Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2017

Commission file number 001-34981

__________________________________________________________________

Fidelity Southern Corporation

(Exact name of registrant as specified in its charter)

__________________________________________________________________



Georgia		58-1416811
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



3490 Piedmont Road, Suite 1550 Atlanta, Georgia		30305
(Address of principal executive offices)		(Zip Code)

(404) 639-6500

(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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( § 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý 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 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

(Do not check if smaller reporting company)

Emerging growth company

If an emerging growth company, indicate by check mark if the 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 ý

As of October 31, 2017 (the most recent practicable date), the Registrant had outstanding 26,833,844 shares of Common Stock.

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended September 30, 2017

TABLE OF CONTENTS



			Page
Part I.		Financial Information

	Item l.	Financial Statements :
		Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	1
		Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016	2
		Consolidated Statements of Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017 and 2016	3
		Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and 2016	4
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51
	Item 4.	Controls and Procedures	51

Part II.		Other Information

	Item 1.	Legal Proceedings	53
	Item 1A.	Risk Factors	53
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
	Item 3.	Defaults Upon Senior Securities	53
	Item 4.	Mine Safety Disclosures	53
	Item 5.	Other Information	53
	Item 6.	Exhibits	54
		Signatures	55

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	(Unaudited)
($ in thousands)	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	38,359		$	31,985
Interest-bearing deposits with banks	225,272			97,726
Federal funds sold	48,396			20,000
Cash and cash equivalents	312,027			149,711
Investment securities available-for-sale	124,827			144,310
Investment securities held-to-maturity (fair value of $15,153 and $16,534, respectively)	15,072			16,583
Loans held-for-sale (includes loans at fair value of $257,325 and $252,712, respectively)	340,329			465,328

Loans	3,409,707			3,302,264
Allowance for loan losses	(30,703		)	(29,831		)
Loans, net of allowance for loan losses	3,379,004			3,272,433

Premises and equipment, net	87,792			87,915
Other real estate, net	8,624			14,814
Bank owned life insurance	71,455			70,151
Servicing rights, net	111,890			99,295
Other assets	54,403			69,145
Total assets	$	4,505,423		$	4,389,685
Liabilities
Deposits
Noninterest-bearing demand deposits	$	1,112,714		$	964,900
Interest-bearing deposits	2,825,646			2,665,694
Total deposits	3,938,360			3,630,594
Short-term borrowings	14,746			243,351
Subordinated debt, net	120,554			120,454
Other liabilities	43,695			32,639
Total liabilities	4,117,355			4,027,038
Shareholders’ equity
Preferred stock, no par value. Authorized 10,000,000; zero issued and outstanding	—			—
Common stock, no par value. Authorized 50,000,000; issued and outstanding 26,815,287 and 26,318,400, respectively	212,633			205,309
Accumulated other comprehensive income, net of tax	964			692
Retained earnings	174,471			156,646
Total shareholders’ equity	388,068			362,647
Total liabilities and shareholders’ equity	$	4,505,423		$	4,389,685

See accompanying notes to unaudited consolidated financial statements.

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FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended September 30,					Nine Months Ended September 30,
($ in thousands, except per share data)	2017		2016			2017		2016
Interest income:
Loans, including fees	$	37,290	$	38,481		$	110,933	$	106,670
Investment securities:
Taxable interest income	982		1,196			3,280		3,756
Nontaxable interest income	29		72			109		236
Other	804		149			2,003		334
Total interest income	39,105		39,898			116,325		110,996
Interest expense:
Deposits	4,163		3,336			11,503		9,812
Short-term borrowings	16		345			910		950
Subordinated debt	1,532		1,454			4,538		4,334
Total interest expense	5,711		5,135			16,951		15,096
Net interest income	33,394		34,763			99,374		95,900
Provision for loan losses	1,425		2,118			4,275		5,746
Net interest income after provision for loan losses	31,969		32,645			95,099		90,154
Noninterest income:
Service charges on deposit accounts	1,553		1,530			4,489		4,333
Other fees and charges	2,197		2,305			6,060		5,829
Mortgage banking activities	25,040		30,091			77,865		64,113
Indirect lending activities	1,901		2,388			9,967		11,434
SBA lending activities	1,460		1,202			3,959		4,329
Bank owned life insurance	401		968			1,259		1,916
Securities gains	—		296			—		578
Other	1,086		545			2,465		1,650
Total noninterest income	33,638		39,325			106,064		94,182
Noninterest expense:
Salaries and employee benefits	26,331		24,224			77,621		70,876
Commissions	9,244		9,450			26,126		24,393
Occupancy	4,508		4,597			13,371		12,994
Professional and other services	4,604		4,053			13,723		11,685
Other	8,150		9,843			27,119		26,902
Total noninterest expense	52,837		52,167			157,960		146,850
Income before income tax expense	12,770		19,803			43,203		37,486
Income tax expense	4,836		7,288			15,850		13,785
Net income	$	7,934	$	12,515		$	27,353	$	23,701

Earnings per common share:
Basic	$	0.30	$	0.48		$	1.03	$	0.94
Diluted	$	0.30	$	0.48		$	1.03	$	0.92

Cash dividends declared per common share	$	0.12	$	0.12		$	0.36	$	0.36

Net income	$	7,934	$	12,515		$	27,353	$	23,701
Other comprehensive income/(loss), net of tax:
Change in net unrealized gains/(losses) on available-for-sale securities, net of tax effect of $3, ($171), $167, and $1,051, respectively	5		(279		)	272		1,715
Adjustments for net gains/(losses) included in net income, net of tax effect of $0, ($112), $0, and ($220), respectively	—		(184		)	—		(358		)
Other comprehensive income/(loss), net of tax	5		(463		)	272		1,357
Total comprehensive income	$	7,939	$	12,052		$	27,625	$	25,058

See accompanying notes to unaudited consolidated financial statements.

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FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)



	Preferred Stock			Common Stock			Accumulated Other Comprehensive Income, Net of Tax		Retained Earnings			Total
(in thousands)	Shares	Amount		Shares	Amount		Accumulated Other Comprehensive Income, Net of Tax		Retained Earnings			Total
Balance at December 31, 2015	—	$	—	23,141	$	169,848	$	1,544	$	130,067		$	301,459
Net income									23,701			23,701
Other comprehensive income, net of tax							1,357					1,357
Comprehensive income												25,058
Common stock issued for AEB acquisition				1,470	22,727							22,727
Common stock issued under various employee plans, net				507	4,893							4,893
Stock issuance pursuant to exercise of warrants				1,000	2,685							2,685
Cash dividends paid									(9,052		)	(9,052		)
Balance at September 30, 2016	—	$	—	26,118	$	200,153	$	2,901	$	144,716		$	347,770

Balance at December 31, 2016	—	$	—	26,318	$	205,309	$	692	$	156,646		$	362,647
Net income									27,353			27,353
Other comprehensive income, net of tax							272					272
Comprehensive income												27,625
Common stock issued under various employee plans, net				497	7,324							7,324
Cash dividends paid									(9,528		)	(9,528		)
Balance at September 30, 2017	—	$	—	26,815	$	212,633	$	964	$	174,471		$	388,068

See accompanying notes to consolidated financial statements.

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FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash flows from operating activities:
Net income	$	27,353		$	23,701
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses	4,275			5,746
Depreciation and amortization of premises and equipment	3,316			3,771
Amortization of FDIC indemnification asset, net	1,159			967
Accretion of purchase discounts or premiums, net	(1,645		)	(585		)
Other amortization	1,081			1,069
Impairment of other real estate	951			1,046
Amortization and impairment of servicing rights, net	13,305			27,353
Share-based compensation expense	3,105			859
Postretirement benefits, net	2,033			1,377
Net gain on investment securities called or sold	—			(578		)
Gains on loan sales, including origination of servicing rights	(67,255		)	(72,385		)
Net gain on sales of other real estate	(847		)	(1,007		)
Net income on bank owned life insurance	(1,304		)	(1,393		)
Net change in deferred income tax, net of acquisition	7,656			1,364
Net change in fair value of loans held-for-sale	(2,771		)	(7,090		)
Originations of loans held-for-sale	(2,272,714		)	(2,568,570		)
Proceeds from sales of loans held-for-sale	2,441,839			2,571,393
Net payments received from FDIC under loss-share agreements	487			189
Decrease (increase) in other assets, net of acquisition	5,914			(1,988		)
Increase (decrease) in other liabilities, net of acquisition	1,200			(3,334		)
Net cash provided by (used in) operating activities	167,138			(18,095		)
Cash flows from investing activities:
Purchases of investment securities available-for-sale	—			(10,396		)
Maturities, calls, and repayment of investment securities available-for-sale	18,955			35,090
Purchases of investment securities held-to-maturity	—			(3,929		)
Maturities, calls and repayment of investment securities held-to-maturity	1,435			1,464
Purchases of FHLB stock	(6,681		)	(11,883		)
Redemption of FHLB stock	15,938			7,650
Net increase in loans, net of loans acquired	(110,881		)	(297,300		)
Proceeds from bank owned life insurance	—			834
Purchase of bank owned life insurance	—			(2,500		)
Proceeds from sales of other real estate	7,897			8,762
Purchases of premises and equipment, net of acquisition	(5,337		)	(5,926		)
Cash received in excess of cash paid for acquisition	—			37,609
Net cash used in investing activities	(78,674		)	(240,525		)

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FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

(UNAUDITED)



	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash flows from financing activities:
Net increase in noninterest-bearing deposits, net of acquisition	$	147,814		$	125,034
Net increase in interest-bearing deposits, net of acquisition	159,952			50,680
Net (decrease) increase in other short-term borrowings	(3,605		)	52,873
Proceeds from FHLB advances	350,000			1,125,000
Repayments on FHLB advances	(575,000		)	(1,035,000		)
Proceeds from the issuance of common stock, net	4,219			6,861
Cash dividends paid on common stock	(9,528		)	(9,052		)
Net cash provided by financing activities	73,852			316,396
Net increase in cash and cash equivalents	162,316			57,776
Cash and cash equivalents, beginning of period	149,711			86,133
Cash and cash equivalents, end of period	$	312,027		$	143,909

Supplemental cash flow information and non-cash disclosures:
Cash paid during the period for:
Interest on deposits and borrowings	$	15,836		$	13,677
Income taxes	7,896			11,570
Acquisition:
Assets acquired	—			169,321
Liabilities assumed	—			184,203
Common stock issued	—			22,727
Transfers of loans from held-for-sale to held for investment	3,109			2,900
Transfers of loans to other real estate	1,812			6,241

See accompanying notes to unaudited consolidated financial statements.

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FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(UNAUDITED)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include the accounts of Fidelity Southern Corporation (“FSC” or “Fidelity”) and its wholly-owned subsidiaries. FSC owns 100% of Fidelity Bank (the “Bank”) and LionMark Insurance Company, an insurance agency offering consumer credit related insurance products. FSC also owns three subsidiaries established to issue trust preferred securities, which are not consolidated for financial reporting purposes in accordance with current accounting guidance, as FSC is not the primary beneficiary. The “Company” or “our,” as used herein, includes FSC and its subsidiaries, unless the context otherwise requires.

These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses; the calculations of, amortization of, and the potential impairment of capitalized servicing rights; the valuation of loans held-for-sale and certain derivatives; the valuation of real estate or other assets acquired in connection with foreclosures or in satisfaction of loans; estimates used for fair value acquisition accounting and valuation of deferred income taxes. In addition, the actual lives of certain amortizable assets and income items are estimates subject to change. The Company principally operates in one business segment, which is community banking.

In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.

Operating results for the nine -month period ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 . These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K and Annual Report to Shareholders for the year ended December 31, 2016 .

The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in the 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). There were no new accounting policies or changes to existing policies adopted during the first nine months of 2017 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Contingencies

Due to the nature of their activities, the Company and its subsidiaries are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of September 30, 2017 . Although the ultimate outcome of all claims and lawsuits outstanding as of September 30, 2017 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.

Recent Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, “ Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ,” (“ASU 2017-12”) that is intended to improve and simplify rules relevant to hedge accounting. This ASU refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. ASU 2017-12 takes a three-pronged approach to improving accounting rules, with a focus on: (1) measurement and hedging strategies; (2) presentation and disclosure; and (3) easing the administrative burden that hedge accounting can create for an entity. Entities will (a) measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged; (b) consider only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity when calculating the fair value of the hedged item; and (c) measure the fair value of the hedged item using the benchmark rate component of the contracted coupon cash flows determined at conception. The amendments in this ASU shall take effect for public business entities for fiscal years, and interim periods within those fiscal years,

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beginning after December 15, 2018. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The adoption of this ASU is not expected to have a significant impact on the Company's Consolidated Financial Statements. However, the Company is currently evaluating this ASU to determine whether its provisions will enhance its risk management strategies.

In May 2017, the FASB issued ASU No. 2017-09, “ Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, ” (“ASU 2017-09”) that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Under the new guidance, an entity should account for the effect of a modification unless all of the following conditions are met. These conditions are: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments in this ASU affect any entity that changes the terms or conditions of a share-based payment award and are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued and should be applied prospectively to an award modified on or after the adoption date. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-08, “ Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities ,” (“ASU 2017-08”) that amends the amortization period for certain purchased callable debt securities held at a premium. Under GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The ASU shortens the amortization period for the premium to the earliest call date. This amendment affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date, i.e., at a premium. The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. These amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. In addition, in the period of adoption, disclosures should be provided about a change in accounting principle. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements .

In March 2017, the FASB issued ASU No. 2017-07, “ Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ,” (“ASU 2017-07”) that will change how employers who sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will be required to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. The other components of the net periodic benefit cost will be presented separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. Employers will be required to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. The guidance on the presentation of the components of net periodic benefit cost in the income statement will be applied retrospectively while the guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. Employers will have to provide the relevant disclosures required under ASC 250, Accounting Changes and Error Corrections , in the first interim and annual periods when they adopt the guidance. The guidance also provides a practical expedient for disaggregating the service cost component and other components for comparative periods. An employer that elects to apply the practical expedient must disclose the reason for doing so and other qualitative information about the capitalization of net periodic benefit cost. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption must be within the first interim period if an employer issues interim financial statements. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, “ Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ,” (“ASU 2017-04”) which simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under Step 2, an entity was required to determine the fair value of individual assets and liabilities of a reporting unit (including unrecognized assets and liabilities) using the procedure for determining fair values in a business

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combination. Under the new guidance, goodwill impairment will be measured at the amount by which a reporting unit’s carrying amount, including those with a zero or negative carrying amount, exceeds its fair value. Any resulting impairment is limited to the carrying amount of goodwill. An entity must also disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and is required to be applied prospectively with early adoption permitted for any impairment tests performed on testing dates after January 1, 2017. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-03, “ Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), ” (“ASU 2017-03”). ASU 2017-03 amends the Codification for SEC staff announcements made at two Emerging Issues Task Force (EITF) meetings. At the September 2016 meeting, the SEC staff expressed its expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance (including any amendments issued prior to adoption) on revenue from the new FASB guidance (ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606), ” (“ASU 2014-09”)), leases, (ASU No. 2016-02, “ Leases, ” (“ASU 2016-02”)), and credit losses on financial instruments (ASU No. 2016-13, “ Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ” (“ASU 2016-13”)), in accordance with SAB Topic 11.M. That Topic requires registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. ASU 2017-03 incorporates these SEC staff views into ASC 250 and adds references to that guidance in the transition paragraphs of each of the three new standards. The Company adopted this guidance in the fourth quarter of 2016. The Company has determined that this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, “ Business Combinations (Topic 805) - Clarifying the Definition of a Business,” (“ASU 2017-01”) which provides clarification on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in ASU 2017-01 provide a screen to determine when an asset is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the asset is not a business. This screen reduces the number of transactions that need to be further evaluated, and therefore are considered businesses. The amendments also provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods. Early adoption is permitted. The amendments in this ASU should be applied prospectively on or after the effective date and no disclosures are required at transition. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In December 2016, the FASB issued ASU No. 2016-20, “ Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers. ” ASU 2016-20 updates the new revenue standard by clarifying issues that had arisen from ASU No. 2014-09 but does not change the core principle of the new standard. In August 2015, the FASB had previously issued ASU No. 2015-14, “ Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ” which deferred the effective date of ASU No. 2014-09, “ Revenue from Contracts with Customers, ” (“ASU 2014-09”) by one year to annual reporting periods beginning after December 15, 2017, and interim reporting periods therein. The FASB had previously issued ASU 2014-09 in May 2014. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that period. The amendments in ASU 2014-09 indicated that entities should recognize revenue to reflect the transfers of goods or services to customers in an amount equal to the consideration the entity receives or expects to receive. The Company’s revenue is comprised of net interest income and noninterest income. As ASU 2014-09 does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, net interest income, mortgage origination and servicing activities, and gain and losses from securities are specifically excluded from the scope of the standard. The Company has performed an overall assessment of its revenue streams and identified the following items of noninterest income that are potentially affected: (1) service charges on deposit accounts; (2) ORE revenue; (3) trust and asset management fees; and (4) various components of other fees and charges, including interchange fees and merchant income. The Company has substantially completed its review of the material contracts associated with these revenue streams to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements and does not expect any changes in how these revenue streams are recognized within noninterest income. The Company continues to evaluate the impact of the adoption of the standard, including its expanded disclosure requirements, but does not expect there to be a significant impact on its Consolidated Financial Statements. The Company plans to adopt the standard on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings.

In November 2016, the FASB issued ASU No. 2016-18, “ Statement of Cash Flows (Topic 230) — Restricted Cash, ” (“ASU 2016-18”). The amendments in this ASU require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for the Company beginning in fiscal 2018, including interim periods therein. Early adoption is permitted, including adoption in an interim

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period, with retrospective application. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In October 2016, the FASB issued ASU No. 2016-16, “ Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, ” (“ASU 2016-16”). This guidance addresses the income tax consequences of intra-entity transfers of assets other than inventory. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The amendments in this ASU should be applied using a modified retrospective approach through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, “ Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, ” (“ASU 2016-15”) intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. The guidance addresses eight issues: (1) cash payments for debt prepayment or debt extinguishment costs; (2) cash payments for the settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance (“COLI”) policies, including bank-owned life insurance (“BOLI”) policies; (6) distributions received from equity method investments; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows using the application of the predominance principle, whereby an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, with adoption of all of the guidance in the same period.The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13 which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) securities. For AFS securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application for all organizations will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has allocated staff and resources in place to evaluate the appropriate model options and is in the process of collecting and reviewing loan data for use in these models; however, it is too early to assess the impact that the guidance will have on the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 which requires the recognition of assets and liabilities arising from most lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The transition guidance also provides specific guidance for

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sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. The Company anticipates that the adoption of ASU 2016-02 will not have a significant impact on its Consolidated Financial Statements, but will likely require changes to its systems and processes. The Company is continuing to evaluate the full impact of this ASU on the Company’s Consolidated Financial Statements.

