The rate on total interest-bearing liabilities was 1.05% for the three months ended September 30, 2018, compared to 0.70% for the three months ended September 30, 2017. The increase in average deposits was due primarily to the inclusion of Landmark’s, Premier’s, FirstAtlantic’s and Patriot Bank’s deposits in our results for the three months ended September 30, 2018. Interest-bearing liability costs increased due to increased rates on deposit accounts, primarily as a result of the effect of increases in short-term rate indices, such as the prime rate, and some resultant competitive pricing pressure in certain account types. Landmark, Premier, FirstAtlantic and Patriot Bank contributed average interest-bearing deposit balances of $840.7 million during the three months ended September 30, 2018.

Average noninterest-bearing deposits increased to $867.0 million during the three months ended September 30, 2018, representing an increase of $251.8 million compared to the three months ended September 30, 2017.

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

ANALYSIS OF CHANGES IN NET INTEREST INCOME

	For the Three Months Ended
	September 30,
(Dollars in thousands)	2018 vs. 2017
	Variance due to
Interest-earning assets	Volume			Yield/Rate			Total
Loans	$	15,355		$	1,470		$	16,825
Mortgage loans held-for-sale		21			63			84
Securities:
Taxable securities		784			18			802
Tax-exempt securities		(2	)		(54	)		(56	)
Cash balances in other banks		(25	)		310			285
Funds sold		-			-			-
Total interest-earning assets	$	16,133		$	1,807		$	17,940

Interest-bearing liabilities
Interest-bearing transaction accounts	$	332		$	338		$	670
Savings and money market deposits		634			1,247			1,881
Time deposits		593			316			909
Federal Home Loan Bank advances and other borrowed money		(31	)		(14	)		(45	)
Securities sold under agreements to repurchase		-			49			49
Subordinated debt		137			12			149
Total interest-bearing liabilities	$	1,665		$	1,948		$	3,613

Net interest income
Net interest income (taxable equivalent)		14,468			(141	)		14,327
Taxable equivalent adjustment		(52	)		(1	)		(53	)
Net interest income	$	14,520		$	(140	)	$	14,380

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Comparison of Net Interest Income for the Nine Months Ended September 30, 2018 and 2017

AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS

	For the Nine Months Ended
(Dollars in thousands)	September 30, 2018							September 30, 2017
Assets	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Loans (1)	$	2,646,876	$	113,180		5.72	%	$	1,860,398	$	74,835		5.38	%
Mortgage loans held-for-sale		19,867		658		4.43			18,962		543		3.83
Securities:
Taxable securities		166,463		3,878		3.11			86,903		1,871		2.88
Tax-exempt securities (1)		24,888		763		4.10			25,559		940		4.92
Cash balances in other banks		141,366		1,943		1.84			222,307		1,744		1.05
Funds sold		971		10		1.38			-		-		0.00
Total interest-earning assets		3,000,431	$	120,432		5.37			2,214,129	$	79,933		4.83
Noninterest-earning assets		379,536							222,139
Total assets	$	3,379,967						$	2,436,268

Liabilities and shareholders' equity
Interest-bearing transaction accounts		529,534		1,831		0.46	%		329,444		667		0.27	%
Savings and money market deposits		1,059,602		7,112		0.90			817,815		3,467		0.57
Time deposits		380,562		3,431		1.21			289,924		2,031		0.94
Federal Home Loan Bank advances		5,809		170		3.91			7,000		212		4.05
Securities sold under agreements to repurchase		6,220		49		1.05			741		1		0.18
Subordinated debt		27,392		1,311		6.40			24,520		1,165		6.35
Total interest-bearing liabilities		2,009,119	$	13,904		0.93			1,469,444	$	7,543		0.69
Noninterest-bearing deposits		795,771							609,698
Total funding sources		2,804,890							2,079,142
Noninterest-bearing liabilities		23,150							17,566
Shareholders' equity		551,927							339,560
Total liabilities and shareholders' equity	$	3,379,967						$	2,436,268
Net interest rate spread						4.44	%						4.14	%
Net interest income/margin (taxable equivalent)				106,528		4.75	%				72,390		4.37	%
Tax equivalent adjustment				204							366
Net interest income/margin			$	106,324		4.74	%			$	72,024		4.35	%

(1) Yields on tax-exempt loans and securities have been computed on a tax-equivalent basis using an income tax rate of 25.25% and 37.00% for the nine-month periods ended September 30, 2018 and 2017, respectively.

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Net interest income increased $34.3 million, or 47.6%, to $106.3 million for the nine months ended September 30, 2018, compared to $72.0 million for the same period of 2017. The increase was due to an increase in interest income of $40.7 million, resulting from higher levels of loan volume and securities from organic growth and the acquisitions of Landmark, Premier, FirstAtlantic and Patriot Bank. This increase in interest income was partially offset by a $6.4 million increase in interest expense. The increase in interest income was primarily due to a 42.3% increase in average loans outstanding for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Our average investment in taxable securities increased $79.6 million, or 91.6%, to $166.5 million for the nine months ended September 30, 2018, compared to $86.9 million for the nine months ended September 30, 2017. The resulting net interest margin for the nine months ended September 30, 2018, rose to 4.74%, from 4.35% during the nine months ended September 30, 2017.

Interest-earning assets averaged $3.0 billion for the nine months ended September 30, 2018, compared to $2.2 billion for the nine months ended September 30, 2017, an increase of $786.3 million, or 35.5%. Additional information on growth in our loan portfolio for these periods is presented below. The yield on average interest-earning assets increased 0.54%, to 5.37% for the nine months ended September 30, 2018, compared to 4.83% for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, the loan yield was 5.72%, compared to 5.38% during the nine months ended September 30, 2017. The increase in loan yield was attributable to recent increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR and increased accretion on our acquired loan portfolios due to early pay-offs and higher balances of acquired loans with associated accretable discounts due to the Landmark, Premier, FirstAtlantic and Patriot Bank acquisitions. Landmark, Premier, FirstAtlantic and Patriot Bank contributed average loan balances of $555.6 million during the nine months ended September 30, 2018.

