UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2018

Commission file number: 001-36878

NATIONAL COMMERCE CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(205) 313-8100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☒

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $693,191,145

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

Class of Common Stock		Outstanding at March 1, 2019
Common stock, par value $0.01 per share		20,813,165 shares

DOCUMENTS INCORPORATED BY REFERENCE: None

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NATIONAL COMMERCE CORPORATION

FORM 10-K

INDEX

	General	1

	Forward – Looking Statements	1

PART I.

Item 1.	Business	2

Item 1A.	Risk Factors	13

Item 1B.	Unresolved Staff Comments	34

Item 2.	Properties	34

Item 3.	Legal Proceedings	35

Item 4.	Mine Safety Disclosure	35

PART II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36

Item 6.	Selected Financial Data	38

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 8.	Financial Statements and Supplementary Data	72

Item 9.	Changes in and Disagreements with Accounting and Financial Disclosures	121

Item 9A.	Controls and Procedures	121

Item 9B.	Other Information	121

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance	122

Item 11.	Executive Compensation	127

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	145

Item 13.	Certain Relationships and Related Transactions and Director Independence	148

Item 14.	Principal Accounting Fees and Services	148

Part IV.

Item 15.	Exhibits and Financial Statement Schedules	151

Signatures		159

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GENERAL

Unless the context otherwise indicates or requires, references in this Annual Report on Form 10-K to “NCC,” the “Company,” “we,” “us” and “our” refer to National Commerce Corporation, a Delaware corporation, and our consolidated affiliates as of December 31, 2018.

On October 28, 2014, the Company’s Registration Statement on Form S-4 (File No. 333-198219) became effective, and the Company became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

FORWARD-LOOKING STATEMENTS

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

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

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PART I

Item 1.

Business.

Overview

We are a bank holding company headquartered in Birmingham, Alabama, that has elected to become a “financial holding company” under the Bank Holding Company Act of 1956, as amended (the “BHCA”). We engage in the business of banking through our wholly-owned banking subsidiary, National Bank of Commerce, which we may refer to as “the Bank” or “NBC.”

Through the Bank, we provide a broad array of financial services to businesses, business owners, and professionals. We operate seven full-service banking offices in Alabama, located in Birmingham, Huntsville, Auburn-Opelika, and Baldwin County, twenty‐four full‐service banking offices in central and northeast Florida (including under the trade names United Legacy Bank, Reunion Bank of Florida, Patriot Bank, FirstAtlantic Bank and Premier Community Bank of Florida) and five full‐service banking offices in the Atlanta, Georgia metro area (including under the trade names Private Bank of Buckhead, Private Bank of Decatur, PrivatePlus Mortgage and Landmark Bank).

We engage in the business of factoring commercial receivables through the Bank’s ownership of a 70% equity interest in CBI Holding Company, LLC (“CBI”). CBI owns Corporate Billing, LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama, that provides factoring, invoicing, collection, and accounts receivable management services to transportation companies and automotive parts and service providers throughout the United States and parts of Canada.

In August 2017, we entered into a definitive agreement to acquire FirstAtlantic Financial Holdings, Inc. (“FirstAtlantic”), the holding company of FirstAtlantic Bank, headquartered in Jacksonville, Florida. As a result of the FirstAtlantic transaction, which became effective on January 1, 2018, we acquired eight full-service banking offices in the Jacksonville, Florida metro area.

On July 1, 2018, the Company closed the previously-announced merger of Premier Community Bank of Florida (“Premier”) with and into NBC. As a result of the Premier transaction, we acquired four full-service banking offices in Florida. NBC continues to operate the former offices of Premier under the trade name “Premier Community Bank of Florida, a division of National Bank of Commerce.”

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

As of December 31, 2018, we had total assets of approximately $4.21 billion, total loans net of unearned income of approximately $3.32 billion, total deposits of approximately $3.43 billion, and total shareholders’ equity of approximately $697.1 million.