In January 2016, the FASB issued ASU No. 2016-01, “ Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ” (“ASU 2016-01”). ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring that (a) equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value through net income, unless they qualify for the practicability exception for investments that do not have readily determinable fair values; (b) changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option will be recognized in other comprehensive income; and (c) entities will make the assessment of the realizability of a deferred tax asset related to an available-for-sale debt security in combination with other deferred tax assets. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

Other accounting standards that have recently been issued by the FASB or other standard-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

2. Business Combinations

The Company accounts for its acquisitions as business combinations. As such, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the acquisition date. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Purchase price allocations on completed acquisitions may be modified through the measurement period which cannot exceed one year from the acquisition date. If the Company recognizes adjustments to provisional amounts that are identified during the measurement period, the adjustments will be reported in the period in which the amounts are determined. Fair value adjustments based on updated estimates could materially affect the goodwill, if any, recorded on the acquisition. The Company may incur losses on the acquired loans that are materially different from losses originally projected in the fair value estimate. Acquisition-related costs are expensed as incurred.

The effects of the acquired assets and liabilities have been included in the consolidated financial statements since their respective acquisition date. Pro forma results have not been disclosed as those amounts are not significant to the unaudited consolidated financial statements.

American Enterprise Bankshares, Inc.

On March 1, 2016 , the Company acquired American Enterprise Bankshares, Inc. (“AEB”), the holding company for American Enterprise Bank of Florida, a Jacksonville, Florida-based community bank. The Company acquired all of the outstanding common stock of the former AEB shareholders, including common shares issued upon conversion of subordinated debentures prior to the acquisition. Total consideration of $22.8 million , primarily consisting of 1,470,068 shares of the Company's common stock, was issued in the transaction. With this acquisition, the Company added $208.8 million in assets (including $36.3 million in cash, $147.3 million in loans, and $5.2 million in goodwill), and $181.8 million in deposits.

For a more in-depth discussion about the AEB acquisition and the 2015 FDIC-assisted and branch acquisitions, refer to Note 2 - “ Business Combinations ” previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

3. Investment Securities

Management’s primary objective in managing the investment securities portfolio includes maintaining a portfolio of high quality investments with competitive returns while providing for pledging and liquidity needs within overall asset and liability management parameters. The Company is required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. As such, management regularly evaluates the investment portfolio for cash flows, the level of loan production and sales, current interest rate risk strategies and the potential future direction of market interest rate changes. Individual investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

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The following table summarizes the amortized cost and fair value of debt securities and the related gross unrealized gains and losses at September 30, 2017 , and December 31, 2016 :



	September 30, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Investment securities available-for-sale:
Obligations of U.S. Government sponsored enterprises	$	22,191	$	264	$	—		$	22,455
Municipal securities	9,584		353		(26		)	9,911
SBA pool securities	13,185		57		(103		)	13,139
Residential mortgage-backed securities	53,441		1,263		(48		)	54,656
Commercial mortgage-backed securities	24,870		17		(221		)	24,666
Total available-for-sale	$	123,271	$	1,954	$	(398	)	$	124,827

Investment securities held-to-maturity:
Municipal securities	$	1,588	$	67	$	—		$	1,655
Residential mortgage-backed securities	9,459		127		(113		)	9,473
Commercial mortgage-backed securities	4,025		—		—			4,025
Total held-to-maturity	$	15,072	$	194	$	(113	)	$	15,153



	December 31, 2016
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Investment securities available-for-sale:
Obligations of U.S. Government sponsored enterprises	$	22,218	$	227	$	(40	)	$	22,405
Municipal securities	11,706		329		(54		)	11,981
SBA pool securities	14,142		—		(230		)	13,912
Residential mortgage-backed securities	64,141		1,584		(95		)	65,630
Commercial mortgage-backed securities	30,987		—		(605		)	30,382
Total available-for-sale	$	143,194	$	2,140	$	(1,024	)	$	144,310

Investment securities held-to-maturity:
Municipal securities	$	1,588	$	—	$	(52	)	$	1,536
Residential mortgage-backed securities	10,899		160		(157		)	10,902
Commercial mortgage-backed securities	4,096		—		—			4,096
Total held-to-maturity	$	16,583	$	160	$	(209	)	$	16,534

The Company held 13 and 21 investment securities available-for-sale that were in an unrealized loss position at September 30, 2017 , and December 31, 2016 , respectively. There were six and seven investment securities held-to-maturity that were in an unrealized loss position at September 30, 2017 , and December 31, 2016 , respectively.

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The following table reflects the gross unrealized losses and fair values of the investment securities with unrealized losses, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position:



	September 30, 2017
	Less Than 12 Months					12 Months or Longer
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Investment securities available-for-sale:
Municipal securities	$	1,051	$	(26	)	$	—	$	—
SBA pool securities	5,110		(103		)	—		—
Residential mortgage-backed securities	3,647		(25		)	2,103		(23		)
Commercial mortgage-backed securities	22,684		(221		)	—		—
Total available-for-sale	$	32,492	$	(375	)	$	2,103	$	(23	)

Investment securities held-to-maturity:
Residential mortgage-backed securities	$	5,028	$	(49	)	$	2,927	$	(64	)
Total held-to-maturity	$	5,028	$	(49	)	$	2,927	$	(64	)

	December 31, 2016
	Less Than 12 Months					12 Months or Longer
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Investment securities available-for-sale:
Obligations of U.S. Government sponsored enterprises	$	10,050	$	(40	)	$	—	$	—
Municipal securities	3,380		(54		)	—		—
SBA pool securities	13,912		(230		)	—		—
Residential mortgage-backed securities	7,539		(65		)	2,624		(30		)
Commercial mortgage-backed securities	23,595		(605		)	—		—
Total available-for-sale	$	58,476	$	(994	)	$	2,624	$	(30	)

Investment securities held-to-maturity:
Municipal securities	$	1,536	$	(52	)	$	—	$	—
Residential mortgage-backed securities	8,065		(136		)	930		(21		)
Total held-to-maturity	$	9,601	$	(188	)	$	930	$	(21	)

At September 30, 2017 , and December 31, 2016 , the unrealized losses on investment securities were related to market interest rate fluctuations since purchase. Management does not have the intent to sell the temporarily impaired securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost, which may be maturity. Accordingly, as of September 30, 2017 , management has reviewed its portfolio for other-than-temporary-impairment and believes the impairment detailed in the table above is temporary, and no other-than-temporary impairment loss has been recognized in the Company’s Consolidated Statements of Comprehensive Income.

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The amortized cost and fair value of investment securities at September 30, 2017 , and December 31, 2016 , are categorized in the following table by remaining contractual maturity. The amortized cost and fair value of securities not due at a single maturity (i.e., mortgage-backed securities) are shown separately and are calculated based on estimated average remaining life:



	September 30, 2017				December 31, 2016
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities available-for-sale:
Obligations of U.S. Government sponsored enterprises
Due after one year through five years	$	20,079	$	20,221	$	15,001	$	15,112
Due five years through ten years	2,112		2,234		7,217		7,293
Municipal securities
Due after one year through five years	1,508		1,494		431		448
Due five years through ten years	3,006		3,130		3,961		4,070
Due after ten years	5,070		5,287		7,314		7,463
SBA pool securities
Due after five years through ten years	7,972		8,028		8,407		8,325
Due after ten years	5,213		5,111		5,735		5,587
Residential mortgage-backed securities	53,441		54,656		64,141		65,630
Commercial mortgage-backed securities	24,870		24,666		30,987		30,382
Total available-for-sale	$	123,271	$	124,827	$	143,194	$	144,310

Investment securities held-to-maturity:
Municipal securities
Due after five years through ten years	$	1,588	$	1,655	$	—	$	—
Due after ten years	—		—		1,588		1,536
Residential mortgage-backed securities	9,459		9,473		10,899		10,902
Commercial mortgage-backed securities	4,025		4,025		4,096		4,096
Total held-to-maturity	$	15,072	$	15,153	$	16,583	$	16,534

There were five investment securities available-for-sale called, matured, or paid off during the nine months ended September 30, 2017 , and eight investment securities called, matured, or paid off during the nine months ended September 30, 2016 . There were no gross gains or losses for the investment securities that were called during the nine months ended September 30, 2017 , and gross gains of $578,000 were recorded during the same period in 2016 .

There were no transfers from investment securities available-for-sale to investment securities held-to-maturity during the nine months ended September 30, 2017, and 2016 .

The following table summarizes the investment securities that were pledged as collateral at September 30, 2017 , and December 31, 2016 :



(in thousands)	September 30, 2017		December 31, 2016
Public deposits	$	79,574	$	103,104
Securities sold under repurchase agreements	20,179		19,183
Total pledged securities	$	99,753	$	122,287

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4. Loans Held-for-Sale

Residential mortgage loans held-for-sale are carried at fair value and SBA and indirect automobile loans held-for-sale are carried at the lower of cost or fair value. The following table summarizes loans held-for-sale at September 30, 2017 , and December 31, 2016 :



(in thousands)	September 30, 2017		December 31, 2016
Residential mortgage	$	257,325	$	252,712
SBA	8,004		12,616
Indirect automobile	75,000		200,000
Total loans held-for-sale	$	340,329	$	465,328

During the nine months ended September 30, 2017, and 2016 , the Company transferred loans with unpaid principal balances of $3.1 million and $2.9 million to the held for investment residential mortgage portfolio, respectively.

The Company had residential mortgage loans held-for-sale with unpaid principal balances of $180.6 million and $188.5 million pledged to the FHLB at September 30, 2017 , and December 31, 2016 , respectively.

5. Loans

Loans outstanding, by class, are summarized in the following table at carrying value and include net unamortized costs of $33.9 million and $35.5 million at September 30, 2017 , and December 31, 2016 . Covered loans represent previously acquired loans covered under Loss Share Agreements with the FDIC. Non-covered loans represent loans acquired that are not covered under Loss Share Agreements with the FDIC and legacy Bank loans. Legacy Bank loans represent existing portfolio loans originated prior to each acquisition and additional loans originated subsequent to each acquisition (collectively, “legacy loans”). Because of the difference in accounting for acquired loans, the tables below further segregate the Company’s non-covered loans between legacy loans and acquired loans:



	September 30, 2017
	Non-covered Loans				Covered Loans Acquired
(in thousands)	Legacy		Acquired		Covered Loans Acquired		Total
Commercial	$	640,175	$	149,613	$	—	$	789,788
SBA	133,623		9,366		—		142,989
Total commercial loans	773,798		158,979		—		932,777

Construction	237,553		5,997		50		243,600

Indirect automobile	1,609,678		—		—		1,609,678
Installment loans and personal lines of credit	23,244		2,945		—		26,189
Total consumer loans	1,632,922		2,945		—		1,635,867
Residential mortgage	422,590		29,708		286		452,584
Home equity lines of credit	125,850		16,669		2,360		144,879
Total mortgage loans	548,440		46,377		2,646		597,463
Total loans	$	3,192,713	$	214,298	$	2,696	$	3,409,707

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	December 31, 2016
	Non-covered Loans				Covered Loans Acquired ⁽¹⁾
(in thousands)	Legacy		Acquired		Covered Loans Acquired ⁽¹⁾		Total
Commercial	$	601,557	$	172,747	$	10,433	$	784,737
SBA	143,339		6,098		342		149,779
Total commercial loans	744,896		178,845		10,775		934,516

Construction	225,795		12,180		935		238,910

Indirect automobile	1,575,865		—		—		1,575,865
Installment loans and personal lines of credit	26,291		6,850		84		33,225
Total consumer loans	1,602,156		6,850		84		1,609,090
Residential mortgage	346,512		39,732		338		386,582
Home equity lines of credit	107,390		21,980		3,796		133,166
Total mortgage loans	453,902		61,712		4,134		519,748
Total loans	$	3,026,749	$	259,587	$	15,928	$	3,302,264

⁽¹⁾ Included in covered loans at December 31, 2016, are $6.3 million of assets whose reimbursable loss period ended at December 31, 2016 , and $5.4 million of assets whose reimbursable loss period ended June 30, 2017.

The Company has extended loans to certain officers and directors. The Company does not believe these loans involve more than the normal risk of collectability or present other unfavorable features when originated. None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at September 30, 2017 , or December 31, 2016 .

Nonaccrual Loans

The accrual of interest income is generally discontinued when a loan becomes 90 days past due. Past due status is based on the contractual terms of the loan agreement. A loan may be placed on nonaccrual status sooner if reasonable doubt exists as to the full, timely collection of principal or interest. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed against current period interest income. Subsequent interest collected is recorded as a principal reduction. Nonaccrual loans are returned to accrual status when all contractually due principal and interest amounts are brought current and the future payments are reasonably assured.

Loans in nonaccrual status are presented by class of loans in the following table. The Company has repurchased certain Government National Mortgage Association (“GNMA”) government-guaranteed loans, which are accounted for in nonaccrual status. The Company’s loss exposure on government-guaranteed loans is mitigated by the government guarantee in whole or in part. Purchased credit impaired (“PCI”) loans are considered to be performing due to the application of the accretion method and are excluded from the table.



(in thousands)	September 30, 2017		December 31, 2016
Commercial	$	8,772	$	8,488
SBA	2,859		5,664
Total commercial loans	11,631		14,152

Construction	4,646		6,408

Indirect automobile	1,402		1,276
Installment loans and personal lines of credit	539		581
Total consumer loans	1,941		1,857
Residential mortgage	20,053		10,860
Home equity lines of credit	3,137		2,081
Total mortgage loans	23,190		12,941
Total nonaccrual loans	$	41,408	$	35,358

If such nonaccrual loans had been on a full accrual basis, interest income on these loans for the three months ended September 30, 2017, and 2016 , would have been $559,000 and $622,000 , respectively. For both the nine months ended September 30, 2017, and 2016 , the interest income on these loans would have been $1.1 million . The amount of repurchased GNMA government-guaranteed loans, primarily residential mortgage loans, included in the table above was $15.5 million and $7.8 million at September 30, 2017 , and December 31, 2016 , respectively.

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Accruing loans delinquent 30 - 89 days, 90 days or more, and troubled debt restructured loans (“TDRs”) accruing interest, including PCI loans, presented by class of loans at September 30, 2017 , and December 31, 2016 , were as follows:



	September 30, 2017						December 31, 2016
(in thousands)	Accruing Delinquent 30-89 Days		Accruing Delinquent 90 Days or More		TDRs Accruing		Accruing Delinquent 30-89 Days		Accruing Delinquent 90 Days or More		TDRs Accruing
Commercial	$	3,019	$	5,927	$	8,540	$	1,407	$	4,231	$	5,942
SBA	419		—		3,405		1,452		—		3,788
Construction	387		159		—		32		343		—
Indirect automobile	2,934		31		1,954		2,972		—		1,474
Installment and personal lines of credit	218		—		—		39		26		—
Residential mortgage	3,000		373		495		380		1,577		406
Home equity lines of credit	216		44		52		1,320		12		53
Total	$	10,193	$	6,534	$	14,446	$	7,602	$	6,189	$	11,663

TDR Loans

There were no TDR modifications that occurred during the three months ended September 30, 2017, and 2016 . During the nine months ended September 30, 2017 , there were TDR loans of $2.8 million modified for interest rate and $4.4 million modified for term, all of which were commercial loans. During the nine months ended September 30, 2016 there were $626,000 of TDR loans modified for term of which $478,000 of these loans were indirect auto and $148,000 were residential mortgage loans. Modified PCI loans are not removed from their accounting pool and accounted for as TDRs, even if those loans would otherwise be deemed TDRs.

During the three months ended September 30, 2017, and 2016 , the amount of loans that were restructured in the past twelve months and subsequently redefaulted were $54,000 and $14,000 , respectively, and were all indirect automobile loans. During the nine months ended September 30, 2017, and 2016 , the amount of loans that were restructured in the previous twelve months and subsequently redefaulted were $252,000 and $2.2 million , respectively, that were comprised of indirect automobile and commercial loans in 2017 and commercial, indirect automobile loans and home equity lines of credit in 2016. The Company defines subsequently redefaulted as a payment default within 12 months of the restructuring date.

The Company had total TDRs with a balance of $17.9 million and $16.1 million at September 30, 2017 , and December 31, 2016 , respectively. There were net charge-offs of TDR loans of $50,000 and $2,000 for the three months ended September 30, 2017, and 2016 , respectively. There were net charge-offs of TDR loans of $105,000 and net recoveries of TDR loans of $864,000 for the nine months ended September 30, 2017, and 2016 , respectively. Net charge-offs on such loans are factored into the rolling historical loss rate, which is used in the calculation of the allowance for loan losses.

The Company is not committed to lend a material amount of additional funds as of September 30, 2017 , or December 31, 2016 , to customers with outstanding loans that are classified as impaired or as TDRs.

Pledged Loans

Presented in the following table is the unpaid principal balance of loans held for investment that were pledged to the Federal Home Loan Bank of Atlanta (“FHLB of Atlanta”) as collateral for borrowings under a blanket lien arrangement at September 30, 2017 , and December 31, 2016 :



(in thousands)	September 30, 2017		December 31, 2016
Commercial	$	248,610	$	257,645
Home equity lines of credit	92,509		93,560
Residential mortgage	327,824		223,013
Total	$	668,943	$	574,218

Indirect automobile loans with an unpaid principal balance of approximately $330.0 million and $311.4 million were pledged to the Federal Reserve Bank of Atlanta (“FRB”) at September 30, 2017 , and December 31, 2016 , respectively, as collateral for potential Discount Window borrowings under a blanket lien arrangement.