Interest-bearing liabilities averaged $2.0 billion for the nine months ended September 30, 2018, compared to $1.5 billion for the nine months ended September 30, 2017, an increase of $539.7 million, or 36.7%. The rate on total interest-bearing liabilities was 0.93% for the nine months ended September 30, 2018, compared to 0.69% for the nine months ended September 30, 2017. The increase in average deposits was due primarily to the inclusion of Landmark’s, Premier’s, FirstAtlantic’s and Patriot Bank’s deposits in our results for the nine months ended September 30, 2018. Interest-bearing liability costs increased due to increased rates on deposit accounts, primarily as a result of the effect of increases in short-term rate indices, such as the prime rate, and some resultant competitive pricing pressure in certain account types. Landmark, Premier, FirstAtlantic and Patriot Bank contributed average interest-bearing deposit balances of $610.2 million during the nine months ended September 30, 2018.

Average noninterest-bearing deposits increased to $795.8 million during the nine months ended September 30, 2018, representing an increase of $186.1 million compared to the nine months ended September 30, 2017.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

	For the Nine Months Ended
	September 30,
(Dollars in thousands)	2018 vs. 2017
	Variance due to
Interest-earning assets	Volume			Yield/Rate			Total
Loans	$	33,371			4,974			38,345
Mortgage loans held-for-sale		27			88			115
Securities:
Taxable securities		1,841			166			2,007
Tax-exempt securities		(25	)		(152	)		(177	)
Cash balances in other banks		(790	)		989			199
Funds sold		10			-			10
Total interest-earning assets	$	34,434			6,065			40,499

Interest-bearing liabilities
Interest-bearing transaction accounts	$	538			626			1,164
Savings and money market deposits		1,226			2,419			3,645
Time deposits		730			670			1,400
Federal Home Loan Bank advances		(35	)		(7	)		(42	)
Securities sold under agreements to repurchase		29			19			48
Subordinated debt		137			9			146
Total interest-bearing liabilities	$	2,625			3,736			6,361

Net interest income
Net interest income (taxable equivalent)		31,809			2,329			34,138
Taxable equivalent adjustment		(149	)		(13	)		(162	)
Net interest income	$	31,958			2,342			34,300

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Provision for Loan Losses

During the three and nine months ended September 30, 2018, we recorded a provision for loan losses of $1.0 million and $3.2 million, respectively. During the three and nine months ended September 30, 2017, we recorded a provision for loan losses of $1.1 million and $2.4 million, respectively. The provision expense for the nine months ended September 30, 2018 is higher due to the additional expense resulting from loan growth during the first nine months of 2018 and higher net charge-offs (primarily commercial and industrial loans and factored receivables) during the nine months ended September 30, 2018.

Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses (which is a charge to earnings) and loan recoveries, and is decreased by charge-offs. In determining the adequacy of our allowance for loan losses, we consider our historical loan loss experience, the general economic environment, the overall portfolio composition and other information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated and an impairment is deemed necessary, the impaired portion of the loan amount generally is charged off. As of September 30, 2018, $90 thousand of our recorded allowance was related to impaired loans.

Noninterest Income

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

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

NONINTEREST INCOME

	For the Three Months Ended				For the Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2018		2017		2018		2017
Service charges and fees on deposit accounts	$	1,166	$	671	$	3,207	$	1,978
Mortgage origination and fee income		1,825		2,780		5,982		9,079
Merchant sponsorship revenue		749		622		2,144		1,968
Income from bank-owned life insurance		323		210		885		645
Wealth management fees		16		12		46		36
Gain on sale of other real estate, net		-		6		139		110
Gain on sale of investments available-for-sale		-		-		193		28
Other noninterest income		689		245		1,555		1,242
Total noninterest income	$	4,768	$	4,546	$	14,151	$	15,086

Noninterest income for the three months ended September 30, 2018 and 2017 was $4.8 million and $4.5 million, respectively. Noninterest income for the nine months ended September 30, 2018 and 2017 was $14.2 million and $15.1 million, respectively. The inclusion of Landmark, Premier, FirstAtlantic and Patriot Bank in our results of operations for the three and nine months ended September 30, 2018, contributed approximately $873 thousand and $1.8 million, respectively, in noninterest income for each period.

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All categories of recurring noninterest income, except for mortgage origination and fee income, experienced an increase during the three and nine months ended September 30, 2018 compared to the same periods of 2017. Mortgage division income decreased $955 thousand during the three months ended September 30, 2018, and totaled $1.8 million for the quarter ended September 30, 2018, compared to $2.8 million during the three months ended September 30, 2017. Mortgage division income decreased $3.1 million during the nine months ended September 30, 2018, and totaled $6.0 million for the nine months ended September 30, 2018, compared to $9.1 million during the nine months ended September 30, 2017. Recent interest rate increases have negatively impacted our mortgage loan pricing and led to lower mortgage division income. The rate increases have also led to slightly lower origination volume during the three and nine months ended September 30, 2018, compared to the same period of 2017. During the three months ended September 30, 2018, total production was $116.5 million, compared to $122.7 million during the three months ended September 30, 2017. During the nine months ended September 30, 2018, total production was $381.0 million, compared to $386.6 million during the nine months ended September 30, 2017.