Pending Merger

On November 23, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CenterState Bank Corporation, a Florida corporation (“CenterState”), whereby the Company will be merged with and into CenterState (the “Merger”). Pursuant to and simultaneously with entering into the Merger Agreement, NBC and CenterState’s wholly owned subsidiary bank, CenterState Bank, N.A. (“CenterState Bank”), entered into a Plan of Merger and Merger Agreement (the “Bank Plan of Merger”), whereby NBC will be merged with and into CenterState Bank immediately following the merger of NCC with and into CenterState (the “Bank Merger”). CenterState’s and CenterState Bank’s existing charters and bylaws will remain in place following the Merger and the Bank Merger.

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Pursuant to the Merger Agreement, each outstanding share of NCC common stock issued and outstanding immediately prior to the effective time of the Merger will be entitled to receive 1.65 (the “Exchange Ratio”) shares of CenterState common stock, provided that cash will be paid in lieu of issuance of any fractional shares of CenterState common stock. Each outstanding share of CenterState common stock shall remain outstanding and unaffected by the Merger. Each option and warrant to purchase shares of NCC common stock, to the extent that such option or warrant is outstanding and unexercised as of the effective time of the Merger, will be assumed by CenterState and converted into an option or warrant, as the case may be, to purchase a number of shares of CenterState common stock equal to the product obtained by multiplying the Exchange Ratio by that number of shares of NCC common stock that such option or warrant entitles the holder thereof to purchase (rounded to the nearest whole share), and at an exercise price equal to the quotient obtained by dividing the exercise price per share of the option or warrant by the Exchange Ratio (rounded to the nearest cent).

CenterState has filed a registration statement on Form S-4 with the SEC to register the shares of CenterState’s common stock that will be issued to NCC’s stockholders in connection with the proposed merger. The registration statement includes a joint proxy statement of CenterState and NCC and a prospectus of CenterState. A definitive joint proxy statement-prospectus has been provided to the stockholders of each of CenterState and NCC in connection with the proposed merger. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE DEFINITIVE JOINT PROXY STATEMENT-PROSPECTUS (AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED MERGER OR INCORPORATED BY REFERENCE INTO THE JOINT PROXY STATEMENT-PROSPECTUS) BECAUSE SUCH DOCUMENTS CONTAIN IMPORTANT INFORMATION REGARDING THE PROPOSED MERGER. Investors and security holders may obtain free copies of these documents and other documents filed with the SEC on its website at www.sec.gov. Investors and security holders may also obtain free copies of the documents filed with the SEC by CenterState on its website at www.centerstatebanks.com and by NCC on its website at www.nationalbankofcommerce.com.

This report does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. Before making any voting or investment decision, investors and security holders of CenterState and NCC are urged to read carefully the entire registration statement and definitive joint proxy statement-prospectus, including any amendments thereto, because these documents contain important information about the proposed merger. Free copies of these documents may be obtained as described above.

CenterState, NCC and certain of their directors and executive officers may be deemed participants in the solicitation of proxies from the stockholders of each of CenterState and NCC in connection with the proposed merger. Information regarding the directors and executive officers of CenterState and NCC and other persons who may be deemed participants in the solicitation of the stockholders of CenterState or of NCC in connection with the proposed merger is included in the definitive joint proxy statement-prospectus for each of CenterState’s and NCC’s special meeting of stockholders, which has been filed by CenterState and NCC with the SEC. Information about the directors and officers of CenterState and their ownership of CenterState common stock can also be found in CenterState’s definitive proxy statement in connection with its 2018 annual meeting of stockholders, as filed with the SEC on March 12, 2018, and other documents subsequently filed by CenterState with the SEC. Information about the directors and officers of NCC and their ownership of NCC common stock can also be found in this Annual Report on Form 10-K, and other documents subsequently filed by NCC with the SEC. Additional information regarding the interests of such participants is included in the definitive joint proxy statement-prospectus and other relevant documents regarding the proposed merger filed with the SEC.

Stockholder Complaints

After the mailing of the joint proxy statement-prospectus on February 4, 2019 in connection with the Merger, two lawsuits by purported NCC stockholders (Paul Parshall v. National Commerce Corporation, et al., No. 1:19-cv-00355-UNA (D. Del.), and Stephen Bushansky v. National Commerce Corporation, et al., No. 1:19-cv-00379 (D. Del.)) were filed in the United States District Court, District of Delaware against NCC and its directors, alleging inadequate disclosures in the joint proxy statement-prospectus and associated violations of the Securities Exchange Act of 1934. These complaints generally seek, among other things, an injunction enjoining the stockholder vote and the closing of the proposed transaction, rescission of the Merger if it closes, or an award of rescissory damages, an order directing the NCC board of directors to disseminate a new joint proxy statement-prospectus, a declaration that the defendants violated the securities laws and an award of the plaintiffs’ costs of the actions including a reasonable allowance for the plaintiffs’ attorneys’ and experts’ fees. NCC and CenterState believe that the claims in these complaints are without merit and intend to defend these actions vigorously.