Impaired Loans

The following tables present by class the unpaid principal balance, recorded investment and related allowance for impaired legacy loans and acquired non PCI loans at September 30, 2017 , and December 31, 2016 . Legacy impaired loans include all TDRs and all other nonaccrual loans, excluding nonaccrual loans below the Company’s specific review threshold:

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	September 30, 2017						December 31, 2016
(in thousands)	Unpaid Principal Balance		Recorded Investment ⁽¹⁾		Related Allowance		Unpaid Principal Balance		Recorded Investment ⁽¹⁾		Related Allowance
Impaired Loans with Allowance
Commercial	$	19,825	$	16,573	$	2,632	$	17,337	$	14,412	$	993
SBA	1,806		1,570		257		4,671		1,956		156
Indirect automobile	3,236		2,792		305		2,655		2,151		246
Installment and personal lines of credit	446		392		239		283		235		235
Residential mortgage	4,578		4,517		694		3,178		3,117		703
Home equity lines of credit	1,138		1,011		400		1,279		1,171		333
Loans	$	31,029	$	26,855	$	4,527	$	29,403	$	23,042	$	2,666



	September 30, 2017				December 31, 2016
(in thousands)	Unpaid Principal Balance		Recorded Investment ⁽¹⁾		Unpaid Principal Balance		Recorded Investment ⁽¹⁾
Impaired Loans with No Allowance
Commercial	$	6,630	$	5,287	$	7,267	$	5,888
SBA	6,765		5,082		9,135		8,045
Construction	6,114		4,633		7,875		6,394
Installment and personal lines of credit	1,445		163		1,445		163
Residential mortgage	17,337		16,950		9,464		9,347
Home equity lines of credit	1,898		1,803		1,149		749
Loans	$	40,189	$	33,918	$	36,335	$	30,586

⁽ ¹⁾ The primary difference between the unpaid principal balance and recorded investment represents charge-offs previously taken; it excludes accrued interest receivable due to materiality. Related allowance is calculated on the recorded investment, not the unpaid principal balance.

The average recorded investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2017, and 2016 , by class, are summarized in the table below. Impaired loans include legacy impaired loans, which include all TDRs and all other nonaccrual loans. Interest income recognized during the periods on a cash basis was not material.



	Three Months Ended September 30,
	2017				2016
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	24,544	$	166	$	12,840	$	134
SBA	6,583		24		10,674		188
Construction	5,102		183		5,318		6
Indirect automobile	2,754		77		2,112		53
Installment and personal lines of credit	559		63		400		33
Residential mortgage	20,135		117		7,702		51
Home equity lines of credit	2,961		39		825		34
Total	$	62,638	$	669	$	39,871	$	499

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	Nine Months Ended September 30,
	2017				2016
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial	$	22,725	$	552	$	14,746	$	465
SBA	8,099		214		12,464		379
Construction	5,816		184		5,736		15
Indirect automobile	2,472		185		2,141		179
Installment and personal lines of credit	469		142		430		89
Residential mortgage	16,272		224		6,195		121
Home equity lines of credit	2,426		78		650		82
Total	$	58,279	$	1,579	$	42,362	$	1,330

Credit Quality Indicators

The Company uses an asset quality ratings system to assign a numeric indicator of the credit quality and level of existing credit risk inherent in a loan ranging from 1 to 8, where a higher rating represents higher risk. Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with the Company’s internal loan policy. These ratings are adjusted periodically as the Company becomes aware of changes in the credit quality of the underlying loans through its ongoing monitoring of the credit quality of the loan portfolio.

Indirect automobile loans typically receive a risk rating only when being downgraded to an adverse rating which typically occurs when payments of principal and interest are greater than 90 days past due. The Company uses a number of factors, including FICO scoring, to help evaluate the likelihood consumer borrowers will pay their credit obligations as agreed. The weighted-average FICO score for the indirect automobile portfolio was 771 for the nine months ended September 30, 2017 , and 752 for the year ended December 31, 2016 .

The following are definitions of the loan rating categories:

• Pass – These categories include loans rated satisfactory with high, good, average or acceptable business and credit risk.

• Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention.

• Substandard – A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard asset has a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.

• Doubtful – Doubtful loans have all the weaknesses inherent in assets classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

• Loss – Loss loans are considered uncollectable and of such little value that their continuance as recorded assets is not warranted.

The following tables present the recorded investment in loans, by loan class and risk rating category, as of September 30, 2017 , and December 31, 2016 :



(in thousands)	September 30, 2017
Asset Rating	Commercial		SBA		Construction		Indirect Automobile		Installment and Personal Lines of Credit		Residential Mortgage		Home Equity Lines of Credit		Total
Pass	$	740,520	$	131,913	$	231,375	$	—	$	25,364	$	426,219	$	141,214	$	1,696,605
Special Mention	17,205		6,590		7,387		—		163		1,382		365		33,092
Substandard	32,063		4,486		4,838		4,924		662		24,983		3,300		75,256
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
	789,788		142,989		243,600		4,924		26,189		452,584		144,879		1,804,953
Ungraded Performing	—		—		—		1,604,754		—		—		—		1,604,754
Total	$	789,788	$	142,989	$	243,600	$	1,609,678	$	26,189	$	452,584	$	144,879	$	3,409,707

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(in thousands)	December 31, 2016
Asset Rating	Commercial		SBA		Construction		Indirect Automobile		Installment and Personal Lines of Credit		Residential Mortgage		Home Equity Lines of Credit		Total
Pass	$	721,133	$	131,047	$	229,978	$	—	$	32,521	$	368,492	$	129,847	$	1,613,018
Special Mention	31,040		10,997		615		—		45		2,759		550		46,006
Substandard	32,564		7,735		8,317		4,003		659		15,331		2,769		71,378
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
	784,737		149,779		238,910		4,003		33,225		386,582		133,166		1,730,402
Ungraded Performing	—		—		—		1,571,862		—		—		—		1,571,862
Total	$	784,737	$	149,779	$	238,910	$	1,575,865	$	33,225	$	386,582	$	133,166	$	3,302,264

Acquired Loans

As part of the AEB acquisition on March 1, 2016, the Company acquired loans with a fair value of $147.3 million . Of this amount, $145.8 million were determined to have no evidence of deteriorated credit quality and are accounted for as acquired performing loans. The remaining $1.5 million were determined to have exhibited deteriorated credit quality since origination and were accounted for as PCI loans. There were no loans acquired in 2017.

The tables below show the balances acquired in 2016 for these two subsections of the portfolio as of the acquisition date. Contractually required principal and interest payments are based on a loan’s contractual rate and payment schedule at acquisition, assuming no loss or prepayment.

Acquired Performing Loans



(in thousands)	2016
Contractually required principal and interest payments at acquisition	$	173,726
Fair value of acquired performing loans at acquisition	$	145,843

Acquired PCI Loans



(in thousands)	2016
Contractually required principal and interest payments at acquisition	$	2,515
Less: Nonaccretable difference (expected losses and foregone interest)	(962		)
Cash flows expected to be collected at acquisition	1,553
Less: Accretable yield	(92		)
Basis in acquired PCI loans at acquisition	$	1,461

The carrying amount and outstanding balance at September 30, 2017 , of the PCI loans from acquisitions prior to 2017 was $29.8 million and $39.7 million , respectively, and $37.3 million and $48.9 million , respectively, at December 31, 2016 .

Changes in the accretable yield, or income expected to be collected on PCI loans, for the nine months ended September 30, 2017, and 2016 , were as follows:



	For the Nine Months Ended September 30,
(in thousands)	2017			2016
Beginning balance	$	4,403		$	3,797
Increase due to acquired loans	—			92
Accretion of income	(1,776		)	(1,478		)
Other activity, net ⁽¹⁾	1,351			290
Ending balance	$	3,978		$	2,701

⁽¹⁾ Includes changes in cash flows expected to be collected due to changes in timing of liquidation events, prepayment assumptions, etc.

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6. Allowance for Loan Losses

A summary of changes in the allowance for loan losses (“ALL”) by loan portfolio type is as follows:



	Three Months Ended September 30, 2017
	Commercial Loans
(in thousands)	Commercial			SBA			Construction			Consumer			Mortgage		Unallocated			Total
Beginning balance	$	9,971		$	1,949		$	2,364		$	10,265		$	5,690	$	186		$	30,425
Charge-offs	(327		)	(81		)	—			(1,342		)	—		—			(1,750		)
Recoveries	103			6			204			330			6		—			649
Net (charge-offs) / recoveries	(224		)	(75		)	204			(1,012		)	6		—			(1,101		)
Decrease in FDIC indemnification asset	(46		)	—			—			—			—		—			(46		)
Provision for loan losses ⁽¹⁾	(4		)	34			(228		)	1,432			208		(17		)	1,425
Ending balance	$	9,697		$	1,908		$	2,340		$	10,685		$	5,904	$	169		$	30,703



	Three Months Ended September 30, 2016
	Commercial Loans
(in thousands)	Commercial			SBA			Construction			Consumer			Mortgage			Unallocated		Total
Beginning balance	$	9,087		$	2,114		$	2,046		$	8,867		$	4,921		$	1,002	$	28,037
Charge-offs	(371		)	—			—			(1,207		)	(90		)	—		(1,668		)
Recoveries	11			2			1,114			447			123			—		1,697
Net (charge-offs) / recoveries	(360		)	2			1,114			(760		)	33			—		29
Increase (decrease) in FDIC indemnification asset	292			(759		)	20			—			—			—		(447		)
Provision for loan losses ⁽¹⁾	118			693			(1,075		)	1,575			419			388		2,118
Ending balance	$	9,137		$	2,050		$	2,105		$	9,682		$	5,373		$	1,390	$	29,737



	Nine Months Ended September 30, 2017
	Commercial Loans
(in thousands)	Commercial			SBA			Construction			Consumer			Mortgage			Unallocated			Total
Beginning balance	$	9,331		$	1,978		$	2,176		$	9,812		$	5,755		$	779		$	29,831
Charge-offs	(583		)	(166		)	—			(4,877		)	(41		)	—			(5,667		)
Recoveries	564			57			793			962			43			—			2,419
Net (charge-offs) / recoveries	(19		)	(109		)	793			(3,915		)	2			—			(3,248		)
Decrease in FDIC indemnification asset	(155		)	—			—			—			—			—			(155		)
Provision for loan losses ⁽¹⁾	540			39			(629		)	4,788			147			(610		)	4,275
Ending balance	$	9,697		$	1,908		$	2,340		$	10,685		$	5,904		$	169		$	30,703



	Nine Months Ended September 30, 2016
	Commercial Loans
(in thousands)	Commercial			SBA			Construction			Consumer			Mortgage			Unallocated		Total
Beginning balance	$	8,582		$	2,433		$	1,711		$	8,668		$	4,294		$	776	$	26,464
Charge-offs	(1,597		)	(387		)	—			(3,615		)	(271		)	—		(5,870		)
Recoveries	734			23			1,911			1,205			143			—		4,016
Net (charge-offs) / recoveries	(863		)	(364		)	1,911			(2,410		)	(128		)	—		(1,854		)
Increase (decrease) in FDIC indemnification asset	389			(758		)	(347		)	73			24			—		(619		)
Provision for loan losses ⁽¹⁾	1,029			739			(1,170		)	3,351			1,183			614		5,746
Ending balance	$	9,137		$	2,050		$	2,105		$	9,682		$	5,373		$	1,390	$	29,737

⁽¹⁾ Net of benefit attributable to FDIC indemnification asset.

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The following tables present, by loan portfolio type, the balance in the ALL disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans:



	September 30, 2017
	Commercial Loans
(in thousands)	Commercial		SBA		Construction		Consumer		Mortgage			Unallocated		Total
Individually evaluated	$	2,632	$	257	$	—	$	544	$	1,094		$	—	$	4,527
Collectively evaluated	6,863		1,651		2,340		10,136		4,858			169		26,017
Acquired with deteriorated credit quality	202		—		—		5		(48		)	—		159
Total ALL	$	9,697	$	1,908	$	2,340	$	10,685	$	5,904		$	169	$	30,703

Individually evaluated	$	21,860	$	6,653	$	4,633	$	3,347	$	24,280		$	—	$	60,773
Collectively evaluated	744,753		135,861		238,237		1,632,435		567,861			—		3,319,147
Acquired with deteriorated credit quality	23,175		475		730		85		5,322			—		29,787
Total loans	$	789,788	$	142,989	$	243,600	$	1,635,867	$	597,463		$	—	$	3,409,707



	December 31, 2016
	Commercial Loans
(in thousands)	Commercial		SBA		Construction		Consumer		Mortgage		Unallocated		Total
Individually evaluated	$	993	$	156	$	—	$	481	$	1,036	$	—	$	2,666
Collectively evaluated	8,101		1,822		2,151		9,324		4,705		779		26,882
Acquired with deteriorated credit quality	237		—		25		7		14		—		283
Total ALL	$	9,331	$	1,978	$	2,176	$	9,812	$	5,755	$	779	$	29,831

Individually evaluated	$	20,300	$	10,001	$	6,394	$	2,549	$	14,384	$	—	$	53,628
Collectively evaluated	738,297		139,246		229,907		1,590,110		513,821		—		3,211,381
Acquired with deteriorated credit quality	26,140		532		2,609		209		7,765		—		37,255
Total loans	$	784,737	$	149,779	$	238,910	$	1,592,868	$	535,970	$	—	$	3,302,264

The determination of the overall allowance for credit losses has two components, the allowance for originated loans and the allowance for acquired loans.

Total loans include acquired loans of $217.0 million and $275.5 million at September 30, 2017 , and December 31, 2016 , respectively, which were recorded at fair value when acquired. The ALL for acquired loans is evaluated at each reporting date subsequent to acquisition. For acquired performing loans, an allowance is determined for each loan pool using a methodology similar to that used for originated loans and then compared to the remaining fair value discount for that pool. For PCI loans, estimated cash flows expected to be collected are re-evaluated at each reporting date for each loan pool. The methodology also considers the remaining fair value discounts recognized upon acquisition associated with acquired performing loans in estimating a general allowance and also includes establishing an ALL for PCI loans that have deteriorated since acquisition.

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7. Other Real Estate

The following table segregates the other real estate (“ORE”) by type:



(in thousands)	September 30, 2017		December 31, 2016
Commercial	$	2,196	$	6,625
Residential	487		1,514
Undeveloped property	5,941		6,675
Total ORE, net	$	8,624	$	14,814

The following table summarizes the changes in ORE:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Beginning balance	$	9,382		$	18,621		$	14,814		$	18,677
ORE acquired in acquisition	—			—			—			809
Transfers of loans to ORE	112			1,307			1,812			6,241
Sales	(811		)	(2,346		)	(7,051		)	(7,755		)
Write-downs	(59		)	(656		)	(951		)	(1,046		)
Ending balance	$	8,624		$	16,926		$	8,624		$	16,926

At September 30, 2017 , and December 31, 2016 , the recorded investment of residential mortgage loans formally in the process of foreclosure proceedings was approximately $3.1 million and $2.0 million , respectively.

8. Fair Value of Financial Instruments

Valuation Methodologies and Fair Value Hierarchy

The primary financial instruments that the Company carries at fair value include investment securities available-for-sale, derivative instruments including Interest Rate Lock Commitments (“IRLCs”), and residential mortgage loans held-for-sale.

Debt securities issued by U.S. Government corporations and agencies, debt securities issued by U.S. states and political subdivisions, and agency residential and commercial mortgage-backed securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent third party pricing service. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques are appropriate. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The fair value of mortgage loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The fair value measurements consider observable data that may include market trade pricing from brokers and investors and the mortgage-backed security markets. As such, the Company classifies these loans as Level 2.

The Company classifies IRLCs on residential mortgage loans held-for-sale, which are derivatives under ASC 815-10-15, on a gross basis within other assets or other liabilities. The fair value of these commitments, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. These “pull-through” rates are based on both the Company’s historical data and the current interest rate environment and reflect the Company’s best estimate of the likelihood that a commitment will ultimately result in a closed loan. The loan servicing value is also included in the fair value of IRLCs. Because these inputs are not transparent in market trades, IRLCs are considered to be Level 3 assets.

Derivative instruments are primarily transacted in the secondary mortgage and institutional dealer markets and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit if applicable. To date, no material losses due to a counterparty’s inability to pay any net uncollateralized position have occurred. Derivative instruments are considered to be Level 3.

The credit risk associated with the underlying cash flows of an instrument carried at fair value was a consideration in estimating the fair value of certain financial instruments. Credit risk was considered in the valuation through a variety of inputs, as applicable, including, the actual default and loss severity of the collateral, and level of subordination. The assumption used to estimate credit risk applied relevant information that a market participant would likely use in valuing an instrument. Because mortgage loans

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held-for-sale are generally sold within a few weeks of origination, they are unlikely to demonstrate any of the credit weaknesses discussed above and as a result, the amount of any credit related adjustments to fair value during the three and nine months ended September 30, 2017, and 2016 , was insignificant.

Recurring Fair Value Measurements

The following tables present certain information regarding the financial assets measured at fair value on a recurring basis by level within the fair value hierarchy based on the inputs used to estimate the fair value at the measurement date. There were no transfers between Levels 1, 2, and 3, during the three and nine months ended September 30, 2017, and 2016 .



				September 30, 2017
(in thousands)	Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale	$	124,827		$	—	$	124,827	$	—
Mortgage loans held-for-sale	257,325			—		257,325		—
Other assets ⁽¹⁾	5,389			—		—		5,389
Other liabilities ⁽¹⁾	(324		)	—		—		(324		)



				December 31, 2016
(in thousands)	Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Investment securities available-for-sale	$	144,310		$	—	$	144,310	$	—
Mortgage loans held-for-sale	252,712			—		252,712		—
Other assets ⁽¹⁾	7,111			—		—		7,111
Other liabilities ⁽¹⁾	(1,065		)	—		—		(1,065		)

⁽¹⁾ Includes mortgage-related IRLCs and derivative financial instruments to hedge interest rate risk. IRLCs are recorded on a gross basis.