Our mortgage production totals include mortgage loans purchased by the Bank for its loan portfolio. When such loans are originated, they become Bank portfolio loans and no gain on sale is recognized. The Company will record interest income over the life of the loan. During the three and nine months ended September 30, 2018, the Bank acquired approximately 39.9% and 38.0%, respectively, of the mortgage origination volume compared to 19.0% and 19.1% for the same periods of 2017.

During the three months ended September 30, 2018, refinance activity accounted for 23.4% of production volume, compared to 23.6% during the same period in 2017 and 17.0% during the second quarter of 2018.

Service charges and fees on deposit accounts increased by $495 thousand to $1.2 million for the three months ended September 30, 2018, and increased $1.2 million to $3.2 million for the nine months ended September 30, 2018, compared to the same periods in 2017. The inclusion of Landmark, Premier, FirstAtlantic and Patriot Bank in our results of operations for the three and nine months ended September 30, 2018, contributed approximately $225 thousand and $657 thousand, respectively, to this increase for each period of 2018, and the remaining portion of this increase was the result of an increase in the number of deposit accounts.

Income from bank-owned life insurance increased $113 thousand to $323 thousand for the three months ended September 30, 2018, and increased $240 thousand to $885 thousand for the nine months ended September 30, 2018, compared to the same periods in 2017. The increase for each period was due to the addition of bank-owned life insurance acquired in the Landmark, Premier and FirstAtlantic transactions.

Merchant sponsorship revenue increased by $127 thousand to $749 thousand for the three months ended September 30, 2018, and increased $176 thousand to $2.1 million for the nine months ended September 30, 2018, compared to the same periods in 2017. The increase was due to growth in the volume of transactions we processed.

Noninterest Expense

The increase in our total noninterest expense during the three and nine months ended September 30, 2018, reflects the continued growth of the Company (organic growth and growth through acquisitions), as well as the expansion of our operational framework, employee base and facilities infrastructure as we build the foundation to support our growth strategies.

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

NONINTEREST EXPENSE

	For the Three Months Ended				For the Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2018		2017		2018		2017
Salaries and employee benefits	$	14,336	$	9,804	$	39,294	$	29,540
Commission-based compensation		1,876		1,748		5,202		5,155
Occupancy and equipment expense		2,439		1,608		6,458		4,560
Data processing expenses		1,820		976		6,545		2,931
Advertising and marketing expenses		296		309		925		1,104
Legal fees		384		204		1,040		630
FDIC insurance assessments		267		351		771		1,017
Property and casualty insurance premiums		232		229		707		581
Accounting and audit expenses		388		288		1,055		900
Consulting and other professional expenses		1,347		510		2,453		1,524
Telecommunications expenses		295		203		751		558
Other real estate owned, repossessed asset and other collection expenses		63		26		203		347
Core deposit intangible amortization		1,306		366		2,783		1,062
Other noninterest expense		2,047		1,365		5,503		4,276
Total noninterest expense	$	27,096	$	17,987	$	73,690	$	54,185

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Noninterest expense for the three months ended September 30, 2018 and 2017 was $27.1 million and $18.0 million, respectively. Noninterest expense for the nine months ended September 30, 2018 and 2017 was $73.7 million and $54.2 million, respectively. During the nine months ended September 30, 2018, we incurred $3.8 million in merger-related expenses, of which approximately $2.1 million was associated with the termination of a data processing contract for FirstAtlantic. Combined noninterest expense for the three and nine months ended September 30, 2018 at Landmark, Premier, FirstAtlantic and Patriot Bank were approximately $8.1 million and $15.3 million, respectively (excluding merger-related expenses of $3.8 million during the nine months ended September 30, 2018). The inclusion of Landmark, Premier, FirstAtlantic and Patriot Bank accounts for most of the increase in noninterest expense recorded during each period of 2018 compared to the same periods in 2017.

Two of the largest components of noninterest expense are related to employee costs shown in the table above as salaries and employee benefits and commission-based compensation. Salaries continue to increase as our company grows and we expand our presence in the markets we serve. Higher incentive compensation accruals during the three and nine months ended September 30, 2018, and a larger workforce have contributed to the increase in salaries and employee benefits. Commission-based compensation expense is directly related to mortgage loan origination activity and certain production activity at Corporate Billing. Total commission-based compensation increased for the three and nine months ended September 30, 2018 compared to the same periods of 2017. Although mortgage origination volume was down in each period of 2018, activity at Corporate Billing increased and led to higher total commission-based compensation expense. Additionally, salaries and benefits for Landmark, Premier, FirstAtlantic and Patriot Bank employees contributed approximately $4.7 million of the $4.5 million increase in salaries and employee benefits expense recorded during the three months ended September 30, 2018, and approximately $9.2 million of the $9.8 million increase in salaries and employee benefits expense recorded during the nine months ended September 30, 2018.

Many categories of noninterest expense increased during the three and nine months ended September 30, 2018 compared to same periods of 2017. This was largely a result of the additional expenses associated with the operations of Landmark, Premier, FirstAtlantic and Patriot Bank, including $2.1 million to terminate FirstAtlantic’s contract with its previous core operating system provider.

Income Tax Provision

Income tax expense for the three months ended September 30, 2018 and 2017 was $4.0 million and $3.8 million, respectively. Income tax expense for the nine months ended September 30, 2018 and 2017 was $10.1 million and $10.0 million, respectively. Our effective tax rate for the three months ended September 30, 2018 was 24.2% (25.2% including the minority interest in CBI), compared to 34.5% (36.4% including the minority interest in CBI) during the three months ended September 30, 2017. Our effective tax rate for the nine months ended September 30, 2018, was 23.2% (24.2% including the minority interest in CBI), compared to 32.6% (34.3% including the minority interest in CBI) during the nine months ended September 30, 2017. The lower effective tax rate and the overall tax expense for the three and nine months ended September 30, 2018 reflects the lower federal income tax rates implemented by the Tax Cuts and Jobs Act of 2017. The effective tax rates are also affected by items of income and expense that are not subject to federal and state taxation.