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Our Products and Services

Through the Bank, we engage in the business of banking, which consists primarily of accepting deposits from the public and making loans and other investments. Through Corporate Billing, we provide factoring, invoicing, collection, and accounts receivable management services to transportation companies and automotive parts and service providers throughout the United States and parts of Canada. Our principal sources of funds for loans and investments at the Bank are demand, time, savings, and other deposits (including negotiable orders of withdrawal, or NOW accounts) and the amortization and prepayments of loans and investments. Our principal sources of income are interest and fees collected on loans, interest collected on other investments, fees earned from the origination and sale of residential mortgage loans, and service charges, as well as income from factored receivables through Corporate Billing. Our principal expenses are interest paid on savings and other deposits (including NOW accounts), interest paid on other borrowings, employee compensation, office expenses, and other overhead expenses.

Deposits

Our principal sources of funds are core deposits, including demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit. Transaction accounts include checking and NOW accounts, which customers use for cash management and which provide a source of fee income for us, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable and low-cost source of funding. Our largest source of funds is money market accounts. Certificates of deposit in excess of $100,000 are held primarily by customers in our market areas. We utilize brokered and internet certificates of deposit to supplement our market funding sources when funding needs or pricing warrant the use of wholesale funding.

Deposit rates are reviewed weekly by senior management. Management believes that the rates that we offer are competitive with those offered by other institutions in our market areas. We also focus on customer service to attract and retain deposits.

Lending

We offer a range of lending services, including real estate, consumer and commercial loans, to individuals, small businesses, and other organizations located in or conducting a substantial portion of their business in our market areas. Our total loans, net of unearned income, at December 31, 2018, were approximately $3.32 billion, or approximately 89.0% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity and amount of the loan and are further subject to competitive pressures, money market rates, availability of funds, and government regulations.

Real Estate Loans. Loans secured by real estate are the primary component of our loan portfolio, constituting approximately $2.73 billion, or 82.1% of total loans, net of unearned income, at December 31, 2018. We originate consumer and commercial loans for the purpose of acquiring real estate that are secured by such real estate. We also often take real estate as an additional source of collateral to secure commercial and industrial loans. Such loans are classified as real estate loans rather than commercial and industrial loans if the real estate collateral is considered significant as a secondary source of repayment for the loan. Loans are typically made on a recourse basis and are supported by financial statements and a review of the repayment ability of the borrower(s) and/or guarantor(s). Origination fees are charged for many loans secured by real estate.

Our real estate lending activities are generally characterized by the following types of loans and loan terms.

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Commercial real estate term loans accrue at either variable or fixed rates. The variable rates approximate current market rates. Amortizations are typically no more than 25 years.

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The primary type of residential mortgage loan is the single-family first mortgage, typically structured with fixed or adjustable interest rates, based on market conditions. These loans usually have fixed rates for up to five years, with maturities of 15 to 30 years. We also originate home equity lines of credit secured by residential property. These loans are typically made on a variable-rate basis with maturities up to 10 years.

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Construction and land development loans are typically made on a variable-rate basis. Loan terms usually do not exceed 24 months.

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We originate residential loans for sale into the secondary market. These loans are made in accordance with underwriting standards set by the purchaser of the loan, normally as to loan-to-value ratio, interest rate, borrower qualification, and documentation. These loans are originated on both a “best efforts” and a “mandatory delivery” basis. We typically collect from the borrower or purchaser a combination of the origination fee, discount points, and/or a service release fee.