The following table presents a reconciliation of all other assets and other liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2017, and 2016 . The changes in the fair value of economic hedges were recorded in noninterest income from mortgage banking activities in the Consolidated Statements of Comprehensive Income and are designed to partially offset the change in fair value of the financial instruments referenced in the following table:



	As of or for the Three Months Ended September 30,
	2017						2016
(in thousands)	Other Assets ⁽¹⁾			Other Liabilities ⁽¹⁾			Other Assets ⁽¹⁾			Other Liabilities ⁽¹⁾
Beginning balance	$	7,181		$	(560	)	$	8,738		$	(5,041	)
Total gains / (losses) included in earnings:
Issuances	5,389			(324		)	8,158			(2,095		)
Settlements and closed loans	(7,246		)	560			(9,229		)	5,041
Expirations	65			—			491			—
Ending balance	$	5,389		$	(324	)	$	8,158		$	(2,095	)

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	As of or for the Nine Months Ended September 30,
	2017						2016
(in thousands)	Other Assets ⁽¹⁾			Other Liabilities ⁽¹⁾			Other Assets ⁽¹⁾			Other Liabilities ⁽¹⁾
Beginning balance	$	7,111		$	(1,065	)	$	4,022		$	(651	)
Total gains / (losses) included in earnings:
Issuances	20,595			(3,233		)	24,077			(9,633		)
Settlements and closed loans	(22,629		)	3,974			(21,035		)	8,189
Expirations	312			—			1,094			—
Ending balance	$	5,389		$	(324	)	$	8,158		$	(2,095	)

⁽¹⁾ Includes mortgage-related IRLCs and derivative financial instruments entered to hedge interest rate risk

Nonrecurring Fair Value Measurements

Certain financial assets held by the Company are not included in the tables above, but are measured at fair value on a nonrecurring basis. The following tables present the assets that had changes in their recorded fair value and still held at the end of the reporting period by level within the fair value hierarchy based on the inputs used to estimate the fair value at the measurement date.



			September 30, 2017
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	20,124	$	—	$	—	$	20,124
ORE, net	5,081		—		—		5,081
Residential mortgage servicing rights	38,807		—		—		38,807
SBA servicing rights	1,064		—		—		1,064



			December 31, 2016
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	22,338	$	—	$	—	$	22,338
ORE, net	9,396		—		—		9,396
Residential mortgage servicing rights	44,600		—		—		44,600

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Quantitative Information about Level 3 Fair Value Measurements

The following table shows the valuation technique and range, including weighted average, of the significant unobservable inputs and assumptions used in the fair value measurement of the Company’s Level 3 assets and liabilities:



	Fair Value at
($ in thousands)	September 30, 2017		December 31, 2016		Valuation Technique	Unobservable Inputs	Range/Weighted Average at September 30, 2017	Range/Weighted Average at December 31, 2016
Nonrecurring:
Impaired loans	$	20,124	$	22,338	Appraised value less estimated selling costs	Estimated selling costs	0% - 10.00% 9.88%	0% - 10.00% 9.69%
Other real estate	5,081		9,396		Discounted appraisals less estimated selling costs	Estimated selling costs	0% - 10.00% 9.53%	0% - 10.00% 9.13%
Residential mortgage servicing rights	38,807		44,600		Discounted cash flows	Discount rate	9.52% - 11.00% 9.82%	9.64% - 11.13% 9.91%
						Modeled prepayment speeds	7.62% - 15.85% 8.28%	7.47% - 18.03% 7.98%
SBA servicing rights	1,064		—		Discounted cash flows	Discount rate	13.00%	N/A
						Modeled prepayment speeds	9.18%	N/A
Recurring:
IRLCs	3,631		3,231		Pricing model	Modeled pull-through ratio	82.50%	82.50%
Forward commitments	1,434		2,815		Investor pricing	Pricing spreads	90.00% - 105.39% 102.55%	90.00% - 106.14% 101.94%

The tables above exclude the initial measurement of assets and liabilities that were acquired as part of acquisitions accounted for as business combinations. These assets and liabilities were recorded at their fair value upon acquisition and were not remeasured during the periods presented unless specifically required by GAAP. Acquisition date fair values represent either Level 2 fair value measurements (investment securities, ORE, property, equipment and borrowings) or Level 3 fair value measurements (loans, deposits and core deposit intangible asset).

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value less estimated selling costs. A loan is considered impaired if it is probable that the Company will be unable to collect all amounts contractually due according to the terms of the loan agreement. Measuring the impairment of loans using the present value of expected future cash flows, discounted at the loan’s effective interest rate, is not considered a fair value measurement. For collateral-dependent loans, fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may include real estate or business assets, including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on appraisals prepared by qualified licensed appraisers ordered by the Company’s internal appraisal department, which is independent of the Company’s lending function. If significant, the value of business equipment is based on an appraisal by qualified licensed appraisers ordered by the Company; otherwise, the equipment’s net book value on the business’s financial statements is the basis for the value of business equipment. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

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Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to ORE, which becomes the new carrying value of the ORE. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based on independent market prices, appraised values of the collateral, sales agreements, or management’s estimation of the value of the collateral using market data including recent sales activity for similar assets in the property’s market. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the property. Management continues to evaluate the appropriateness of appraised values on at least an annual basis.

Mortgage and SBA servicing rights are initially recorded at fair value when loans are sold with servicing retained. These assets are then amortized in proportion to and over the period of estimated net servicing income. On at least a quarterly basis, these servicing assets are assessed for impairment based on fair value. Management uses a model operated and maintained by an independent third party to assist in determining fair value which stratifies the servicing portfolio into homogeneous subsets with unique behavior characteristics. The model then converts those characteristics into income and expense streams, adjusts those streams for estimated prepayments, present values the adjusted streams, and combines the present values into a total. If the cost basis of any loan stratification tranche is higher than the present value of the tranche, an impairment is recorded. Management periodically obtains an independent review of the valuation assumptions to validate the fair value estimate and the reasonableness of the assumptions used in measuring fair value. See Note 11 for additional disclosures related to assumptions used in the fair value calculation for mortgage and SBA servicing rights.

Management makes certain estimates and assumptions related to costs to service varying types of loans and pools of loans, prepayment speeds, the projected lives of loans and pools of loans sold servicing retained, and discount factors used in calculating the present values of servicing fees projected to be received. Management periodically obtains an independent review of the valuation assumptions to validate the fair value estimate and the reasonableness of the assumptions used in measuring fair value.

No less frequently than quarterly, management reviews the status of mortgage loans held-for-sale for which the fair value option has been elected and pools of servicing assets to determine if there is any impairment to those assets due to such factors as earlier than estimated repayments or significant prepayments. Any impairment identified in these assets results in reductions in their carrying values through a valuation allowance and a corresponding increase in operating expenses.

The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the pull-through ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLCs is positive (negative) if the prevailing interest rate is lower (higher) than the IRLCs rate. Therefore, an increase in the pull-through ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLCs increasing if in a gain position, or decreasing if in a loss position. The pull-through ratio is largely dependent on the processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull-through ratio is estimated based on calculations provided by the secondary marketing department using historical data. The estimated pull-through ratio is periodically reviewed by the Company’s Secondary Marketing Department of the Mortgage Banking Division for reasonableness.

Forward commitments are instruments that are used to hedge the value of the IRLCs and mortgage loans held-for-sale. The Company takes investor commitments to sell a loan or pool of newly originated loans to an investor for an agreed upon price for delivery in the future. This type of forward commitment is also known as a mandatory commitment. Generally, the fair value of a forward commitment is negative (positive) if the prevailing interest rate is lower (higher) than the current commitment interest rate. The value of these commitments is ultimately determined by the investor that sold the commitment and represents a significant unobservable input used in the fair value measurement of the Company’s forward commitments.

Fair Value Option

The Company records mortgage loans held-for-sale at fair value. The Company chose to fair value these mortgage loans held-for-sale to align results with the underlying economic changes in value of the loans and related hedge instruments. Interest income on residential mortgage loans held-for-sale is recorded on an accrual basis in the Consolidated Statements of Comprehensive Income under the heading “Interest Income: Loans, including fees.”

The servicing value is included in the fair value of the mortgage loans held-for-sale and initially recognized at the time the Company enters into IRLCs with borrowers. The mark-to-market adjustments related to loans held-for-sale and the associated economic hedges are reported as part of noninterest income from mortgage banking activities in the consolidated statements of comprehensive income.

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The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held-for-sale for which the fair value option (“FVO”) has been elected as of September 30, 2017 , and December 31, 2016 . There were no loans held-for-sale that were 90 days or more past due or in nonaccrual status at September 30, 2017 , or December 31, 2016 .



(in thousands)	Aggregate Fair Value September 30, 2017		Aggregate Unpaid Principal Balance at September 30, 2017		Aggregate Fair Value Over Unpaid Principal
Residential mortgage loans held-for-sale	$	257,325	$	250,742	$	6,583



(in thousands)	Aggregate Fair Value December 31, 2016		Aggregate Unpaid Principal Balance at December 31, 2016		Aggregate Fair Value Over Unpaid Principal
Residential mortgage loans held-for-sale	$	252,712	$	250,096	$	2,616

Net (losses)/gains resulting from the change in fair value of these loans for the three months ended September 30, 2017, and 2016 , were $(718,000) and $2.4 million , respectively, and $4.0 million and $2.7 million for the nine months ended September 30, 2017, and 2016 , respectively.

Fair Value of Financial Instruments

The estimated fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. In cases where quoted market prices for the Company’s various financial instruments are not available, fair values are based on settlements using present value or other valuation techniques. Those techniques are significantly affected by the imprecision in estimating unobservable inputs and the assumptions used, including the discount rate and estimates of future cash flows. While the Company believes its valuation methods are appropriate, the derived fair value estimates cannot be substantiated by comparison to independent markets, and, in many cases, could not be realized in immediate settlement of the instruments. In that regard, the aggregate fair value amounts presented in the tables below do not represent the underlying value of the Company.

The following tables include the carrying amount and estimated fair value, as well as the level within the fair value hierarchy, of the Company’s financial instruments. The fair value estimates presented are based upon relevant information available to management as of September 30, 2017 , and December 31, 2016 :



			Fair Value Measurements at September 30, 2017
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial instruments (assets):
Cash and cash equivalents	$	312,027	$	312,027	$	—	$	—	$	312,027
Investment securities available-for-sale	124,827		—		124,827		—		124,827
Investment securities held-to-maturity	15,072		—		11,128		4,025		15,153
Total loans, net ⁽¹⁾	3,719,333		—		257,325		3,197,080		3,454,405
Financial instruments (liabilities):
Noninterest-bearing demand deposits	$	1,112,714	$	—	$	—	$	1,112,714	$	1,112,714
Interest-bearing deposits	2,825,646		—		—		2,825,198		2,825,198
Short-term borrowings	14,746		—		14,746		—		14,746
Subordinated debt	120,554		—		114,990		—		114,990

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			Fair Value Measurements at December 31, 2016
(in thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Financial instruments (assets):
Cash and cash equivalents	$	149,711	$	149,711	$	—	$	—	$	149,711
Investment securities available-for-sale	144,310		—		144,310		—		144,310
Investment securities held-to-maturity	16,583		—		12,438		4,096		16,534
Total loans, net ⁽¹⁾	3,737,761		—		252,712		3,236,345		3,489,057
Financial instruments (liabilities):
Noninterest-bearing demand deposits	$	964,900	$	—	$	—	$	964,900	$	964,900
Interest-bearing deposits	2,665,694		—		—		2,664,872		2,664,872
Short-term borrowings	243,351		—		243,351		—		243,351
Subordinated debt	120,454		—		114,537		—		114,537

⁽¹⁾ Includes $257,325 and $252,712 in residential mortgage loans held-for-sale at September 30, 2017 , and December 31, 2016 , respectively, for which the Company has elected FVO.

The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents reasonably approximates the fair values of those assets. For investment securities, fair value equals quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or dealer quotes.

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the remaining maturities using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans along with a market risk premium and liquidity discount. Covered loans are measured using projections of expected cash flows, exclusive of the loss sharing agreements with the FDIC.

Fair value for significant nonperforming loans is estimated taking into consideration recent external appraisals of the underlying collateral for loans that are collateral dependent. If appraisals are not available or if the loan is not collateral dependent, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

The fair value of deposits with no stated maturities, such as noninterest-bearing demand deposits, savings, interest-bearing demand, and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows based on the discount rates currently offered for deposits of similar remaining maturities.

The fair value of the Company’s borrowings is estimated based on the quoted market price for the same or similar issued or on the current rates offered for debt of the same remaining maturities.

For off-balance sheet instruments, fair values are based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing for loan commitments and letters of credit. Fees related to these instruments were immaterial at September 30, 2017 , and December 31, 2016 , and the carrying amounts represent a reasonable approximation of their fair values. Loan commitments, letters and lines of credit, and similar obligations typically have variable interest rates and clauses that deny funding if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the foregoing schedule.

Netting of Financial Instruments

Securities sold under repurchase agreements consist primarily of balances in the transaction accounts of commercial customers swept nightly to an overnight investment account. Securities sold under repurchase agreements are collateralized with investment securities having a market value no less than the balance borrowed, which can fluctuate daily. Securities sold under repurchase agreements are not subject to offset.

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The following table presents the net position of securities sold under repurchase agreements:



(in thousands)	September 30, 2017		December 31, 2016
Securities sold under repurchase agreements ⁽¹⁾	$	14,746	$	18,351
Fair value of securities pledged	20,179		19,183
Net position of overnight repurchase agreements	$	5,433	$	832

⁽¹⁾ Included as part of Short-term borrowings on the Consolidated Balance Sheets

The following table summarizes the collateral type pledged for the securities sold under repurchase agreements presented above:



(in thousands)	September 30, 2017		December 31, 2016
Municipal securities	$	6,367	$	5,568
Residential mortgage-backed securities	13,812		13,615
Total fair value of securities pledged	$	20,179	$	19,183

For both periods presented, all of the repurchase agreements contractually mature overnight. Risk arises if the collateral value drops below agreed upon levels and the Company would be required to pledge further securities. Management has mitigated this risk by reviewing the collateral on a daily basis, and reviewing the market value of the collateral on a monthly basis.

There are no derivative contracts subject to master netting agreements.

9. Derivative Financial Instruments

(Losses)/gains of $(1.6) million and $2.4 million were recorded for the three months ended September 30, 2017, and 2016 , respectively, and (losses)/gains of $(981,000) and $2.7 million were recorded for the nine months ended September 30, 2017, and 2016 , respectively, for all mortgage-related derivatives, and are included in the Consolidated Statements of Comprehensive Income as part of noninterest income from mortgage banking activities.

The Company’s derivative positions were as follows:



	Contract or Notional Amount as of
(in thousands)	September 30, 2017		December 31, 2016
Forward rate commitments	$	457,473	$	429,283
Interest rate lock commitments	218,992		174,835
Total derivatives contracts	$	676,465	$	604,118

The Company’s derivative contracts are not subject to master netting arrangements.

10. Earnings Per Common Share

Earnings per common share (“EPS”) were calculated as follows:



	Three Months Ended September 30,
($ in thousands, except per share data)	2017		2016
Net income	$	7,934	$	12,515

Weighted average common shares outstanding - basic ⁽¹⁾	26,729		25,993
Effect of dilutive stock options and warrants ⁽²⁾	120		134
Weighted average common shares outstanding – diluted	26,849		26,127

EPS:
Basic	$	0.30	$	0.48
Diluted	$	0.30	$	0.48



	Nine Months Ended September 30,
($ in thousands, except per share data)	2017		2016
Net income	$	27,353	$	23,701

Weighted average common shares outstanding - basic ⁽¹⁾	26,500		25,252
Effect of dilutive stock options and warrants ⁽²⁾	125		389
Weighted average common shares outstanding – diluted	26,625		25,641

EPS:
Basic	$	1.03	$	0.94
Diluted	$	1.03	$	0.92

⁽¹⁾ Includes participating securities related to unvested restricted stock awards, net of forfeitures during the period

⁽²⁾ Effect of dilutive stock options and warrants includes the dilutive effect of additional potential common shares issuable under contracts outstanding during each respective period

As of September 30, 2017 , and 2016 , there were 557,500 and 460,000 common stock options, respectively, that were excluded as potentially dilutive. These shares were not included in the computation of diluted EPS because they were anti-dilutive in the period (i.e., the options’ exercise price was greater than the average market price of the common shares.)

11. Certain Transfers of Financial Assets

Servicing rights

The Company sells certain residential mortgage loans, SBA loans and indirect automobile loans to third parties. All such transfers are accounted for as sales and the continuing involvement in the loans sold is limited to certain servicing responsibilities. Loan servicing rights are initially recorded at fair value and subsequently recorded at the lower of cost or fair value and are amortized over the remaining service life of the loans, with consideration given to prepayment assumptions. The carrying value of the loan servicing rights assets is shown in the table below:



(in thousands)	September 30, 2017		December 31, 2016
Loan servicing rights
Residential mortgage	$	99,092	$	86,131
SBA	5,308		5,707
Indirect automobile	7,490		7,457
Total servicing rights	$	111,890	$	99,295

Residential Mortgage Loans

The Company typically sells certain first-lien residential mortgage loans to third party investors, primarily Fannie Mae, Ginnie Mae, and Freddie Mac. The Company retains the related mortgage servicing rights (“MSRs”) and receives servicing fees on certain of these loans. During the three months ended September 30, 2017, and 2016 , the Company sold $644.6 million and $723.3 million in residential mortgage loans, respectively, with servicing retained. During the nine months ended September 30, 2017, and 2016 , the Company sold $1.7 billion and $1.8 billion in residential mortgage loans, respectively, with servicing retained.

The net gain on loan sales, MSRs amortization and recoveries/impairment, and ongoing servicing fees on the portfolio of loans serviced for others are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from mortgage banking activities. During the three months ended September 30, 2017, and 2016 , the Company recorded gains on sales of residential mortgage loans of $19.7 million and $25.2 million , respectively. During the nine months ended September 30, 2017, and 2016 , the Company recorded gains on sales of residential mortgage loans of $59.7 million and $63.1 million , respectively.

During the three months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $5.6 million and $4.9 million , respectively. During the nine months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $16.3 million and $14.0 million , respectively. Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.