Comparison of Balance Sheets at September 30, 2018 and December 31, 2017

Overview

Our total assets increased $1.4 billion, or 49.9%, from $2.7 billion at December 31, 2017 to $4.1 billion at September 30, 2018. Loans increased by $1.1 billion, or 51.1%, during the first nine months of 2018. Total investment securities increased by $99.8 million, or 89.6%, during the first nine months of 2018. Cash and cash equivalents decreased by $35.0 million during the first nine months of 2018. The Landmark, Premier and FirstAtlantic acquisitions added total assets and loans of $1.4 billion and $933.5 million, respectively.

During the first nine months of 2018, deposits increased $1.0 billion and totaled $3.3 billion at September 30, 2018. The Landmark, Premier and FirstAtlantic acquisitions added $1.1 billion in deposits. As interest rates rise, competition for deposits increases. In some cases, we have had large deposit customers move deposits to other investment types as rates became more attractive. Excluding the acquired deposits from Landmark, Premier and FirstAtlantic, our total deposits decreased by $13.7 million during the nine months ended September 30, 2018.

Loans

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that management attempts to control and counterbalance. Total loans averaged $2.7 billion during the nine months ended September 30, 2018, or 88.2% of average earning assets, compared to $1.9 billion, or 84.0% of average earning assets, for the nine months ended September 30, 2017. At September 30, 2018, total loans, net of unearned income, were $3.2 billion, compared to $2.1 billion at December 31, 2017, an increase of $1.1 billion, or 51.1%. Excluding the loans acquired in the Landmark, Premier and FirstAtlantic acquisitions, loans increased by $158.9 million, or 7.4%.

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The organic, or non-acquired, growth in the Bank’s loan portfolio is attributable to the Bank’s ability to attract new customers and grow existing banking relationships. We have been successful in building banking relationships with new customers in all of the markets that we serve. We have hired several new bankers in our markets who have transitioned a number of their former clients and new clients to the Bank. Our bankers are expected to be involved in their communities and to maintain business development efforts to develop relationships with clients, and our philosophy is to be responsive to customer needs by providing decisions in a timely manner. In addition to our business development efforts, many of the markets in which we operate have shown signs of economic recovery over the past few years, which has increased demand for the services that we provide. The organic loan growth during the nine months ended September 30, 2018, was lower than our historical growth; however, we believe some of our growth during the fourth quarter of 2017 may have been activity that normally would have occurred during the first three months of 2018. During the nine months ended September 30, 2018, we experienced unusually high loan pay-offs and principal reductions. Origination activity has remained strong, but overall loan growth has been muted during 2018 due to the 2018 payoff activity.

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

COMPOSITION OF LOAN PORTFOLIO

	As of
	September 30,						December 31,
(Dollars in thousands)	2018						2017
	Amount			Percent of Total			Amount			Percent of Total
Construction, land development and other land loans	$	363,561			11.25	%	$	231,030			10.80	%
Secured by farmland		21,685			0.67			17,726			0.83
Secured by 1-4 family residential properties		698,528			21.62			508,935			23.80
Secured by multifamily (5 or more) residential properties		78,048			2.42			60,054			2.81
Secured by nonfarm nonresidential properties		1,469,291			45.47			888,289			41.53
Loans secured by real estate		2,631,113			81.43			1,706,034			79.77
Commercial and industrial loans		389,985			12.07			258,577			12.09
Factored commercial receivables		151,985			4.70			118,710			5.55
Consumer loans		29,261			0.91			26,314			1.23
Other loans		28,962			0.89			29,082			1.36
Total gross loans		3,231,306			100.00	%		2,138,717			100.00	%
Unearned income		(928	)					(659	)
Total loans, net of unearned income		3,230,378						2,138,058
Allowance for loan losses		(16,759	)					(14,985	)
Total net loans	$	3,213,619					$	2,123,073

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

The principal component of our loan portfolio is loans secured by real estate. At September 30, 2018, this category totaled $2.6 billion and represented 81.4% of our total loan portfolio, compared to $1.7 billion, or 79.8% of the total loan portfolio, at December 31, 2017. Each category of real estate mortgage loans increased during the first nine months of 2018.

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Loans secured by nonfarm nonresidential properties (“commercial mortgage loans”) increased by $581.0 million, or 65.4%, to $1.5 billion at September 30, 2018, compared to $888.3 million at December 31, 2017. Excluding the acquired loans from Landmark, Premier and FirstAtlantic, commercial mortgage loans increased by $118.8 million, or 13.4%, during the nine months ended September 30, 2018. Commercial mortgage loans represent the single largest category of our loans, and at September 30, 2018, accounted for 45.5% of our entire loan portfolio. Our management team has a great deal of experience and expertise in commercial mortgage loans, and this loan type has traditionally represented a large portion of our loan portfolio. Of the $1.5 billion in total commercial mortgage loans at September 30, 2018, approximately $645.5 million were loans secured by owner-occupied properties. The following table provides a summary of our non-owner-occupied commercial mortgage loans as of the dates indicated.

	As of
	September 30,		December 31,
(Dollars in thousands)	2018		2017
Office	$	179,973	$	122,554
Retail		309,220		203,647
Industrial/Warehouse		76,618		51,852
Other		258,161		131,711
Total	$	823,972	$	509,764

Residential mortgage loans increased by $189.6 million, or 37.3%, to $698.5 million at September 30, 2018, compared to $508.9 million at December 31, 2017. Excluding the acquired loans from Landmark, Premier and FirstAtlantic, residential mortgage loans decreased by $24.0 million, or 4.7%, during the nine months ended September 30, 2018. At September 30, 2018, residential mortgage loans accounted for 21.6% of our entire loan portfolio.