Commercial and Industrial Loans. We make loans for commercial purposes in various lines of business. These loans are typically made on terms up to five years at fixed or variable rates. The loans are secured by various types of collateral, including accounts receivable, inventory, or, in the case of equipment loans, the financed equipment. We attempt to reduce our credit risk on commercial loans by underwriting the loan based on the borrower’s cash flow and ability to service the debt from earnings, and by limiting the loan-to-value ratio. Historically, we have typically loaned up to 80% on loans secured by accounts receivable, up to 50% on loans secured by inventory (which are usually also secured by accounts receivable), and up to 100% on loans secured by equipment. We also make some unsecured commercial loans. Commercial and industrial loans constituted $408.2 million, or 12.3% of our loan portfolio, at December 31, 2018. Interest rates are negotiable and are based on the borrower’s financial condition, credit history, management stability and collateral.

Consumer Loans. Consumer lending includes installment lending to individuals in our market areas and generally consists of loans to purchase automobiles and other consumer durable goods. Consumer loans constituted $31.2 million, or 0.9% of our loan portfolio, at December 31, 2018. Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history and collateral. Consumer rates are both variable and fixed, with terms negotiable. Terms generally range from one to five years, depending on the nature and condition of the collateral. Periodic amortization, generally monthly, is typically required.

Loan Approval. Certain credit risks are inherent in making loans. These include repayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectability.

We attempt to minimize loan losses through various means and the use of standardized underwriting criteria. We have established a standardized loan policy that may be modified based on local market conditions. In particular, on larger credits, we generally rely on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, we attempt to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.

We address repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer lending limits, a loan committee approval process for larger loans, documentation examination, and follow-up procedures for loan review and any exceptions to credit policies. The point in the loan approval process at which a loan is approved depends on the size of the borrower’s credit relationship with the bank and the loan authority of the lending officer to whom the loan request is made. Each of our lending officers has the authority to approve loans up to an approved loan authority amount, as determined by the Bank’s board of directors. Loans in excess of the highest loan authority amount of a particular lending officer must be approved by either the Bank’s loan committee or another officer with sufficient loan authority to approve the request.

Risk Ratings. Loan officers are directly responsible for monitoring the risk in their respective portfolios. On commercial loans, risk grades are assigned by the loan officer for the probability of default following an analysis of borrower characteristics and external economic factors. However, on consumer loans, risk grades are primarily determined by a borrower’s credit score, personal debt ratio, repayment history, and liquidity.

Electronic Banking

We offer electronic banking services to our customers, including commercial and retail online banking, automated bill payment, mobile banking, and remote deposit capture for certain customers.

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Factoring

Since August 29, 2014, NBC has owned a 70% interest in CBI, the holding company of Corporate Billing. Corporate Billing is a transaction-based finance company engaged in the purchase of accounts receivable at a discount from businesses throughout the United States and parts of Canada, a business traditionally known as “factoring.” In a typical factoring transaction, Corporate Billing purchases all of the rights associated with the account receivable and assumes the billing and collection responsibilities. Corporate Billing may purchase a receivable with or without recourse. If an account is purchased without recourse, Corporate Billing bears the loss if the account debtor does not pay the invoice amount. If the receivable is purchased with recourse, however, Corporate Billing has the right to collect the unpaid invoice amount from the seller of the receivable if the account debtor does not pay. Corporate Billing engages in both recourse and non-recourse purchases, with its recourse operations focused primarily in the transportation industry, and its non-recourse operations focused primarily in the automotive dealer and distributor industries. As an operating subsidiary of NBC, Corporate Billing is regulated by the Office of the Comptroller of the Currency (the “OCC”).

Market Areas

We conduct our banking operations through the Bank’s seven full-service banking offices in Alabama (in Birmingham, Huntsville, Auburn-Opelika, and Baldwin County), twenty-four full-service banking offices in central and northeast Florida (including in the Bradenton, Orlando, Tampa and Jacksonville, Florida metro areas) and five full-service banking offices and a loan production office in the Atlanta, Georgia metro area. In addition to the “National Bank of Commerce” name, we also use the trade names “United Legacy Bank,” “Reunion Bank of Florida,” “Patriot Bank,” “Premier Community Bank of Florida” and “FirstAtlantic Bank” for certain of our Florida offices and “Private Bank of Buckhead,” “Private Bank of Decatur,” “Private Plus Mortgage” and “First Landmark Bank” for our operations in Georgia. We conduct our factoring business through Corporate Billing’s office in Decatur, Alabama, with clients located throughout the United States and parts of Canada. Technology allows us to service a national client base in our factoring business, with sales representatives traveling to meet existing and potential clients in their places of business.