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The table below is an analysis of the activity in the Company’s MSRs and impairment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Residential mortgage servicing rights
Beginning carrying value, net	$	94,750		$	64,899		$	86,131		$	72,766
Additions	8,445			7,745			22,203			19,989
Amortization	(3,559		)	(4,414		)	(10,051		)	(11,295		)
(Impairment) / recoveries, net ⁽¹⁾	(544		)	458			809			(12,772		)
Ending carrying value, net	$	99,092		$	68,688		$	99,092		$	68,688

⁽¹⁾ Principally reflects changes in market interest rates and prepayment speeds, both of which affect future cash flow projections



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Residential mortgage servicing impairment
Beginning balance	$	7,799		$	22,753		$	9,152		$	9,523
Additions	1,766			523			4,127			14,947
Recoveries	(1,222		)	(981		)	(4,936		)	(2,175		)
Ending balance	$	8,343		$	22,295		$	8,343		$	22,295

The fair value of MSRs, key metrics, and the sensitivity of the fair value to adverse changes in model inputs and/or assumptions are summarized below:



($ in thousands)	September 30, 2017			December 31, 2016
Residential Mortgage Servicing Rights
Fair Value	$	103,145		$	88,502
Composition of residential loans serviced for others:
Fixed-rate	99.54		%	99.47		%
Adjustable-rate	0.46		%	0.53		%
Total	100.00		%	100.00		%
Remaining term (years)	25.8			25.7
Modeled prepayment speed	8.28		%	7.98		%
Decline in fair value due to a 10% adverse change	$	(3,531	)	$	(2,918	)
Decline in fair value due to a 20% adverse change	(6,842		)	(5,643		)
Weighted average discount rate	9.82		%	9.91		%
Decline in fair value due to a 10% adverse change	$	(4,141	)	$	(3,619	)
Decline in fair value due to a 20% adverse change	(8,063		)	(6,889		)

As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the MSRs is calculated without changing any other input or assumptions. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

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Information about the asset quality of residential mortgage loans serviced by the Company is shown in the table below:



Residential mortgage loans serviced	September 30, 2017						Net Charge-offs for the Nine Months Ended September 30, 2017
	Unpaid Principal Balance		Delinquent (days)
(in thousands)	Unpaid Principal Balance		30 to 89		90+
Serviced for others	$	8,717,521	$	17,820	$	13,580	$	—
Held-for-sale	250,742		—		—		—
Held-for-investment	452,483		39		14,194		36
Total residential mortgage loans serviced	$	9,420,746	$	17,859	$	27,774	$	36

Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.

Mortgage Recourse Liability

During the last five years ended September 30, 2017 , the Company has sold approximately 50,500 loans with a principal balance of approximately $12.5 billion . Purchasers generally have recourse to return a sold loan to the Company under limited circumstances. As seller, the Company has made various representations and warranties related to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance with origination criteria established by the purchasers. In the event of a breach of these representations and warranties, the Company is obligated to repurchase loans with identified defects and/or to indemnify the purchasers. Some of these conditions include underwriting errors or omissions, fraud or material misstatements, and invalid collateral values. The contractual obligation arises only when the breach of representations and warranties is discovered and repurchase/indemnification is demanded. Generally, the maximum amount the Company would be required to pay would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers, plus accrued interest, return of the premium received at the time of the loan sale, and reimbursement of certain expenses. To date, the claims to the Company from the purchasers to be paid upon repurchase or paid because of indemnification have been insignificant. In addition, the Company’s loan sale contracts define a condition in which the borrower defaults during a short period of time as an early payment default (“EPD”). In the event of an EPD, the Company may be required to return the premium paid for the loan, pay certain administrative fees, and may be required to repurchase the loan or indemnify the purchaser unless an EPD waiver is obtained. The Company also makes a number of representations and warranties that it will service the originated loans in accordance with investor servicing guidelines and standards.

Management recognizes the potential risk from costs related to breaches of representations and warranties made in connection with residential loan sales and subsequent required repurchases, indemnifications, and EPD claims. As a result, the Company has established a liability to cover potential costs related to these events based on historical experience, adjusted for any risk factors not captured in the historical losses, current business volume, and known claims outstanding. The recourse liability totaled $1.4 million at September 30, 2017 , and December 31, 2016 , respectively, and management believes this amount is adequate for potential exposure related to loan sale indemnification, repurchase loans, and EPD claims. There is a significant degree of judgment involved in estimating the recourse liability as the estimation process is inherently uncertain and subject to imprecision. Management will continue to monitor the adequacy of the reserve level and may decide that further additions to the reserve are appropriate in the future. However, there can be no assurance that the current balance of this reserve will prove sufficient to cover actual future losses.

It should be noted that the Company’s historical loan sale activity began to increase at a time when underwriting requirements were strengthened from prior years and limited documentation conventional loans (i.e., non-government insured) were no longer eligible for purchase in the secondary market. Accordingly, the population of conventional loans the Company has sold has been underwritten based on fully documented information. While this does not eliminate all risk of repurchase or indemnification costs, management believes it significantly mitigates that risk.

SBA Loans

The Company has executed certain transfers of SBA loans with third parties. These loans, which are typically partially guaranteed by the SBA or otherwise credit enhanced, are generally secured by business property such as real estate, inventory, equipment, and accounts receivable. During the three months ended September 30, 2017, and 2016 , the Company sold $15.8 million and $18.2 million in SBA loans, respectively, with servicing retained. During the nine months ended September 30, 2017, and 2016 , the Company sold $39.5 million and $47.0 million in SBA loans, respectively, with servicing retained.

The Company retains the loan servicing rights and receives ongoing servicing fees on the portfolio of loans serviced for others. The net gain on SBA loan sales, amortization and recoveries/impairment of servicing rights, and ongoing servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from SBA lending activities. During the three months ended September 30, 2017, and 2016 , the Company recorded gains on sales of SBA loans of $870,000 and $530,000 , respectively. During the nine months ended September 30, 2017, and 2016 , the Company recorded gains on sales of SBA loans of $2.1 million and $2.5 million , respectively.

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During the three months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $607,000 and $672,000 , respectively. For each of the nine months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $1.9 million . Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.

The table below is an analysis of the activity in the Company’s SBA loan servicing rights and impairment:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
SBA loan servicing rights
Beginning carrying value, net	$	5,312		$	5,747		$	5,707		$	5,358
Additions	429			413			1,091			1,219
Amortization	(393		)	(464		)	(1,387		)	(1,117		)
(Impairment) / recoveries, net ⁽¹⁾	(40		)	7			(103		)	243
Ending carrying value, net	$	5,308		$	5,703		$	5,308		$	5,703

⁽¹⁾ Principally reflects changes in market interest rates and prepayment speeds, both of which affect future cash flow projections



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(in thousands)	2017		2016			2017		2016
SBA servicing rights impairment
Beginning balance	$	63	$	7		$	—	$	243
Additions	40		—			103		—
Recoveries	—		(7		)	—		(243		)
Ending balance	$	103	$	—		$	103	$	—

The fair value of the SBA loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in the model inputs and/or assumptions are summarized below:



($ in thousands)	September 30, 2017			December 31, 2016
SBA loan servicing rights
Fair Value	$	6,161		$	6,424
Composition of loans serviced for others:
Fixed-rate	—		%	0.19		%
Adjustable-rate	100.00		%	99.81		%
Total	100.00		%	100.00		%
Remaining term (years)	19.2			19.6
Modeled prepayment speed	9.18		%	8.62		%
Decline in fair value due to a 10% adverse change	$	(161	)	$	(161	)
Decline in fair value due to a 20% adverse change	(315		)	(314		)
Weighted average discount rate	13.00		%	13.13		%
Decline in fair value due to a 10% adverse change	$	(219	)	$	(226	)
Decline in fair value due to a 20% adverse change	(421		)	(443		)

As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the value of the SBA loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.

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Information about the asset quality of SBA loans serviced by the Company is shown in the table below:



	September 30, 2017						Net Charge-offs for the Nine Months Ended September 30, 2017
SBA loans serviced	Unpaid Principal Balance
			Delinquent (days)
(in thousands)			30 to 89		90+
Serviced for others	$	276,326	$	1,892	$	2,441	$	—
Held-for-sale	8,004		—		—		—
Held-for-investment	148,895		492		2,458		109
Total SBA loans serviced	$	433,225	$	2,384	$	4,899	$	109

Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.

Indirect Automobile Loans

The Company purchases, on a nonrecourse basis, consumer installment contracts secured by new and used vehicles purchased by consumers from franchised motor vehicle dealers and select independent dealers. A portion of the indirect automobile loans is sold with servicing retained and the Company receives ongoing servicing fees on the portfolio of loans serviced for others. During the three months ended September 30, 2017, and 2016 , the Company sold $27.1 million and $64.8 million in indirect automobile loans, respectively, with servicing retained. During the nine months ended September 30, 2017, and 2016 , the Company sold $371.5 million and $412.6 million in indirect automobile loans, respectively, with servicing retained.

The gain on loan sales, amortization of servicing rights, and ongoing servicing fees are recorded in the Consolidated Statements of Comprehensive Income as part of noninterest income from indirect lending activities. During the three months ended September 30, 2017, and 2016 , the Company recorded gains on sales of indirect automobile loans of $445,000 and $1.2 million , respectively. During the nine months ended September 30, 2017, and 2016 , the Company recorded gains on sales of indirect automobile loans of $5.8 million and $7.3 million , respectively.

During both of the three months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $2.3 million . During the nine months ended September 30, 2017, and 2016 , the Company recorded servicing fee income of $6.8 million and $6.6 million , respectively. Servicing fee income includes servicing fees, late fees and ancillary fees earned for each period.

The table below is an analysis of the activity in the Company’s indirect automobile loan servicing rights:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016
Indirect automobile loan servicing rights
Beginning carrying value	$	8,154		$	8,174		$	7,457		$	6,820
Additions	182			523			2,606			3,221
Amortization	(846		)	(1,068		)	(2,573		)	(2,412		)
Ending carrying value	$	7,490		$	7,629		$	7,490		$	7,629

The Company has not recorded impairment on its indirect automobile loan servicing rights.

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The fair value of the indirect automobile loan servicing rights, key metrics, and the sensitivity of the fair value to adverse changes in model inputs and/or assumptions are summarized below:



($ in thousands)	September 30, 2017			December 31, 2016
Indirect automobile loan servicing rights
Fair value	$	7,577		$	7,579
Composition of loans serviced for others:
Fixed-rate	100		%	100		%
Adjustable-rate	—		%	—		%
Total	100		%	100		%
Remaining term (years)	4.5			4.8
Modeled prepayment speed	18.95		%	18.95		%
Decline in fair value due to a 10% adverse change	$	(184	)	$	(190	)
Decline in fair value due to a 20% adverse change	(360		)	(371		)
Weighted average discount rate	6.91		%	6.94		%
Decline in fair value due to a 10% adverse change	$	(69	)	$	(71	)
Decline in fair value due to a 20% adverse change	(136		)	(141		)

As demonstrated in the table above, the Company’s methodology is highly sensitive to changes in model inputs and/or assumptions. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in model inputs and/or assumptions generally cannot be extrapolated because the relationship of the change in input or assumption to the change in fair value may not be linear. In addition, the effect of an adverse variation in a particular input or assumption on the fair value of the indirect automobile loan servicing rights is calculated without changing any other input or assumption. In reality, changes in one factor may magnify or counteract the effect of the change.

Information about the asset quality of the indirect automobile loans serviced by the Company is shown in the table below:



	September 30, 2017						Net Charge-offs for the Nine Months Ended September 30, 2017
Indirect automobile loans serviced	Unpaid Principal Balance
			Delinquent (days)
(in thousands)			30 to 89		90+
Serviced for others	$	1,114,710	$	3,247	$	2,750	$	2,153
Held-for-sale	75,000		—		—		—
Held-for-investment	1,609,678		4,232		3,256		3,881
Total indirect automobile loans serviced	$	2,799,388	$	7,479	$	6,006	$	6,034

Loans serviced for others are not included in the Consolidated Balance Sheets as they are not assets of the Company.

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

The following analysis reviews important factors affecting our financial condition at September 30, 2017 compared to December 31, 2016 , and compares the results of operations for the three and nine months ended September 30, 2017, and 2016 . These comments should be read in conjunction with our consolidated financial statements and accompanying notes appearing in this Quarterly Report on Form 10-Q and the “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 . All percentage and dollar variances noted in the following analysis are calculated from the balances presented in the accompanying consolidated financial statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current expectations relating to present or future trends or factors generally affecting the banking industry and specifically affecting our operations, markets and services. Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Without limiting the foregoing, the words “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “targets,” “initiatives,” “potentially,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could” are intended to identify forward-looking statements. Such statements are based upon the current beliefs and expectations of management and on information currently available to management based upon assumptions that management believes are reasonable and may relate to, among other things, the difficult economic conditions and the economy’s impact on operating results, credit quality, liquidity, capital, the adequacy of the allowance for loan losses, changes in interest rates, and litigation results. These forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those projected for many reasons, including without limitation, changing events and trends that have influenced our assumptions.

These trends and events include: (1) events adversely affecting our loan portfolio, such as potential difficulties maintaining quality loan growth, the risk of credit losses and an insufficient allowance for loan losses, maintaining and servicing relationships with customers and other counterparties, the ability to rely upon information from customers and other counterparties, and managing changes in our lending operations; (2) events adversely affecting our investment portfolio, resulting in potential impairments or losses that may adversely affect earnings and capital; (3) potential adverse economic conditions at the national, regional, and local levels where we conduct business, and the resulting impact on the quality of our loan portfolio, earnings, and business operations; (4) expectations of and actual timing and amount of interest rate movements, and the slope and shape of the yield curve; (5) extensive regulation, new or enhanced enforcement of laws and regulations, increased compliance costs, potential failure to comply with laws and regulations, and the possibility of claims or litigation from customers or other parties; (6) maintaining adequate liquidity, the failure or which would adversely impact our growth and ability to meet our current or future funding obligations; (7) our ability to maintain sufficient capital and to raise additional capital when needed; (8) events affecting our business operations, such as the effectiveness of our risk management framework and internal controls and procedures, our reliance on financial models and the accuracy of such financial models, our reliance on third party vendors, the risk of security breaches and potential fraud, including cyber-fraud, ability to maintain sufficient investment in technological improvements, and potential adverse weather events in the geographic markets in which we operate; (9) events affecting our ability to compete effectively and achieve our strategies, such as greater competitive pressures among financial institutions in our market areas, the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in our transaction deposit, trust and lending businesses, and our ability to attract and retain skilled people; (10) events that adversely affect our reputation, and the resulting potential adverse impact on our operations in the event of negative public opinion; and (11) risks arising from owning our common stock, such as the volatility and trading volume of our common stock, our ability to pay dividends, the impact of dilution on our common stock, the lack of FDIC insurance with respect to our common stock, regulatory limitations on stock ownership, and provisions in our bylaws that may make it more difficult for another party to obtain control of us.

This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business. Investors are encouraged to read the related section in our 2016 Annual Report on Form 10-K, including the “Risk Factors” set forth therein. Additional information and other factors that could affect future financial results may be included, from time to time, in our filings with the Securities and Exchange Commission (“SEC”).

Selected Financial Data

The following table contains selected consolidated financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and unaudited consolidated financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q:



	As of or for the Three Months Ended										As of or for the Nine Months Ended
($ in thousands, except per share data)	September 30, 2017			June 30, 2017			September 30, 2016				September 30, 2017				September 30, 2016
INCOME STATEMENT DATA:
Interest income	$	39,105		$	39,578		$	39,898			$	116,325			$	110,996
Interest expense	5,711			5,832			5,135				16,951				15,096
Net interest income	33,394			33,746			34,763				99,374				95,900
Provision for loan losses	1,425			750			2,118				4,275				5,746
Noninterest income	33,638			35,056			39,325				106,064				94,182
Noninterest expense	52,837			54,551			52,167				157,960				146,850
Net income	7,934			8,892			12,515				27,353				23,701
PERFORMANCE:
Earnings per common share - basic	$	0.30		$	0.34		$	0.48			$	1.03			$	0.94
Earnings per common share - diluted	0.30			0.33			0.48				1.03				0.92
Book value per common share	14.47			14.21			13.32				14.47				13.32
Tangible book value per common share	14.00			13.72			12.78				14.00				12.78
Cash dividends paid per common share	0.12			0.12			0.12				0.36				0.36
Return on average assets	0.70		%	0.78		%	1.15		%		0.81		%		0.76		%
Return on average shareholders' equity	8.28		%	9.58		%	14.58		%		9.66		%		9.68		%
Net interest margin	3.20		%	3.20		%	3.47		%		3.20		%		3.33		%
END OF PERIOD BALANCE SHEET SUMMARY:
Total assets	$	4,505,423		$	4,609,280		4,395,611				$	4,505,423			$	4,395,611
Earning assets	4,167,549			4,267,358			4,074,834				4,167,549				4,074,834
Loans, excluding loans held-for-sale	3,409,707			3,332,132			3,332,311				3,409,707				3,332,311
Total deposits	3,938,360			3,899,796			3,538,908				3,938,360				3,538,908
Shareholders' equity	388,068			379,399			347,770				388,068				347,770
Assets serviced for others	10,109,466			9,877,434			8,926,574			10,109,466				8,926,574
DAILY AVERAGE BALANCE SHEET SUMMARY:
Total assets	$	4,479,645		$	4,579,531		$	4,329,974			$	4,497,259			$	4,161,662
Earning assets	4,147,053			4,245,954			4,020,463				4,159,262				3,852,269
Loans, excluding loans held-for-sale	3,351,857			3,339,694			3,266,511				3,337,544				3,152,018
Total loans	3,725,976			3,736,026			3,718,341				3,726,980				3,561,643
Total deposits	3,913,514			3,798,523			3,573,131				3,786,678				3,421,511
Shareholders' equity	379,962			372,323			341,393				378,514				327,189
Assets serviced for others	9,970,191			9,685,378			8,807,270				9,681,324				8,484,514
ASSET QUALITY RATIOS:
Net charge-offs, annualized to average loans	0.13		%	0.09		%	—		%		0.13		%		0.23		%
Allowance to period-end loans	0.90		%	0.91		%	0.89		%		0.90		%		0.89		%
Nonperforming assets to total loans, ORE and repossessions	1.56		%	1.50		%	1.51		%		1.56		%		1.51		%
Allowance to nonperforming loans, ORE and repossessions	0.52x			0.54x			0.58x				0.52x				0.58x
SELECTED RATIOS:
Loans to total deposits	86.58		%	85.44		%	94.16		%		86.58		%		94.16		%
Average total loans to average earning assets	89.85		%	87.99		%	92.49		%		89.61		%		94.47		%
Noninterest income to revenue	46.24		%	46.97		%	49.64		%		47.69		%		45.90		%
Leverage ratio	8.81		%	8.36		%	8.48		%		8.81		%		8.48		%
Common equity tier 1 capital	8.81		%	8.61		%	8.19		%		8.81		%		8.19		%
Tier 1 risk-based capital	9.96		%	9.76		%	9.31		%		9.96		%		9.31		%
Total risk-based capital	12.68		%	12.47		%	11.97		%		12.68		%		11.97		%

Overview

Fidelity Southern Corporation (“FSC” or “Fidelity”) is a bank holding company headquartered in Atlanta, Georgia. We conduct operations primarily through Fidelity Bank, a state chartered wholly-owned subsidiary bank (the “Bank”). The Bank was organized as a national banking corporation in 1973 and converted to a Georgia chartered state bank in 2003. LionMark Insurance Company (“LionMark”) is a wholly-owned subsidiary of FSC and is an insurance agency offering consumer credit related insurance products. FSC also owns three subsidiaries established to issue trust preferred securities. The “Company,” “we,” or “our,” as used herein, includes FSC and its subsidiaries, unless the context otherwise requires.