Real estate construction, land development and other land loans totaled $363.6 million at September 30, 2018, an increase of 57.4% from $231.0 million at December 31, 2017. Excluding the acquired loans from Landmark, Premier and FirstAtlantic, real estate construction, land development and other land loans increased by $28.4 million, or 12.3%, during the nine months ended September 30, 2018. At September 30, 2018, this loan type accounted for 11.3% of our total loan portfolio.

Commercial and industrial loans totaled $390.0 million at September 30, 2018, an increase of 50.8% from $258.6 million at December 31, 2017. Excluding the acquired loans from Landmark, Premier and FirstAtlantic, commercial and industrial loans increased by $17.1 million, or 6.6%, during the nine months ended September 30, 2018. At September 30, 2018, this loan type accounted for 12.1% of our total loan portfolio.

Factored commercial receivables totaled $152.0 million at September 30, 2018, compared to $118.7 million at December 31, 2017. This balance fluctuates based on several variables, such as when receivables are purchased and when and how quickly payments are received.

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

Allowance for Loan Losses and Provision for Loan Losses

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

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

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

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

ALLOWANCE FOR LOAN LOSSES

	As of and for the Three Months Ended						As of and for the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2018			2017			2018			2017
Total loans outstanding, net of unearned income	$	3,230,378		$	2,056,406		$	3,230,378			2,056,406
Average loans outstanding, net of unearned income	$	3,002,640		$	1,937,115		$	2,646,876			1,860,398
Allowance for loan losses at beginning of period	$	15,997		$	13,407		$	14,985			12,113
Charge-offs:
Loans secured by real estate		-			104			411			148
Commercial and industrial loans		476			-			736			-
Factored receivables		500			583			2,405			1,936
Consumer loans		4			-			50			30
All other loans		10			26			26			28
Total charge-offs		990			713			3,628			2,142
Recoveries:
Loans secured by real estate		301			-			427			19
Commercial and industrial loans		14			2			39			6
Factored receivables		418			459			1,739			1,424
Consumer loans		17			1			19			7
All other loans		1			3			3			421
Total recoveries		751			465			2,227			1,877
Net charge-offs		239			248			1,401			265
Provision for loan losses		1,001			1,105			3,175			2,416
Allowance for loan losses at period end	$	16,759		$	14,264		$	16,759			14,264
Allowance for loan losses to period end loans		0.52	%		0.69	%		0.52	%		0.69	%
Net charge-offs to average loans		0.03	%		0.05	%		0.07	%		0.02	%

The table above does not include the allowances of banks that we have acquired that were established prior to each bank’s respective date of acquisition. In accordance with ASC Topic 805, Business Combinations, these acquired entities’ respective allowances for loan losses were not brought forward at acquisition; instead, the acquired loans were recorded at fair value and any discount to fair value was recorded against the loans rather than as an allowance for loan losses. The portion of the discount deemed related to credit quality was recorded as a non-accretable difference, and the remaining discount was recorded as an accretable discount and accreted into interest income over the estimated average life of the loans using the level yield method. At September 30, 2018, our acquired loan portfolios totaled $1.3 billion and had an aggregate related non-accretable difference of $15.6 million and accretable discount of $17.9 million.

For the acquired loan portfolio, the allowance is determined for each loan pool and compared to the remaining discount for that pool. If the allowance amount calculated under the Company’s methodology is greater than the Company’s remaining discount on the acquired loan portfolio, this amount is added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology is less than the Company’s recorded discount, no additional allowance or provision is recognized. Our analysis indicates that no additional allowance is necessary on our acquired loan portfolio as of September 30, 2018.

Overall, asset quality indicators have remained steady or improved, and, as a result, provision expense related directly to asset quality has been minimal. During the nine months ended September 30, 2018, we recorded a provision expense of $3.2 million due to organic loan growth and the maturity and renewal of approximately $43.1 million in previously acquired loans. These loans are no longer classified as acquired and have no remaining discount based on the fact that they have now been underwritten by the Company. During the nine months ended September 30, 2018, Corporate Billing experienced net charge-offs of $666 thousand and required loan loss provision expense of the same amount.

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Allocation of the Allowance for Loan Losses

While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance for loan losses to specific loan categories as of the dates indicated.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

	As of
	September 30,					December 31,
	2018					2017
(Dollars in thousands)	Amount		Percent of Loans in each Category to Total Loans			Amount		Percent of Loans in each Category to Total Loans
Commercial, financial and agricultural	$	3,056		12.97	%	$	2,511		13.45	%
Factored receivables		600		4.70			600		5.55
Real estate - mortgage		10,778		70.17			9,845		68.97
Real estate - construction		2,188		11.25			1,884		10.80
Consumer		137		0.91			145		1.23
	$	16,759		100.00	%	$	14,985		100.00	%

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

Nonperforming Assets

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

NONPERFORMING ASSETS

	For the Nine Months Ended
	September 30,						December 31,
(Dollars in thousands)	2018			2017			2017

Non-accrual loans	$	4,281			2,695			2,722
Loans past due 90 days or more and still accruing		484			1,690			677
Total nonperforming loans		4,765			4,385			3,399
Other real estate and repossessed assets		1,339			1,171			1,094
Total nonperforming assets	$	6,104			5,556			4,493
Allowance for loan losses to period-end loans		0.52	%		0.69	%		0.70	%
Allowance for loan losses to period-end nonperforming loans		351.71			325.29			440.86
Net charge-offs to average loans		0.07			0.02			0.05
Nonperforming assets to period-end loans and foreclosed property and repossessed assets		0.19			0.27			0.21
Nonperforming loans to period-end loans		0.15			0.21			0.16

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

Total nonperforming assets totaled $6.1 million at September 30, 2018, an increase from $4.5 million at December 31, 2017. Many of the nonperforming assets as of September 30, 2018, were acquired as a result of our recent bank acquisitions. As of September 30, 2018, acquired nonaccrual loans and other real estate totaled $4.1 million and $1.0 million, respectively. Acquired nonaccrual loans and other real estate totaled $2.6 million and $1.1 million, respectively, at December 30, 2017. Asset quality has been and will continue to be a primary focus of management.