Competition

The financial services industry is highly competitive. We compete for loans, deposits and financial services in all of our principal markets. We compete directly with other bank and non-bank institutions located within our markets, internet-based banks, out-of-market banks, and bank holding companies that advertise in or otherwise serve our markets, along with money market and mutual funds, brokerage houses, mortgage companies, and insurance companies or other commercial entities that offer financial products and services. Competition involves efforts to retain current customers, obtain new loans and deposits, increase the scope and type of services that we provide, and offer competitive interest rates paid on deposits and charged on loans. Many of our competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence, more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives, and lower origination and operating costs. Some of our competitors have been in business for a long time and have an established customer base and name recognition. We believe that our competitive pricing, personalized service, and community involvement enable us to effectively compete in the communities in which we operate.

Employees

As of December 31, 2018, we had approximately 632 full-time and full-time equivalent employees. None of these employees is party to a collective bargaining agreement.

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SUPERVISION AND REGULATION

General

We are extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage, and fiduciary activities. They also impose capital adequacy requirements and conditions on a bank holding company’s ability to repurchase stock or to receive dividends from its subsidiary banks. NCC and its non-bank subsidiary, National Commerce Risk Management, Inc., are subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and NBC and its operating subsidiary, CBI, are subject to comprehensive examination and supervision by the OCC. These regulatory agencies generally have broad discretion to impose restrictions and limitations on our operations. This supervisory framework could materially impact the conduct and profitability of our activities.

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of such provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact that such changes may have on us, are difficult to ascertain. A change in applicable laws or regulations, or in the manner in which such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations, and earnings.

Regulation of NCC

NCC is a registered bank holding company that has elected to become a financial holding company under the BHCA and is subject to the examination authority and the regulatory and periodic reporting requirements of the Federal Reserve. Under the BHCA, bank holding companies and their non-bank subsidiaries generally may engage in activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident thereto, and may, in some cases and subject to certain restrictions, invest in companies not engaged in activities closely related to banking. As a financial holding company, we are permitted to (i) engage in other activities that the Federal Reserve determines to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally, and (ii) acquire an equity stake in companies engaged in such activities. We may not, however, directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares, or substantially all of the assets, of a bank holding company or a bank without the prior approval of the Federal Reserve. In order to maintain our status as a financial holding company, we must remain “well capitalized” and “well managed” under applicable regulations. Failure to meet one or more of the requirements would mean, depending on the requirements not met, that we could not undertake new activities, make acquisitions other than those permitted generally for bank holding companies, or continue certain activities.

Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations, require approval from the Federal Reserve before any person or company may acquire “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. A rebuttable presumption arises if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either: (i) the bank holding company has a registered class of securities under Section 12 of the Securities Act or (ii) no other person owns a greater percentage of that class of voting securities immediately after the transaction.

There are a number of restrictions imposed on NCC by law and regulatory policy that are designed to minimize potential loss to depositors and to the Deposit Insurance Fund maintained by the Federal Deposit Insurance Corporation (the “FDIC”) in the event that a subsidiary depository institution should become insolvent. For example, federal law requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances in which it might not otherwise do so. The Federal Reserve also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Any capital loan by a bank holding company to a subsidiary depository institution is subordinate in right of payment to deposits and certain other indebtedness of the institution. In addition, in the event of the holding company’s bankruptcy, any commitment made by the bank holding company to a federal banking regulatory agency to maintain the capital of its subsidiary depository institution(s) will be assumed by the bankruptcy trustee and entitled to a priority of payment.

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The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the institution’s holding company, with respect to any extensions of credit they have made to such insured depository institution.