Since our inception in 1973, we have pursued managed profitable growth through providing quality financial services. Our overall focus is on building shareholder value. Our mission is to continue growth, improve earnings and increase shareholder value; to treat customers, employees, community and shareholders according to the Golden Rule; and to operate within a culture of strong internal controls.

Our franchise primarily spans the metropolitan Atlanta, Georgia and Jacksonville, Orlando, and Sarasota-Bradenton, Florida markets. We also conduct indirect automobile lending, residential mortgage lending, and SBA lending activities in the South and parts of the Midwest.

During the remainder of 2017 and into 2018, we expect to continue to expand our footprint and customer base to focus on growth and profitability. Organic growth remains our focus, while we emphasize investing in systems and infrastructure to create efficiencies to provide support for our continued growth. Branches will be opened in Tallahassee, Florida, and Macon and Covington, Georgia over the next several quarters. We believe these branches will be well positioned to generate new customers and opportunities in these markets. Our investment in the Wealth Management business is expected to contribute to earnings by the end of the year. We are also continuing to focus on asset quality, revenue growth, deposit growth, and quality loan growth at a well-maintained capital level.

On March 1, 2016 , we completed our acquisition of American Enterprise Bankshares, Inc. (“AEB”), the holding company for American Enterprise Bank of Florida, headquartered in Jacksonville, Florida. Under the terms of the acquisition agreement, AEB merged with and into the Company and American Enterprise Bank of Florida merged with and into Fidelity Bank. With this acquisition, we added approximately $208.8 million in assets (including cash of $36.3 million, $147.3 million in loans and $5.2 million in goodwill) and $181.8 million in deposits. The AEB acquisition expanded and strengthened our retail branch footprint with the addition of two branches in the Jacksonville, Florida market.

Our lending activities are significantly influenced by the local economic environments in the markets we serve. We have grown our indirect auto loan, mortgage and construction portfolios organically and through acquisitions. Our loan portfolio is well diversified among consumer, commercial, and real estate lending. The credit quality of the loans we have originated continues to be strong.

We derive about half of our revenues from noninterest income sources such as service charges on loan and deposit accounts, fees on other products and services and income from mortgage banking, indirect automobile, and SBA activities. The majority of the noninterest income earned from these sources is generated from gains on sales of loans including recognition of gain on loan servicing on the majority of loans sold. The retained servicing obligation generates servicing revenue over the life of the loans sold. The revenue generated from gains on sales of loans and related servicing is partially offset by amortization and possible impairment of the related servicing rights. Servicing rights are amortized in proportion to the estimated future servicing income on the underlying loans sold. Impairment on servicing rights is recorded based on changes in the estimated and actual prepayment speeds and default rates and losses on the underlying loans sold. During the nine months ended September 30, 2017 , impairment recovery on mortgage servicing rights was recorded as part of noninterest income from mortgage banking activities. The impairment recovery occurred as estimated future prepayment speeds stabilized during the period, and subsequently, the estimated remaining life of the servicing income on the underlying loans serviced for others extended slightly.

A portion of our profitability, as with other financial institutions, is dependent upon net interest income, which is the difference between the interest we receive on interest-earning assets, such as loans and securities, and the interest we pay on interest-bearing liabilities, principally deposits and borrowings. Our net interest margin is affected by prevailing interest rates, nonperforming assets and competition among financial institutions for loans and deposits.

We continue to attract new customer relationships, and talented and experienced bankers to support our growth.

Financial Performance

We recorded net income for the three months ended September 30, 2017 of $7.9 million compared to $12.5 million for the same period in 2016 , a decrease of $4.6 million , or 36.6% . For the nine months ended September 30, 2017 , we recorded net income of $27.4 million compared to $23.7 million for the same period in 2016 , an increase of $3.7 million , or 15.4% .

Basic and diluted earnings per common share for the three months ended September 30, 2017 , were both $0.30 compared to $0.48 for both basic and diluted earnings per common share, for the same period last year. For the nine months ended September 30, 2017 , both basic and diluted earnings per common share were $1.03 , compared to $0.94 and $0.92 , respectively, for the same period last year.

Results of Operations

Net Income

Net income for the three months ended September 30, 2017 was $7.9 million compared to $12.5 million for the same period in 2016 , a decrease of $4.6 million , or 36.6% . The primary driver of this decrease in net income for the three months ended September 30, 2017 , was a decrease in net interest income of $1.4 million , lower noninterest income of $5.7 million , and higher noninterest expense of $670,000 , offset by a decrease in provision for loan losses of $693,000 and lower income tax expense of $2.5 million due to lower pretax book income.

Table of Contents

Net income for the nine months ended September 30, 2017 , was $27.4 million compared to $23.7 million for the same period in 2016 , an increase of $3.7 million , or 15.4% . The primary driver of this increase in net income for the nine months ended September 30, 2017 , was an increase of $11.9 million , or 12.6% in total noninterest income stemming from an additional $13.8 million of income from mortgage banking activities, due to a $13.6 million positive swing in MSRs impairment, as compared to the same period in 2016 . The primary offset to the higher income was higher noninterest expense in the amount of $11.1 million , or 7.6% , as compared to the previous period, following the acquisition of American Enterprise Bank on March 1, 2016. Increases in salaries and benefits, commissions, and professional and other services were noted due to an increase in the full-time equivalent employees (“FTE”) count of approximately 103 , or 8.1% , year over year. There were also higher expenses paid to outside third parties, primarily for ongoing projects to build the operating infrastructure, gather data to comply with new and existing regulations, and compliance with new accounting standards. The remainder of the increase was due to higher net interest income of $3.5 million, lower provision for loan losses of $1.5 million, offset by higher income tax expense of $2.1 million.

Interest Income

Interest income was $39.1 million , a decrease of $793,000 , or 2.0% for the quarter compared to the same period in 2016 as the yield on loans decreased by 15 basis points, primarily in the commercial, construction and mortgage loan portfolios, offset by an increase in the yield on the indirect auto portfolio. For the nine months ended September 30, 2017 , interest income was $116.3 million , an increase of $5.3 million , or 4.8% , compared to the same period in 2016 . The increase was primarily from an increase in mortgage loans of $2.0 million , indirect consumer loans of $1.8 million , interest-bearing deposits with banks of $1.6 million and SBA loans of $1.5 million . Year over year, average loans for the quarter increased by $7.6 million , or 0.2% , compared to the same period a year ago.

On a linked-quarter basis, interest income decreased by $473,000 , or 1.2% , primarily driven by a decrease of 6 basis points in the yield on loans and a decrease in average loans of $10.1 million . Additionally, the interest income from excess fed funds sold and interest-bearing deposits with banks decreased by $45,000 , or 5.3% , for the quarter as excess cash from the Florida money market deposit campaign was used to pay off higher-cost short-term borrowings.

Interest Expense

Interest expense for the quarter of $5.7 million reflects an increase of $576,000 , or 11.2% , as compared to the same quarter a year ago, primarily due to an increase in interest expense on deposits. A $241.9 million increase in average interest-bearing deposits for the quarter was due to the Bank’s continued deposit marketing campaign. Interest expense for the nine months ended September 30, 2017 of $17.0 million reflects an increase of $1.9 million , or 12.3% , as compared to the same period a year ago, primarily due to an increase in interest expense on deposits of $1.7 million or 17.2% . A $242.7 million increase in average interest-bearing deposits during the period was due to the Bank’s continued deposit marketing campaign.

On a linked-quarter basis, interest expense decreased by $121,000 , or 2.1% , primarily due to the pay down of short-term borrowings during the quarter. The borrowing expense decreased by $486,000 , partially offset by an increase in interest-bearing deposit expenses of $272,000 from the marketing campaign.

Net Interest Margin

As compared to the same quarter a year ago, net interest margin (tax equivalent) decreased by 27 basis points, from 3.47% , primarily due to a 23 basis point decrease in the yield on earning assets, while the yield on total interest-bearing liabilities increased by 8 basis points from 0.69% .

Average earning assets increased by $126.6 million , primarily due to the increase in excess cash generated over the year by the increase in deposits. Average interest-bearing liabilities increased by $4.8 million primarily driven by an increase in average interest-bearing deposits of $241.9 million and offset by a decrease in average borrowings of $237.2 million .

As compared to the same nine months a year ago, net interest income (tax equivalent) margin decreased by 13 basis points, from 3.33% , primarily due to a 11 basis point decrease in the yield on earning assets, while the yield on total interest-bearing liabilities also increased 4 basis points from 0.70% . Average earning assets increased by $307.0 million , primarily due to the increase in excess cash generated over the year by the increase in deposits and organic growth in the loan portfolio. Average interest-bearing liabilities increased by $160.5 million primarily driven by an increase in average interest-bearing deposits of $242.7 million and offset by a decrease in average borrowings of $82.3 million .

On a linked-quarter basis, net interest margin remained flat at 3.20% . The yield on total average earning assets remained flat at 3.75% , while the yield on total interest bearing liabilities increased slightly by 2 basis points to 0.77% . Average earning assets decreased by $98.9 million , primarily driven by the use of cash to pay down the short-term borrowings, and a reciprocal lowering of FHLB stock. Average interest-bearing liabilities decreased by $182.9 million , primarily driven by the $222.5 million decrease in other short-term borrowings, offset by an increase $39.5 million in total interest-bearing deposits.

Taxable-equivalent Interest Income

The interest income earned on certain assets is completely or partially exempt from federal income and state taxes. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of yields and margins for all earning assets, we also provide revenue on a taxable-equivalent basis by increasing the interest income

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earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. This adjustment is not permitted under GAAP in the Consolidated Statements of Comprehensive Income.

The following is a reconciliation of interest income as reported in the Consolidated Statements of Comprehensive Income to interest income on a taxable-equivalent basis:



Reconciliation of Non-GAAP Measure:	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Interest income, GAAP basis	$	39,105	$	39,898	$	116,325	$	110,996
Taxable-equivalent adjustment	57		348		179		259
Interest income, taxable-equivalent basis	$	39,162	$	40,246	$	116,504	$	111,255

Average Balances, Interest and Yields (Unaudited)



	For the Three Months Ended
	September 30, 2017							September 30, 2016
($ in thousands)	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾	$	3,725,976		$	37,333	3.98	%	$	3,718,341		$	38,631	4.13	%
Investment securities ⁽¹⁾	147,572			1,026		2.76	%	189,365			1,466		3.08	%
Other earning assets	273,505			803		1.16	%	112,757			149		0.53	%
Total interest-earning assets	4,147,053			39,162		3.75	%	4,020,463			40,246		3.98	%
Noninterest-earning assets:
Cash and due from banks	41,590							29,400
Allowance for loan losses	(30,518		)					(28,108		)
Premises and equipment, net	87,679							88,292
Other real estate	9,111							17,714
Other assets	224,730							202,213
Total noninterest-earning assets	332,592							309,511
Total assets	$	4,479,645						$	4,329,974

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand and money market	$	1,447,874		$	1,528	0.42	%	$	1,151,152		$	744	0.26	%
Savings deposits	340,663			267		0.31	%	370,011			322		0.35	%
Time deposits	1,021,563			2,368		0.92	%	1,047,044			2,270		0.86	%
Total interest-bearing deposits	2,810,100			4,163		0.59	%	2,568,207			3,336		0.52	%
Short-term borrowings	20,899			17		0.32	%	258,139			345		0.53	%
Subordinated debt	120,538			1,532		5.04	%	120,415			1,454		4.80	%
Total interest-bearing liabilities	2,951,537			5,712		0.77	%	2,946,761			5,135		0.69	%
Noninterest-bearing liabilities and shareholders' equity:
Demand deposits	1,103,414							1,004,924
Other liabilities	44,732							36,896
Shareholders’ equity	379,962							341,393
Total noninterest-bearing liabilities and stockholders’ equity	1,528,108							1,383,213
Total liabilities and shareholders’ equity	$	4,479,645						$	4,329,974
Net interest income/spread				$	33,450	2.98	%				$	35,111	3.29	%
Net interest margin						3.20	%						3.47	%

⁽¹⁾ Interest income includes the effect of taxable equivalent adjustment using a 35% tax rate

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	For the Nine Months Ended
	September 30, 2017							September 30, 2016
($ in thousands)	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾	$	3,726,980		$	111,054	3.98	%	$	3,561,643		$	106,803	4.01	%
Investment securities ⁽¹⁾	161,064			3,448		2.86	%	196,436			4,118		2.80	%
Other earning assets	271,218			2,002		0.99	%	94,190			334		0.47	%
Total interest-earning assets	4,159,262			116,504		3.75	%	3,852,269			111,255		3.86	%
Noninterest-earning assets:
Cash and due from banks	41,443							29,296
Allowance for loan losses	(30,143		)					(27,281		)
Premises and equipment, net	87,599							86,314
Other real estate	11,365							19,025
Other assets	227,733							202,039
Total noninterest-earning assets	337,997							309,393
Total assets	$	4,497,259						$	4,161,662

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand and money market	$	1,353,050		$	3,734	0.37	%	$	1,111,018		$	2,160	0.26	%
Savings deposits	361,667			899		0.33	%	362,014			910		0.34	%
Time deposits	1,040,445			6,870		0.88	%	1,039,450			6,742		0.87	%
Total interest-bearing deposits	2,755,162			11,503		0.56	%	2,512,482			9,812		0.52	%
Short-term borrowings	169,193			910		0.72	%	251,505			950		0.50	%
Subordinated debt	120,505			4,538		5.03	%	120,372			4,334		4.81	%
Total interest-bearing liabilities	3,044,860			16,951		0.74	%	2,884,359			15,096		0.70	%
Noninterest-bearing liabilities and shareholders’ equity:
Demand deposits	1,031,516							909,029
Other liabilities	42,369							41,085
Shareholders’ equity	378,514							327,189
Total noninterest-bearing liabilities and stockholders' equity	1,452,399							1,277,303
Total liabilities and shareholders’ equity	$	4,497,259						$	4,161,662
Net interest income/spread				$	99,553	3.01	%				$	96,159	3.16	%
Net interest margin						3.20	%						3.33	%

⁽¹⁾ Interest income includes the effect of taxable equivalent adjustment using a 35% tax rate

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Provision for Loan Losses

Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries, net of amounts due from the FDIC under the loss sharing agreements for our past FDIC-assisted transactions. The provision for loan losses is subject to a quarterly review process which incorporates trends in factors such as historical credit losses, delinquencies, level of nonperforming loans, loan growth, composition of the loan portfolio, etc. combined with management's view on qualitative factors such as economic conditions, loan concentrations, etc.

The provision for loan losses was $1.4 million and $4.3 million for the three and nine months ended September 30, 2017 , respectively, a decrease of $693,000 , and $1.5 million , respectively, compared to the same periods in 2016 . The primary reason for the lower provision for loan losses was overall improved credit quality. Annualized net charge-offs remained low for the quarter at 0.13% of average assets.

On a linked-quarter basis, the provision for loan losses increased by $675,000 , Gross charge-offs were flat while recoveries decreased from the previous quarter.

The following schedule summarizes the changes in the allowance for loan losses for the periods indicated:



	As of or for the Nine Months Ended September 30,						Year Ended December 31,
($ in thousands)	2017			2016			2016
Balance at beginning of period	$	29,831		$	26,464		$	26,464
Net charge-offs:
Commercial	(19		)	(863		)	(1,426		)
SBA	(109		)	(364		)	(305		)
Construction	793			1,911			2,157
Consumer	(3,915		)	(2,410		)	(3,747		)
Mortgage	2			(128		)	(846		)
Total net charge-offs	(3,248		)	(1,854		)	(4,167		)
Decrease in FDIC indemnification asset	(155		)	(619		)	(697		)
Provision for loan losses ⁽¹⁾	4,275			5,746			8,231
Balance at end of period	$	30,703		$	29,737		$	29,831

Annualized ratio of net charge-offs to average loans outstanding, net	0.13		%	0.23		%	0.13		%
Allowance for loan losses as a percentage of loans	0.90		%	0.89		%	0.90		%
Allowance for loan losses as a percentage of loans, excluding acquired loans ⁽²⁾	0.96		%	0.98		%	0.99		%

⁽¹⁾ Net of benefit attributable to FDIC indemnification asset

⁽²⁾ Excludes the recorded investment of acquired loans, due to valuation calculated at acquisition

Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio at September 30, 2017 . The allowance for loan losses as a percentage of loans outstanding at the end of the current quarter and the third quarter of 2016 , was 0.90% , and 0.89% , respectively. The allowance for loan losses as a percentage of loans outstanding, excluding acquired loans, at the end of the third quarter of 2017 , and 2016 , was 0.96% , and 0.98% , respectively.