Investment Securities

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

During the nine months ended September 30, 2018, we sold all of the securities we acquired in connection with the acquisitions of Landmark, Premier and FirstAtlantic for total proceeds of $124.9 million and did not realize a gain or loss on the sale. The acquired securities were recorded at fair value in purchase accounting and then immediately sold. We liquidated the acquired portfolio at the time of acquisition and reinvested the proceeds as needed in securities that met our interest rate risk parameters and credit quality metrics. In addition to these sales, during the nine months ended September 30, 2018, we sold ten debt securities from our legacy portfolio totaling $9.5 million and realized a gain of $193 thousand. The securities sold were low-factor residential mortgage-backed securities and one subordinated note issued by Landmark that we were required to liquidate under the terms of the merger agreement pursuant to which we acquired Landmark.

The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2018 and December 31, 2017.

INVESTMENT SECURITIES AVAILABLE-FOR-SALE

	As of
	September 30,				December 31,
(Dollars in thousands)	2018				2017
	Cost		Market		Cost		Market
U.S. government agency obligations	$	2,809		2,803		3,261		3,264
Municipal securities		2,313		2,392		3,074		3,265
Residential mortgage-backed securities		146,997		143,449		39,143		39,244
Other commercial mortgage-backed securities		3,990		3,767		4,012		3,924
Other asset-backed securities		33,499		33,568		35,745		36,137
Total investment securities available-for-sale	$	189,608		185,979		85,235		85,834

INVESTMENT SECURITIES HELD-TO-MATURITY

	As of
	September 30,				December 31,
(Dollars in thousands)	2018				2017
	Cost		Market		Cost		Market
Municipal securities	$	21,215		20,560		21,254		21,645
Residential mortgage-backed securities		3,488		3,387		4,058		4,037
Other debt securities		500		500		250		250
Total investment securities held-to-maturity	$	25,203		24,447		25,562		25,932

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

Deposits

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

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

COMPOSITION OF DEPOSITS

	As of
	September 30,					December 31,
	2018					2017
(Dollars in thousands)	Amount		Percent of Total			Amount		Percent of Total
Noninterest-bearing demand	$	932,089		27.98	%	$	697,144		30.49	%
Interest-bearing demand		663,155		19.90			362,266		15.85
Savings and money market		1,218,215		36.57			951,846		41.64
Time less than $100k		121,875		3.66			63,044		2.76
Time equal to or greater than $100k and less than $250k		156,983		4.71			88,207		3.86
Time equal to or greater than $250k		239,365		7.18			123,324		5.40
Total deposits	$	3,331,682		100.00	%	$	2,285,831		100.00	%

Total deposits were $3.3 billion at September 30, 2018, an increase of $1.0 billion from December 31, 2017. Excluding the acquired Landmark, Premier and FirstAtlantic deposits, deposits decreased by $13.7 million during the nine months ended September 30, 2018. As expected, much of our year-end seasonal deposits left the Bank, and we also had some large depositors move their cash on deposit into other investment types as rates on other investment classes became more attractive. We have experienced increased competition for deposits as deposit rates have increased.

Other Funding Sources

We supplement our deposit funding with wholesale funding when needed for balance sheet planning or when the terms are attractive and will not disrupt our offering rates in our markets. One of our sources of wholesale funding is the Federal Home Loan Bank of Atlanta (“FHLB”). We had FHLB borrowings of $2.0 million and $7.0 million at September 30, 2018 and December 31, 2017, respectively. We have not initiated any additional borrowings from the FHLB since 2012. We also have access to brokered deposits. During the first nine months of 2018, we issued $50.0 million of short-term brokered deposits to compensate for some of our deposit run-off, and $25.0 million matured and was not replaced. At September 30, 2018, we had $24.9 million of brokered deposits outstanding. We expect to have access to additional brokered deposits to fund deposit run-off if it occurs during the remainder of 2018. Another funding source that we have used to supplement our local funding is internet certificates of deposit. We have used this source to book certificates of deposit that mature in three to five years at rates that are lower than we would offer in our local markets, typically below the rates indicated on the LIBOR swap curve for similar maturities. We had internet certificate of deposit balances of $17.0 million and $8.6 million at September 30, 2018 and December 31, 2017, respectively. We have not issued any new internet certificates of deposit during 2018, although we did assume $13.5 million in such certificates of deposit with our acquisition of Landmark.

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Liquidity

Market and public confidence in our financial strength and in financial institutions generally affects our access to appropriate levels of liquidity. Confidence in the Company is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily, weekly and monthly basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet our cash needs as they arise. Liquidity planning and management are necessary to ensure the ability to fund operations in a cost-effective manner and to meet current and future potential obligations, such as loan commitments, lease obligations and deposit outflows. In this process, we focus on both assets and liabilities and on the manner in which they collectively contribute to provide adequate liquidity to meet our needs.