Regulation of NBC

NBC’s operations and investments are subject to the supervision, examination and reporting requirements of the National Bank Act, the regulations of the OCC and other federal banking statutes and regulations, including with respect to the level of reserves that NBC must maintain against deposits, restrictions on the types, amount, and terms and conditions of loans that it may originate and limits on the types of other activities in which it may engage and the investments that it may make. The OCC also has the power to prevent unsafe or unsound banking practices or other violations of law. Because NBC’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations, and the FDIC has backup examination authority and some enforcement powers over NBC. NBC is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

Transactions with Affiliates

We are subject to federal laws, such as Sections 23A and 23B of the Federal Reserve Act, that limit the size and number of the transactions that depository institutions may engage in with their affiliates. Under these provisions, transactions (such as loans or investments) by a bank with non-bank affiliates are generally limited to 10% of the bank’s capital and surplus for all covered transactions with any one affiliate and 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of credit to affiliates, with limited exceptions, must be secured by eligible collateral in specified amounts. Banks are also prohibited from purchasing any “low quality” assets from an affiliate. The Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposed additional requirements on transactions with affiliates, by, among other things, expanding the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

We are also subject to restrictions on extensions of credit to our executive officers, directors, principal stockholders and their related interests under Sections 22(g) and 22(h) of the Federal Reserve Act, as implemented by Regulation O of the Federal Reserve. These extensions of credit must be made on substantially the same terms, including with respect to interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and they must not involve more than the normal risk of repayment or present other unfavorable features. Furthermore, we are prohibited from engaging in asset purchase or sale transactions with our officers, directors or principal stockholders unless the transaction is on market terms and, if the transaction represents more than 10% of the capital and surplus of the Bank, a majority of the Bank’s disinterested directors has approved the transaction.

Monetary Policy

Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve have a significant effect on the operating results, lending practices, investments and deposits of commercial banks through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on bank borrowings and the reserve requirements against bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

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Deposit Insurance

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund maintained by the FDIC. As a result, the Bank is required to pay periodic assessments to maintain insurance coverage for its deposits. Under the FDIC’s assessment system for banks with less than $10 billion in assets, the assessment rate is determined based on a number of factors, including the Bank’s CAMELS (supervisory) rating, leverage ratio, net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year organic asset growth and a loan mix index. The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expense, results of operations, and cash flows. Management cannot predict what insurance assessment rates will be in the future. Furthermore, deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Dividend Restrictions

NCC is a legal entity separate and distinct from NBC. NCC’s ability to pay dividends and make other distributions depends in part on the receipt of dividends from NBC and is limited by federal and state law. The specific limits depend on a number of factors, including NBC’s recent earnings, recent dividends, level of capital and regulatory status. The regulators are authorized, and under certain circumstances are required, to determine that the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment. For example, federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized.

A national bank generally may not withdraw, either in the form of a dividend or otherwise, any portion of its permanent capital and may not declare a dividend in excess of its retained net profits. Further, dividends that may be paid by a national bank without the express approval of the OCC are limited to an amount equal to the bank’s retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the OCC, consist of net income, less dividends declared during the period. Dividend payments by NBC in the future will require the generation of net income and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines.

The ability of a bank holding company to pay dividends and make distributions can also be limited by other laws or regulations. The Federal Reserve, which has authority to prohibit a bank holding company from paying dividends or making other distributions, has issued a Supervisory Letter stating that a bank holding company should not pay cash dividends unless, among other things, (i) its net income available to common stockholders for the past four quarters, net of dividends paid during that period, is sufficient to fully fund the dividends, (ii) the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition and (iii) the dividend will not cause the company to fail to meet, or be in danger of failing to meet, its minimum regulatory capital adequacy ratios. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken its financial health, such as by borrowing. Federal regulations relating to capital adequacy create additional restrictions on the ability of banking institutions to pay dividends.

Capital Adequacy

In July 2013, the federal banking regulatory agencies adopted regulations to implement the framework developed by the Basel Committee on Banking Supervision for strengthening international capital and liquidity, known as “Basel III” (the “Basel III Rule”). The Basel III Rule provides risk-based capital guidelines designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposures, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk-weights. The net amount of assets remaining after applying the risk-weights to the gross asset values comprises the institution’s total risk-weighted assets. An institution’s total risk-weighted assets are used to calculate its regulatory capital ratios. The Basel III Rule establishes minimum capital and leverage ratios that supervised financial institutions are required to maintain, while also providing countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III Rule, banks must maintain a specified capital conservation buffer above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses.