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Noninterest Income

The categories of noninterest income, and the dollar and percentage change between periods, are as follows:



	Three Months Ended September 30,									Nine Months Ended September 30,
($ in thousands)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Service charges on deposit accounts	$	1,553	$	1,530	$	23		1.5	%	$	4,489	$	4,333	$	156		3.6	%
Other fees and charges	2,197		2,305		(108		)	(4.7	)	6,060		5,829		231			4.0
Mortgage banking activities	25,040		30,091		(5,051		)	(16.8	)	77,865		64,113		13,752			21.4
Indirect lending activities	1,901		2,388		(487		)	(20.4	)	9,967		11,434		(1,467		)	(12.8	)
SBA lending activities	1,460		1,202		258			21.5		3,959		4,329		(370		)	(8.5	)
Bank owned life insurance	401		968		(567		)	(58.6	)	1,259		1,916		(657		)	(34.3	)
Securities gains	—		296		(296		)	(100.0	)	—		578		(578		)	(100.0	)
Other	1,086		545		541			99.3		2,465		1,650		815			49.4
Total noninterest income	$	33,638	$	39,325	$	(5,687	)	(14.5	)	$	106,064	$	94,182	$	11,882		12.6

Compared to the same quarter a year ago, noninterest income of $33.6 million decreased by $5.7 million , or 14.5% , primarily due to a net decrease in noninterest income from mortgage banking activities of $5.1 million , or 16.8% , primarily due to a decrease in marketing gains of $5.5 million. This decrease was due to a decrease in the pipeline of locked loans of $129.3 million or 32.8% as well as the mix of loan production with more profitable refinances making up 33.3% of loan production in the third quarter of 2016 compared to 13.7% in the third quarter of 2017.

Noninterest income for the the nine months ended September 30, 2017 was $106.1 million , an increase of $11.9 million or 12.6% compared to the same period of 2016 . This increase was primarily due to a net increase in noninterest income from mortgage banking activities of $13.8 million , or 21.4% , due to a $13.6 million swing in the MSR impairment to a recovery for the first nine months of 2017, partially offset by a decrease in indirect lending activities income of $1.5 million or 12.8% .

On a linked-quarter basis, noninterest income decreased by $1.4 million , or 4.0% , largely due to a net decrease in mortgage banking activities income of $1.9 million or 7.1% and a decrease in indirect lending activities income of $1.7 million , or 47.8% . The mortgage and indirect auto decreases were partially offset by increases of $779,000 in SBA lending activities, $263,000 in service charges and other fees, a $403,000 increase in gain on sale of ORE, a reduction of $649,000 in the amortization of the FDIC indemnification asset as one of the commercial loss share agreements with the FDIC expired at June 30, 2017, and trust service fees increased by $86,000 as the customer base increased from the addition of client advisors to the wealth management division. Marketing gains and origination points and fees, part of mortgage banking activities, decreased during the quarter primarily due to lower mortgage production, which decreased $47.6 million and a lower pipeline of locked loans to be sold, which decreased by $95.1 million, or 26.4%. These factors were offset by higher loan sales of $42.5 million or 6.2%. Due to the industry-wide weakening of the indirect auto loan sales market, the Company's indirect loan sales decreased by $124.9 million, or 82.2%, resulting in lower gain on sale of $811,000 and a decrease in capitalization of servicing rights of $838,000.

Noninterest Expense

The categories of noninterest expense, and the dollar and percentage change between periods, are as follows:



	Three Months Ended September 30,									Nine Months Ended September 30,
($ in thousands)	2017		2016		$ Change			% Change		2017		2016		$ Change		% Change
Salaries and employee benefits	$	26,331	$	24,224	$	2,107		8.7	%	$	77,621	$	70,876	$	6,745	9.5	%
Commissions	9,244		9,450		(206		)	(2.2	)	26,126		24,393		1,733		7.1
Occupancy, net	4,508		4,597		(89		)	(1.9	)	13,371		12,994		377		2.9
Professional and other services	4,604		4,053		551			13.6		13,723		11,685		2,038		17.4
Other	8,150		9,843		(1,693		)	(17.2	)	27,119		26,902		217		0.8
Total noninterest expense	$	52,837	$	52,167	$	670		1.3		$	157,960	$	146,850	$	11,110	7.6

Compared to the same quarter a year ago, noninterest expense for the quarter of $52.8 million increased by $670,000 , or 1.3% mostly due to increased expenses associated with organic growth, especially in the mortgage and Wealth Management divisions. Salaries, employee benefits and commissions increased by $1.9 million , or 5.6% , mainly due to an increase in the FTE count of approximately 103 , or 8.1% , year over year. Professional and other services also increased by $551,000 or 13.6% , primarily due to increased expenses paid to outside third parties for infrastructure improvement projects and costs associated with new and existing regulations. These increases in noninterest expense were offset by decreases in other noninterest expense of $1.7 million or 17.2% and a decrease in occupancy expense of $89,000 or 1.9% . Other noninterest expense was lower by $842,000 due to lower loan origination and credit reports expenses associated with lower mortgage production noted above in the linked-quarter paragraph

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and lower ORE expense of $547,000 as the amount of ORE properties was significantly lower in the third quarter of 2017 compared to the third quarter of 2016.

Compared to the nine months a year ago, noninterest expense for the quarter of $158.0 million increased by $11.1 million , or 7.6% mostly due to increased expenses associated with organic growth, especially in the mortgage and Wealth Management divisions. Salaries, employee benefits and commissions increased by $8.5 million , or 8.9% , mainly due to an increase in the FTE count of approximately 103 , or 8.1% , year over year. Professional and other services also increased by $2.0 million or 17.4% , primarily due to increased expenses paid to outside third parties for infrastructure improvement projects and costs associated with new and existing regulations coupled with an increase in other noninterest expense of $217,000 .

On a linked-quarter basis, noninterest expense decreased by $1.7 million , or 3.1% , primarily due to a decrease in other noninterest expense of $1.4 million . The decrease in other noninterest expense was primarily due to a $1.0 million decrease in loan origination and credit report expenses related to mortgage loan production. Professional and other services expense were also lower by $448,000 , or 8.9% , due to a decline in expenses paid to outside third parties. These decreases were offset by an increase in salaries, commissions and employee benefits of $339,000 or 1.0% , which was mainly due to an increase in $690,000 in deferred compensation expense, offset by a decrease in commissions of $140,000 .

Income Tax Expense

Income tax expense was $4.8 million and $15.9 million , for the three and nine months ended September 30, 2017 , respectively, a decrease of $2.5 million , or 33.6% , and an increase of $2.1 million , or 15.0% , respectively, as compared to the same periods in 2016 . The primary driver of these changes was the level of pre-tax income reported for each period. The effective tax rate for the three months ended September 30, 2017 was 37.9% , as compared to 36.8% for the same period in 2016 .

The effective tax rate for the nine months ended September 30, 2017 was 36.7% , as compared to 36.8% for the same period in 2016 . The decrease in the effective tax rate in the nine months ended September 30, 2017 is primarily driven by an increase in permanent favorable book/tax differences as a percentage of pretax book income, mainly related to the adoption of ASU 2016-09, “ Improvements to Employee Share-based Payment Accounting, ” which changed book/tax differences relating to stock compensation, and Florida tax credits.

Financial Condition

Total assets grew to $4.5 billion at September 30, 2017 , an increase of $115.7 million , or 2.6% , compared to December 31, 2016 , primarily driven by an increase in cash and cash equivalents which grew $162.3 million , or 108.4% , as a result of an increase in total deposits of $307.8 million , or 8.5% , due to successful campaigns in 2017. In addition, total assets were impacted by a decrease of $125.0 million , or 26.9% , in loans held-for-sale due to fluctuations in the pipelines. Loans held-for-investment increased by $107.4 million , or 3.3% , due to new loan production. The excess cash from deposit marketing campaigns was used to pay off $225.0 million in FHLB advances during 2017.

Loans

Total loans of $3.8 billion at September 30, 2017 , decreased by $17.6 million , or 0.5% , as compared to December 31, 2016 . Consistent with industry trends influenced by rising interest rates, loan production has slowed in the indirect automobile and commercial portfolios. The Bank continues to generate organic new business, evidenced by average loan balances increasing by approximately $111.5 million, as compared to December 31, 2016 , as well as leveraging its expansion into new markets, as shown through solid production in the residential mortgage and HELOC portfolios. Loans held for sale fell by $125.0 million , or 26.9% , during the year to $340.3 million , primarily due to slowing of loan sales in the indirect automobile market.

Fair Value Adjustments

Loan servicing rights increased by $12.6 million , or 12.7% , to $111.9 million at September 30, 2017 , compared to December 31, 2016 . Cumulative production and sales of residential mortgage, SBA, and indirect auto loans continued to grow and generate a net increase in servicing rights.

On a linked quarter basis, loan servicing rights increased by $3.7 million , or 3.4% , to $111.9 million . Mortgage servicing rights (“MSRs”), the primary component of loan servicing rights, contributed the majority of the change, increasing by $4.3 million, slightly offset by the change in indirect and SBA loan servicing rights for the quarter.

The increase in MSRs was primarily driven by increased sales of mortgage loans with servicing retained to $644.6 million for the quarter, an increase of $70.8 million, or 12.3%, in comparison to the prior linked-quarter. This increase was partially offset by a slight increase in impairment during the quarter as a result of higher estimated prepayments.

The current estimated fair market value of the MSRs was $103.1 million at September 30, 2017 , an excess of $4.1 million over the net carrying value recorded. If interest rates trend upward, the fair market value would theoretically increase with a corresponding decrease in early prepayment expectations and some portion of the cumulative impairment recorded may be recovered. However, the value of the MSRs is highly dependent on current market rates so any interest rate volatility could significantly impact the value of the asset and the recorded impairment, either positively or negatively.

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Fair value gains on the portfolio of mortgage loans held for sale, interest rate lock commitments (“IRLCs”) and hedge items was $11.6 million at September 30, 2017 , an decrease of $2.3 million , or 16.3% , during the quarter. The decrease was primarily attributable to the decreases in loans held for sale and gross pipeline of locked loans to be sold as we enter into the fall and winter months, historically a lower buying season. Since the bank hedges its mortgage pipeline and held for sale portfolio, the volatility of these items due to interest rate movements collectively should be minimal.

Asset Quality

The following schedule summarizes our asset quality as of or for the three months ended for the dates indicated:



($ in thousands)	September 30, 2017			December 31, 2016			September 30, 2016
NONPERFORMING ASSETS
Nonaccrual loans ^{(2) (6)}	$	41,408		$	35,358		$	32,796
Loans past due 90 days or more and still accruing	6,534			6,189			6,140
Repossessions	2,040			2,274			1,747
Other real estate (ORE)	8,624			14,814			16,926
Nonperforming assets	$	58,606		$	58,635		$	57,609
ASSET QUALITY RATIOS
Loans 30-89 days past due	$	10,193		$	7,707		$	7,304
Loans 30-89 days past due to loans	0.30		%	0.23		%	0.22		%
Loans past due 90 days or more and still accruing to loans	0.19		%	0.19		%	0.18		%
Nonperforming loans as a % of loans	1.41		%	1.26		%	1.17		%
Nonperforming assets to loans, ORE, and repossessions	1.56		%	1.55		%	1.51		%
Classified Asset Ratio ⁽⁴⁾	20.59		%	21.22		%	21.47		%
ALL to nonperforming loans	64.04		%	71.80		%	76.36		%
Net charge-offs, annualized to average loans	0.13		%	0.28		%	—		%
ALL as a % of loans	0.90		%	0.90		%	0.89		%
ALL as a % of loans, excluding acquired loans ⁽⁵⁾	0.96		%	0.99		%	0.98		%
CLASSIFIED ASSETS
Classified loans ⁽¹⁾	$	75,033		$	68,128		$	67,826
ORE and repossessions	10,664			17,088			16,792
Total classified assets ⁽³⁾	$	85,697		$	85,216		$	84,618

⁽¹⁾ Amount of SBA guarantee included in classified loans	$	2,755		$	7,735		$	8,665
⁽²⁾ Amount of repurchased GNMA government-guaranteed loans, primarily residential mortgage loans, included in nonaccrual loans	$	15,450		$	7,771		$	4,648
⁽³⁾ Classified assets include loans having a risk rating of substandard or worse, both accrual and nonaccrual, repossessions and ORE, net of loss share and purchase discounts
⁽⁴⁾ Classified asset ratio is defined as classified assets as a percentage of the sum of Tier 1 capital plus allowance for loan losses
⁽⁵⁾ Allowance calculation excludes the recorded investment of acquired loans, due to valuation calculated at acquisition
⁽⁶⁾ Excludes purchased credit impaired (PCI) loans which are not removed from their accounting pool

The Bank had $17.9 million in troubled debt restructured loans at September 30, 2017 , of which $14.4 million were accruing loans and $3.4 million were on nonaccrual and included in nonperforming assets in the table above.

Nonperforming assets decreased slightly from December 31, 2016 to September 30, 2017 , primarily due to a decrease in ORE property of $6.2 million , partially offset by an increase of $6.1 million in nonaccrual loans. The majority of the increase in nonaccrual loans was due to growth in the portfolio of repurchased GNMA government-guaranteed mortgage loans. Our loss exposure on these government-guaranteed loans is mitigated by the government guarantee in whole or in part.

Qualifying residential mortgage loans guaranteed by U.S. governmental agencies have been sold into GNMA pools since 2012. Under certain performance conditions specified in government programs, the Company may have the right, but not the obligation to repurchase certain loans from the GNMA pools. These loans are recognized as residential mortgage loans in the Consolidated Balance Sheets at the time of repurchase and are classified according to delinquency status. The principal balance of GNMA guaranteed loans is guaranteed in whole or in part. As the average age of the GNMA servicing portfolio increases, normal activity includes buying out delinquent loans which are covered by applicable government guarantees and reimbursements.

Management believes it has been proactive in charging down and charging-off these nonperforming assets as appropriate. Management's assessment of the overall loan portfolio is that loan quality and performance have improved in recent years. Management believes it is being aggressive in evaluating credit relationships and proactive in addressing problems.

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When a loan is classified as nonaccrual, to the extent collection is in question, previously accrued interest is reversed, reducing interest income in the current year. If such nonaccrual loans had been on a full accrual basis, interest income on these loans for the nine months ended September 30, 2017 would have been $1.1 million .

Mortgage Recourse Liability

During the last five years ended September 30, 2017 , the Company has sold approximately 50,500 loans with a principal balance of approximately $12.5 billion . As seller, the Company has made various representations and warranties related to, among other things, the ownership of the loans, the validity of the liens, the loan selection and origination process, and the compliance with origination criteria established by the purchasers. In the event of a breach of these representations and warranties, the Company is obligated to repurchase loans with identified defects and/or to indemnify the purchasers. Some of these conditions include underwriting errors or omissions, fraud or material misstatements, and invalid collateral values. The contractual obligation arises only when the breach of representations and warranties is discovered and repurchase/indemnification is demanded. Generally, the maximum amount the Company would be required to pay would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers, plus accrued interest, return of the premium received at the time of the loan sale, and reimbursement of certain expenses. To date, the claims to the Company from the purchasers to be paid upon repurchase or paid because of indemnification have been insignificant. In addition, the Company’s loan sale contracts define a condition in which the borrower defaults during a short period of time as an early payment default (“EPD”). In the event of an EPD, the Company may be required to return the premium paid for the loan, pay certain administrative fees, and may be required to repurchase the loan or indemnify the purchaser unless an EPD waiver is obtained.

Management recognizes the potential risk from costs related to breaches of representations and warranties made in connection with residential loan sales and subsequent required repurchases, indemnifications, and EPD claims. As a result, the Company has established a liability to cover potential costs related to these events based on historical experience, adjusted for any risk factors not captured in the historical losses, current business volume, and known claims outstanding. The recourse liability totaled $ 1.4 million at September 30, 2017 , and December 31, 2016 . Management believes this amount is adequate for potential exposure related to loan sale indemnification, repurchase loans, and EPD claims. Management will continue to monitor the adequacy of the reserve level and may decide that further additions to the reserve are appropriate. However, there can be no assurance that the current balance of this reserve will prove sufficient to cover actual future losses.

Other Assets

Other assets were $54.4 million at September 30, 2017 compared to $69.1 million at December 31, 2016 , a decrease of $14.7 million . This decrease was in multiple categories, primarily FHLB stock of $9.3 million due to paydown of FHLB advances, escrow receivable advance of $1.8 million , FDIC indemnification assets of $1.6 million due to expiration of one of our loss share agreements with the FDIC on June 30, 2017, and intangible assets of $1.0 million due to amortization of the core deposit premium.

Deposits

Total deposits at September 30, 2017 were $3.9 billion , an increase of $307.8 million , or 8.5% , compared to December 31, 2016 , primarily due to growth in the interest-bearing demand and money market category of $269.8 million , or 22.2% , and in non-interest bearing demand deposits of $147.8 million or 15.3% ; partially offset by decreases of $47.9 million in savings deposits, and $61.9 million in time deposits, respectively.

The majority of the $269.8 million increase in interest-bearing demand and money market deposits occurred primarily due to increased volume in the demand and money market category as a result of an increase of $182.2 million in Florida deposits, as compared to December 31, 2016 . During 2017 , the Bank continued its deposit marketing program, increasing the number of demand deposit accounts.

For the noninterest-bearing demand deposits category, the majority of the $147.8 million increase occurred in escrow deposits due to normal growth compared to December 31, 2016 , as escrow deposits typically grow in the first three quarters and are drawn down in the fourth quarter to pay insurance and property taxes.