Funds are available from a number of basic banking activity sources, including our core deposit base, the repayment and maturity of loans and investment security cash flows. Other funding sources include federal funds purchased, brokered certificates of deposit and borrowings from the FHLB.

Cash and cash equivalents at September 30, 2018 and December 31, 2017 were $200.2 million and $235.3 million, respectively. Based on the balance of cash and cash equivalents, we believe that our liquidity resources were sufficient at September 30, 2018 to fund loans, pay the cash portion of pending acquisitions, and meet our other cash needs as necessary.

Contractual Obligations

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

CONTRACTUAL OBLIGATIONS
As of September 30, 2018

(Dollars in thousands)	Due in 1 year or less		Due after 1 through 3 years		Due after 3 through 5 years		Due after 5 years		Total
Federal Home Loan Bank advances	$	2,000		-		-		-		2,000
Subordinated debt		-		-		-		37,211		37,211
Certificates of deposit of less than $100k		83,727		30,201		7,805		142		121,875
Certificates of deposit of $100k or more		198,621		164,097		33,630		-		396,348
Operating leases		2,128		3,820		2,870		4,064		12,882
Total contractual obligations	$	286,476		198,118		44,305		41,417		570,316

Off-Balance Sheet Arrangements

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

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

CREDIT EXTENSION COMMITMENTS

	As of
	September 30,		December 31,
(Dollars in thousands)	2018		2017

Unfunded lines	$	732,456		483,952
Letters of credit		16,641		10,255
Total credit extension commitments	$	749,097		494,207

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Interest Sensitivity and Market Risk

Interest Sensitivity

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

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

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

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

The following table illustrates our interest rate sensitivity at September 30, 2018, assuming that the relevant assets and liabilities are collected and paid, respectively, based on historical experience rather than their stated maturities.

INTEREST SENSITIVITY ANALYSIS

As of September 30, 2018

(Dollars in thousands)
Interest-earning assets	0-1 Mos			1-3 Mos		3-12 Mos		1-3 Yrs		3-5 Yrs		> 5 Yrs		Total
Loans⁽¹⁾	$	1,175,918			86,853		315,283		751,164		613,690		303,003		3,245,911
Securities		45,005			7,934		12,089		30,824		27,559		87,771		211,182
Cash balances in other banks		137,927			-		-		-		-		-		137,927
Total interest-earning assets	$	1,358,850			94,787		327,372		781,988		641,249		390,774		3,595,020

Interest-bearing liabilities
Interest-bearing transaction accounts	$	249,829			8,580		38,610		102,964		83,679		179,493		663,155
Savings and money market deposits		744,811			10,702		48,162		118,281		108,124		188,135		1,218,215
Time deposits		14,818			61,691		203,870		194,432		41,302		2,110		518,223
Federal Home Loan Bank and other borrowed money		-			-		2,000		-		-		-		2,000
Subordinated debt		-			-		-		-		37,211		-		37,211
Total interest-bearing liabilities	$	1,009,458			80,973		292,642		415,677		270,316		369,738		2,438,804

Interest sensitivity gap
Period gap	$	349,392			13,814		34,730		366,311		370,933		21,036		1,156,216
Cumulative gap		349,392			363,206		397,936		764,247		1,135,180		1,156,216
Cumulative gap - Rate-Sensitive Assets/Rate-Sensitive Liabilities		9.72	%		10.10		11.07		21.26		31.58		32.16

(1) Includes mortgage loans held-for-sale.

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

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Market Risk

Our earnings are dependent, to a large degree, on our net interest income, which is the difference between interest income earned on all earning assets, primarily consisting of loans and securities, and interest paid on all interest-bearing liabilities, primarily consisting of deposits. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises primarily from inherent interest rate risk in our lending, investing and deposit-gathering activities. We seek to reduce our exposure to market risk through actively monitoring and managing interest rate risk. Management relies on static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest-earning assets and interest-bearing liabilities, which quantifies, to a large extent, the degree of market risk inherent in our balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest-bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 400 basis points below the current prevailing rates to 400 basis points above the current prevailing rates. We make certain assumptions regarding the effect that varying levels of interest rates have on certain earning assets and interest-bearing liabilities, based on both historical experience and consensus estimates of outside sources. We also manage interest rate risk by entering into derivative contracts to modify the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. To mitigate the interest rate risk associated with mandatory delivery of mortgage loans, we enter into forward commitments to sell mortgage-backed securities. See Note 11 to the Unaudited Consolidated Financial Statements for more information on derivative instruments.

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

MARKET RISK
	Impact on Net Interest Income
	As of
	September 30,			December 31,
Change in prevailing interest rates	2018			2017
+400 basis points		9.28	%		17.52	%
+300 basis points		6.98			13.17
+200 basis points		4.66			8.83
+100 basis points		2.34			4.41
0 basis points		-			-
-100 basis points		(2.77	)		(5.60	)
-200 basis points		(7.67	)		(13.64	)
-300 basis points		(13.44	)		(18.01	)
-400 basis points		(17.13	)		(21.34	)

Capital Resources

Total shareholders’ equity attributable to NCC at September 30, 2018 was $677.2 million, or 16.5% of total assets. At December 31, 2017, total shareholders’ equity attributable to NCC was $392.6 million, or 14.3% of total assets. The increase in shareholders’ equity during the first nine months of 2018 was primarily attributable to our acquisitions of Landmark, Premier and FirstAtlantic, the exercise of options to purchase our common stock and other share-based compensation and net income.

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

The rules are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off-balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity, such as preferred stock, that may be included in capital. Certain items, such as goodwill and other intangible assets, are deducted from total capital in arriving at the various regulatory capital measures, such as common equity Tier 1 capital, Tier 1 capital and total risk-based capital. Our objective is to maintain our current status as a “well-capitalized” institution under applicable federal regulations. As of September 30, 2018, the Bank was “well-capitalized.”