Table of Contents

The following table summarizes average deposit composition and average rate paid for the periods presented:



	For the Three Months Ended
	September 30, 2017						June 30, 2017						September 30, 2016
($ in millions)	Average Amount		Rate		Percent of Total Deposits		Average Amount		Rate		Percent of Total Deposits		Average Amount		Rate		Percent of Total Deposits
Noninterest-bearing demand deposits	$	1,103.4	—	%	28.2	%	$	1,027.9	—	%	27.1	%	$	1,004.9	—	%	28.1	%
Interest-bearing deposits:
Demand and money market	1,447.9		0.42	%	37.0	%	1,363.7		0.37	%	35.9	%	1,151.2		0.26	%	32.2	%
Savings deposits	340.7		0.31	%	8.7	%	357.7		0.32	%	9.4	%	370.0		0.35	%	10.4	%
Time deposits	1,021.5		0.92	%	26.1	%	1,049.2		0.90	%	27.6	%	1,047.0		0.86	%	29.3	%
Total average deposits	$	3,913.5	0.42	%	100.0	%	$	3,798.5	0.41	%	100.0	%	$	3,573.1	0.37	%	100.0	%



	For the Nine Months Ended
	September 30, 2017						September 30, 2016
($ in millions)	Average Amount		Rate		Percent of Total Deposits		Average Amount		Rate		Percent of Total Deposits
Noninterest-bearing demand deposits	$	1,031.5	—	%	27.2	%	$	909.0	—	%	26.6	%
Interest-bearing deposits:
Demand and money market	1,353.1		0.37	%	35.7	%	1,111.0		0.26	%	32.4	%
Savings deposits	361.7		0.33	%	9.6	%	362.0		0.34	%	10.6	%
Time deposits	1,040.4		0.88	%	27.5	%	1,039.5		0.87	%	30.4	%
Total average deposits	$	3,786.7	0.41	%	100.0	%	$	3,421.5	0.38	%	100.0	%

Average core deposits, including noninterest-bearing demand deposits, grew by $365.9 million , and $142.7 million , or 14.5% and 5.2% , compared to the same quarter in 2016 , and the previous quarter, respectively, mainly due to growth in escrow accounts and demand and money market accounts.

Time deposits that met or exceeded the FDIC insurance limit of $250,000 were $174.8 million , and $181.4 million at September 30, 2017 , and December 31, 2016 , respectively.

Borrowings

Short-term borrowings decreased by $228.6 million , or 93.9% , compared to December 31, 2016 , primarily as the result of paydowns of FHLB advances during 2017 of $225.0 million, due to excess cash from the aforementioned deposit marketing campaign.

Liquidity and Capital Resources

Market and public confidence in our financial strength and that of financial institutions in general largely determines the access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound credit quality and the ability to maintain appropriate levels of capital resources.

We define liquidity as the ability to generate sufficient cash flows to support our operations and to meet our obligations at a reasonable cost and on a timely basis including repayment of borrowings, anticipated customer demands for funds under credit commitments and deposit withdrawals by customers. Liquidity risk is the risk to earnings or capital if we are unable to fulfill our obligations as they become due. Liquidity risk can also develop if we fail to timely recognize or address changes in market conditions that affect our ability to obtain adequate funding to continue to operate on a profitable basis.

Management measures our liquidity position by giving consideration to both on-balance sheet and off-balance sheet sources of and demands for funds on a daily and weekly basis. In addition, due to FSC being a separate entity and apart from the Bank, it must provide for its own liquidity. FSC is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.

Sources of the Bank’s liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for sale or pledging to secure borrowings from dealers and customers pursuant to securities sold under agreements to repurchase; loan repayments; loan sales; deposits and certain interest-sensitive deposits; brokered deposits; a collateralized line of credit at the Federal Reserve Bank of Atlanta (“FRB”) Discount Window; a collateralized line of credit from the Federal Home Loan Bank of Atlanta (“FHLB”); and, to a lesser extent, borrowings under unsecured overnight Federal funds lines available from correspondent banks. The principal demands for liquidity are new loans, anticipated fundings under unfunded credit commitments to customers and deposit withdrawals. Substantially all of FSC’s liquidity is obtained from

capital raises and dividends from its wholly-owned subsidiaries, LionMark Insurance Company and the Bank, which are limited by applicable law.

Management seeks to maintain a stable net liquidity position while optimizing operating results, as reflected in net interest income, the net yield on interest-earning assets and the cost of interest-bearing liabilities in particular. Our Asset Liability Management Committee (“ALCO”), which includes the CEO and senior management representatives, manages our liquidity risk. ALCO meets monthly to review the current and projected net liquidity positions and to review actions taken by management to achieve this liquidity objective. The Board of Directors also reviews performance against internal liquidity benchmarks on at least a quarterly basis. Managing the levels of total liquidity, short-term liquidity, and short-term liquidity sources continues to be an important and complex exercise because of the coordination of the projected mortgage, SBA and indirect automobile loan production and sales, loans held-for-sale balances, and individual loans and pools of loans sold anticipated to fluctuate during the year.

Our loans held for sale are considered highly liquid. The majority of commitments to purchase mortgage loans held-for-sale will be funded within one month of the loan closing. The majority of these loans are conforming residential mortgage loans sold to GNMA, Federal National Mortgage Association (“FNMA”), and Federal Home Loan Mortgage Corporation (“FHLMC”). Other categories of loans held for sale include indirect automobile loans purchased from motor vehicle dealers and the government-guaranteed portion of SBA loans.

Shareholders’ Equity

Shareholders’ equity was $388.1 million at September 30, 2017 , and $362.6 million at December 31, 2016 . The increase of $25.4 million in shareholders’ equity during the nine months ended September 30, 2017 was attributable to net income earned during the nine months of 2017 of $27.4 million , partially offset by cash dividends declared on common shares during 2017 of $9.5 million . The remainder of the increase is primarily attributable to stock issued through employee programs.

On May 5, 2017, we filed a shelf registration statement with the SEC for up to $100 million of common stock, preferred stock, warrants, or debt securities, to be issued from time to time for general corporate purposes which may include funding bank and non-bank subsidiaries, financing business expansion, or refinancing or extending the maturity of debt obligations and investments at the holding company level. The amount was available to be issued as of June 15, 2017, which was the date that the SEC issued a Notice of Effectiveness. As of September 30, 2017 , we have not issued any securities under the shelf registration statement.

Capital Ratios

FSC is regulated by the Board of Governors of the Federal Reserve Board and is subject to the securities registration and public reporting regulations of the SEC. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Georgia Department of Banking and Finance.

The Bank must comply with regulatory capital requirements established by its regulators. Failure to meet minimum regulatory capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific regulatory capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. These regulatory capital standards require us to maintain minimum ratios of “Tier 1” capital to total risk-weighted assets and total capital to risk-weighted assets of 6.00% and 8.00%, respectively. Tier 1 capital is comprised of total shareholders’ equity calculated in accordance with generally accepted accounting principles, excluding accumulated other comprehensive income, less intangible assets and disallowed portions of our loan servicing rights. Total capital is comprised of Tier 1 capital plus certain adjustments, the largest of which is our qualifying subordinated debt, as well as the allowable portion of the allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in FDIC regulations.

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 capital to quarterly average total assets of 4.00%. The Tier 1 leverage ratio does not assign risk weights to assets. The Bank is also subject to a Common Equity Tier 1 (“CET1”) capital to total risk-weighted assets ratio of 4.50%. CET1 is comprised of Tier 1 capital less amounts attributable to qualifying non-cumulative perpetual preferred stock and minority interests in consolidated subsidiaries.

Basel III

In 2004, the Basel Committee on Banking Supervision (“BCBS”) published a new capital accord (“Basel II”) to replace Basel I. Basel II provided two approaches for setting capital standards for credit risk—an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in previous risk-based capital guidelines. Basel II also set capital requirements for operational risk and refined the existing capital requirements for market risk exposures.

In December 2010, the BCBS released its final framework for strengthening international capital and liquidity regulation, now officially identified by the BCBS as “Basel III.” Basel III, when fully phased-in, requires bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The Basel III final capital framework, among other things: (i) introduces the CET1 capital measure; (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements; (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expands the scope of the adjustments as compared to existing regulations, such as deducting a much larger portion of the value of mortgage servicing rights from Tier 1 capital.

On July 2, 2013, the FRB approved the final rules implementing the BCBS's Basel III capital guidelines (“final rules”) for U.S. banking organizations. Under the final rules, minimum requirements will increase for both the quantity and quality of capital we maintain. The rules include a new CET1 capital to risk-weighted assets ratio of 4.50% and a capital conservation buffer of 2.5% of risk-weighted assets in addition to the minimum risk-based capital requirements. This capital conservation buffer began phasing in on January 1, 2016 at 0.625% of risk-weighted assets and continues to increase at the same rate each subsequent year until reaching its final level of 2.5% of risk-weighted assets on January 1, 2019. As of January 1, 2017, the capital conservation buffer was 1.25% of risk-weighted assets. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.00% to 6.00% and require a minimum leverage ratio of 4.00%. The final rules also implement strict eligibility criteria for regulatory capital instruments.

On July 9, 2013, the FDIC approved, as an interim final rule, the Basel III regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC's rule is identical in substance to the final rules issued by the FRB.

The Basel III final rules became effective for us on January 1, 2015, in which we began calculating our capital ratios in accordance with the final risk-based capital rules implementing the BSBC capital guidelines for U.S. banks. Capital ratios for FSC and the Bank are being calculated using the current phase-in applicable for 2017 . Full compliance with all requirements of the new capital guidelines will be phased in by January 1, 2018.

Prompt Corrective Action

In July 2013, the final rules implementing the BCBS's Basel III capital guidelines increased regulatory capital requirements of U.S. banking organizations in a manner that more closely reflected risk exposures, and brought the regulatory capital framework into compliance with Basel III. The final rules revised the level at which the Bank becomes subject to corrective action. The federal banking agencies have broad powers with which to require companies to take prompt corrective action to resolve problems of insured depository institutions that do not meet minimum capital requirements. The law establishes five capital categories for this purpose: (i) well-capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; and (v) critically undercapitalized. The final rules amended the thresholds in the prompt corrective action framework to reflect the higher capital ratios required.

Under the final rules, to be considered “adequately capitalized,” or “well-capitalized”, an institution generally must meet the capital measures as laid out on the table below:



	Adequately Capitalized			Well Capitalized
	(minimum)	(with buffer for 2017)	(with buffer fully phased in 2019)	(minimum)
Total risk-based capital	8.00%	9.25%	10.50%	10.00%
Tier 1 risk-based capital	6.00%	7.25%	8.50%	8.00%
CET 1 capital	4.50%	5.75%	7.00%	6.50%
Leverage ratio	4.00%	N/A	N/A	5.00%

While the prompt corrective action rules apply to banks and not bank holding companies, the FRB is authorized to take actions at the holding company level. Failure to meet applicable capital standards could subject the bank holding company or financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authorities of a capital directive to increase capital, and the termination of deposit insurance by the FDIC. FSC is not subject to the provisions of prompt corrective action.

To continue to conduct our business as currently conducted, we must maintain capital levels well above the minimum regulatory requirements. At September 30, 2017 , the Bank’s capital ratios exceeded the well capitalized and regulatory minimum ratios discussed above.

The following tables sets forth the minimum regulatory capital requirements for the Bank under FDIC regulations and the Bank’s regulatory capital ratios at September 30, 2017 , and December 31, 2016 :



Fidelity Bank	September 30, 2017				December 31, 2016
($ in thousands)	Amount		Percent		Amount		Percent
Common Equity Tier 1 Capital:
Actual	$	351,502	9.09	%	$	337,337	8.58	%
Minimum	174,011		4.50	%	176,925		4.50	%
Tier 1 Capital:
Actual	$	367,282	9.50	%	$	352,601	8.97	%
Minimum	231,968		6.00	%	235,854		6.00	%
Total Risk-Based Capital:
Actual	$	483,929	12.51	%	$	468,234	11.91	%
Minimum	309,467		8.00	%	314,515		8.00	%
Tier 1 Capital Leverage Ratio:
Actual			8.38	%			8.14	%
Minimum			4.00	%			4.00	%

The FRB, as the primary regulator of FSC, has established minimum regulatory capital requirements as a function of its oversight of bank holding companies. The following tables depict FSC’s regulatory capital ratios at September 30, 2017 , and December 31, 2016 , in relation to the minimum capital ratios established by the regulations of the FRB:



Fidelity Southern Corporation	September 30, 2017				December 31, 2016
($ in thousands)	Amount		Percent		Amount		Percent
Common Equity Tier 1 Capital:
Actual	$	341,025	8.81	%	$	328,193	8.35	%
Minimum	174,190		4.50	%	176,870		4.50	%
Tier 1 Capital:
Actual	$	385,574	9.96	%	$	371,841	9.46	%
Minimum	232,273		6.00	%	235,840		6.00	%
Total Risk-Based Capital:
Actual	$	490,828	12.68	%	$	476,081	12.11	%
Minimum	309,671		8.00	%	314,504		8.00	%
Tier 1 Capital Leverage Ratio:
Actual			8.81	%			8.58	%
Minimum			4.00	%			4.00	%

Dividends

On October 20, 2017 , we declared a cash dividend of $0.12 per share, payable on November 14, 2017 , to common shareholders of record as of November 1, 2017 .

Future dividends require a quarterly review of current and projected earnings for the remainder of 2017 in relation to capital requirements prior to the determination of the dividend, and be subject to regulatory restrictions under applicable law. The Board of Directors for both the Bank and the Company will review on a quarterly basis whether to declare and pay dividends for the remainder of the fiscal year 2017 , with the declared and paid dividend consistent with current regulatory limitations, earnings, capital requirements, and forecasts of future earnings.

Market Risk

Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in market rates or prices. Our primary market risk exposure is credit risk and, to a lesser extent, interest rate risk and liquidity risk. We have little or no risk related to trading accounts, commodities, or foreign exchange. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets and, in particular, the regional economy of the South.

Interest rate risk, which encompasses price risk, is the exposure of a banking organization’s financial condition and earnings ability to withstand adverse movements in interest rates. Price and interest rate risks arise from the financial instruments and positions we hold including loans, mortgage servicing rights, investment securities, deposits, borrowings, unfunded postretirement benefit obligations and derivative financial instruments. Accepting this risk can be an important source of profitability and shareholder value; however, excessive levels of interest rate risk can pose a significant threat to assets, earnings, and capital. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to our success.

ALCO, which includes senior management representatives, monitors and considers methods of managing the rate and sensitivity repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in portfolio values and net interest income with changes in interest rates. The primary purposes of ALCO are to manage interest rate risk consistent with earnings and liquidity, to effectively invest our capital, and to preserve the value created by our core business operations. Our exposure to interest rate risk compared to established tolerances is reviewed on at least a quarterly basis by our Board of Directors.

Evaluating our exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest rate risk and the organization’s quantitative levels of exposure. When assessing the interest rate risk management process, we seek to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires us to assess the existing and potential future effects of changes in interest rates on our consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality.

Interest Rate Sensitivity

Economic value of equity (“EVE”) sensitivity analysis measures the estimated changes in the net present value of our cash flows from assets, liabilities and off-balance sheet items to changes in market interest rates. This analysis assesses the risk of balance sheet value decline in the event of a sudden and sustained 100, 200, 300, and 400 basis point increase or decrease in market interest rates. In addition, management reviews the impact of various yield curve scenarios on earnings and cash flows.

The most recent rate shock analysis indicated that the effects of an immediate and sustained change in rates would fall within policy parameters and approved tolerances for net interest income. If large downward shocks did occur from today's already low rates, increased modeled impairment may breach net income and equity at risk internal benchmarks.

Rate shock analysis provides only a limited, point in time view of interest rate sensitivity. The actual impact of interest rate changes upon earnings and net present value may differ from that implied by any static rate shock. In addition, net interest income and net present value under various future interest rate scenarios are affected by multiple other factors not embodied in a static rate shock, including competition, changes in the shape of the Treasury yield curve, divergent movement among various interest rate indices, and the speed with which interest rates change. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers, and to reduce our own exposure to fluctuations in interest rates. These financial instruments, which include commitments to extend credit and letters of credit, involve to varying degrees elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The contract or notional amounts of these instruments reflect the extent of involvement we have in particular classes of financial instruments.

Our exposure to credit loss, in the event of nonperformance by customers for commitments to extend credit and letters of credit, is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for recorded loans. Loan commitments and other off-balance sheet exposures are evaluated by the Credit Review department quarterly and reserves are provided for risk as deemed appropriate.

Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the agreement. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Thus, we will deny funding a commitment if the borrower’s financial condition deteriorates during the commitment period, such that the customer no longer meets the pre-established conditions of lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby and import letters of credit are commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans or lines of credit to customers. We hold collateral supporting those commitments as deemed necessary.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Market Risk” and “Interest Rate Sensitivity” contained in Item 2 of Part I of this report for quantitative and qualitative discussion about our market risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company's management supervised and participated

Table of Contents

in an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on, and as of the date of, that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of September 30, 2017 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

While the Company attempts to identify, manage, and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 , describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our cash flows, results of operations, and financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 .

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



	(a)	(b)		(c)	(d)
Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
July 2017	—	$	—	—	$	10,000,000
August 2017	—	—		—	10,000,000
September 2017	—	—		—	10,000,000
Total	—	$	—	—	$	10,000,000

The repurchase plan announced April 3, 2014, authorizing the repurchase of up to $10.0 million of our outstanding common stock, has no expiration date for the authorized share repurchases under such plan.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

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Item 6. Exhibits

The following exhibits are filed or furnished as part of this Report:




		Incorporated by Reference
Exhibit Number	Description of Document	Form	Filing Date	Exhibit Number	SEC File No.
3(a)	Amended and Restated Articles of Incorporation of Fidelity Southern Corporation, as amended effective December 16, 2008	10-K	03/17/2009	3(a)	001-34981
3(b)	Articles of Amendment to the Articles of Incorporation of Fidelity Southern Corporation	8-K	11/23/2010	3.1	001-34981
3(c)	By-Laws of Fidelity Southern Corporation, as amended	10-Q	11/08/2007	3(b)	001-34981
3(d)	Amendment to By-Laws of Fidelity Southern Corporation	8-K	11/23/2010	3.2	001-34981
4(a)	See Exhibits 3(a), 3(b), and 3(c) for provisions of the Amended and Restated Articles of Incorporation, as amended, and By-laws of Fidelity Southern Corporation, which define the rights of the shareholders.	See 3(a), 3.1, and 3(b) above			001-34981
4(b)	Form of Global Note representing the Fixed/Floating Rate Subordinated Notes due 2030 of Fidelity Bank	8-K	06/03/2015	4.1	001-34981
31.1 ⁺	Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 ⁺	Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 ^#	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 ^#	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Financial Statements submitted in XBRL format

+ Filed herewith
# Furnished 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.



		FIDELITY SOUTHERN CORPORATION
			(Registrant)
Date:	November 9, 2017	BY:	/s/ JAMES B. MILLER, JR.
			James B. Miller, Jr.
			Chief Executive Officer
Date:	November 9, 2017	BY:	/s/ CHARLES D. CHRISTY
			Charles D. Christy
			Chief Financial Officer

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