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

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

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The following table sets forth selected consolidated capital ratios at September 30, 2018 and December 31, 2017 for both NBC and NCC.

CAPITAL ADEQUACY ANALYSIS

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital
(to Risk-Weighted Assets)
NCC	$	464,903		14.74	%	$	252,306		8.00	%		N/A		N/A
NBC	$	442,282		14.03	%	$	252,180		8.00	%	$	315,224		10.00	%
Tier 1 Capital
(to Risk-Weighted Assets)
NCC	$	410,933		13.03	%	$	189,230		6.00	%		N/A		N/A
NBC	$	425,523		13.50	%	$	189,135		6.00	%	$	252,180		8.00	%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)
NCC	$	410,933		13.03	%	$	141,922		4.50	%		N/A		N/A
NBC	$	425,523		13.50	%	$	141,852		4.50	%	$	204,897		6.50	%
Tier 1 Capital
(to Average Assets)
NCC	$	410,933		11.40	%	$	144,154		4.00	%		N/A		N/A
NBC	$	425,523		11.82	%	$	143,972		4.00	%	$	179,965		5.00	%

As of December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital
(to Risk-Weighted Assets)
NCC	$	311,225		14.37	%	$	173,301		8.00	%		N/A		N/A
NBC	$	273,012		12.61	%	$	173,243		8.00	%	$	220,680		10.00	%
Tier 1 Capital
(to Risk-Weighted Assets)
NCC	$	271,687		12.54	%	$	129,975		6.00	%		N/A		N/A
NBC	$	258,027		11.92	%	$	129,932		6.00	%	$	176,543		8.00	%
Common Equity Tier 1 Capital
(to Risk-Weighted Assets)
NCC	$	271,687		12.54	%	$	97,482		4.50	%		N/A		N/A
NBC	$	258,027		11.92	%	$	97,449		4.50	%	$	143,442		6.50	%
Tier 1 Capital
(to Average Assets)
NCC	$	271,687		10.89	%	$	99,786		4.00	%		N/A		N/A
NBC	$	258,027		10.36	%	$	99,630		4.00	%	$	124,538		5.00	%

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of management, including the Company’s Chairman and Chief Executive Officer (Principal Executive Officer) and President and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our Chairman and Chief Executive Officer and President and Chief Financial Officer have concluded that, as of September 30, 2018, the Company’s disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chairman and Chief Executive Officer and our President and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 that could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number		Exhibit Description

3.1		Certificate of Incorporation of National Commerce Corporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (File No. 333-198219), filed with the Securities and Exchange Commission on August 18, 2014)

3.1A		Amendment to Certificate of Incorporation of National Commerce Corporation (incorporated by reference to Exhibit 3.1A to the Company’s Annual Report on Form 10-K (File No. 000-55336), filed with the Securities and Exchange Commission on February 20, 2016)

3.2		By-Laws of National Commerce Corporation (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (File No. 333-198219), filed with the Securities and Exchange Commission on August 18, 2014)

4.1*		Form of Landmark Bancshares, Inc. 6.50% Fixed to Floating Subordinated Note due June 30, 2027

4.2*		Form of Warrant to Purchase Common Stock (FirstAtlantic Financial Holdings, Inc.)

10.1		2018 Supplemental Executive Retirement Benefits Agreement, entered into and effective as of September 12, 2018, by and between National Bank of Commerce and Richard Murray, IV (incorporated by reference to Exhibit 10.1A to the Current Report on Form 8-K (File No. 001-36878), filed on September 17, 2018)

10.2		2018 Split-Dollar Agreement, entered into and effective as of September 12, 2018, by and between National Bank of Commerce and Richard Murray, IV (incorporated by reference to Exhibit 10.2A to the Current Report on Form 8-K (File No. 001-36878), filed on September 17, 2018)

10.3		2018 Supplemental Executive Retirement Benefits Agreement, entered into and effective as of September 12, 2018, by and between National Bank of Commerce and William E. Matthews, V (incorporated by reference to Exhibit 10.1B to the Current Report on Form 8-K (File No. 001-36878), filed on September 17, 2018)

10.4		2018 Split-Dollar Agreement, entered into and effective as of September 12, 2018, by and between National Bank of Commerce and William E. Matthews, V (incorporated by reference to Exhibit 10.2B to the Current Report on Form 8-K (File No. 001-36878), filed on September 17, 2018)

10.5*		Executive Employment Agreement, dated December 21, 2017, by and between National Bank of Commerce and Robert B. Aland

10.6*		Supplemental Executive Retirement Benefits Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and Robert B. Aland

10.7*		Split-Dollar Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and Robert B. Aland

10.8*		Supplemental Executive Retirement Benefits Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and John R. Bragg

10.9*		Split-Dollar Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and John R. Bragg

10.10*		Supplemental Executive Retirement Benefits Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and Michael D. Goodson, Jr.

10.11*		Split-Dollar Agreement, dated as of January 1, 2016, by and between National Bank of Commerce and Michael D. Goodson, Jr.

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*		Interactive Data Files for the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2018
_________
*		Filed herewith.

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SIGNATURES

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

	NATIONAL COMMERCE CORPORATION (Registrant)

Date: November 9, 2018	/s/ Richard Murray, IV
	Richard Murray, IV Chairman and Chief Executive Officer

Date: November 9, 2018	/s/ William E. Matthews, V
	William E. Matthews, V President and Chief Financial Officer

National Commerce Corp - FORM 10-Q - November 9, 2018

Attached files

National Commerce Corp Reports