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In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules, NCC and the Bank must also maintain the required Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of Common Equity Tier 1 capital to risk-weighted assets, and it effectively increases the required minimum risk-based capital ratios. The Capital Conservation Buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the Capital Conservation Buffer is now at its fully phased-in level of 2.5%. Throughout 2018, the required Capital Conservation Buffer was 1.875%. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the Capital Conservation Buffer. In April 2018, the Federal Reserve issued a proposal that would, among other things, replace the Capital Conservation Buffer with stress buffer requirements for certain large bank holding companies, including NCC.

As an additional means of identifying problems in the financial management of depository institutions, the federal banking regulatory agencies have established certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.

Prompt Corrective Action

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” that federal banking agencies are required to take, and certain actions that they have discretion to take, based on the capital category into which a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized. Each institution is assigned to one of five categories based on its capital ratios: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Institutions categorized as “undercapitalized” or worse become subject to increasing levels of regulatory oversight and restrictions, which may include, among other things, limitations on growth and activities and payment of dividends.

Community Reinvestment Act

The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities that they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of the institution’s branch offices). Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” An institution’s record in meeting the requirements of the CRA is made publicly available and is taken into consideration in connection with any applications it files with federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations or expansions into non-banking activities. NBC received a “satisfactory” rating in its most recent CRA evaluation.

Anti-Money Laundering Laws

Under various federal laws, including the Currency and Foreign Transactions Reporting Act (also known as the “Bank Secrecy Act of 1970”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence and “know your customer” requirements, in their dealings with foreign financial institutions and foreign customers. These laws also mandate that financial institutions establish anti-money laundering programs meeting certain standards and require the federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing applications for bank merger and acquisition activities.

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Privacy of Customer Information

The Financial Services Modernization Act of 1999 (also known as the “Gramm-Leach-Bliley Act” or “GLBA”) and the implementing regulations issued by federal banking regulatory agencies require financial institutions (including banks, insurance agencies and broker/dealers) to adopt policies and procedures regarding the disclosure of nonpublic personal information about their customers to non-affiliated third parties. In general, financial institutions are required to explain to customers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. Specifically, the GLBA established certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

Regulation of Lending Practices

Our lending practices are subject to a number of federal and state laws, as supplemented by the rules and regulations of the various agencies charged with the responsibility of implementing these laws. These include, among others, the following:

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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities that it serves;

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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other specified factors in extending credit;

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Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

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Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;

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Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties;

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Military Lending Act, governing the extension of consumer credit to members of the United States armed forces on active duty and their dependents;

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Servicemembers Civil Relief Act, which restricts or limits civil actions with respect to certain financial transactions against military servicemembers who are called to active duty; and

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rules and regulations established by the National Flood Insurance Program.

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In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions, non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer financial laws. Although the CFPB has the power to interpret, administer and enforce federal consumer financial laws, the Dodd-Frank Act provides that the federal banking regulatory agencies continue to have examination and enforcement powers over the financial institutions that they supervise relating to the matters within the jurisdiction of the CFPB if the supervised institutions have less than $10 billion in assets. The CFPB has adopted a number of rules that impact our lending practices, including, among other things, (i) requiring financial institutions to make a “reasonable and good faith determination” that a consumer has a “reasonable ability” to repay a residential mortgage loan before making such a loan, (ii) requiring sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities (and generally prohibiting sponsors from transferring or hedging that credit risk), and (iii) imposing a number of new and enhanced requirements on the mortgage servicing industry, including rules regarding communications with borrowers, maintenance of customer account records, procedures for responding to written borrower requests and complaints of errors, servicing delinquent loans, and conducting foreclosure proceedings, among other measures.

Regulation of Deposit Operations

Our deposit operations are subject to federal laws applicable to depository accounts, including, among others, the following:

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Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

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Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

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rules and regulations of the various agencies charged with the responsibility of implementing these laws.

Federal Home Loan Bank Membership

NBC is a member of the Federal Home Loan Bank of Atlanta (the “FHLBA”). Each member of the FHLBA is required to maintain a minimum investment in the Class B stock of the FHLBA. The Board of Directors of the FHLBA can increase the minimum investment requirements if it concludes that additional capital is required to allow the FHLBA to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation on the part of NBC to increase the level of its investment in the FHLBA depends entirely on the occurrence of a future event, we are currently unable to determine the extent of future required potential payments to the FHLBA. Additionally, in the event that a member financial institution fails, the right of the FHLBA to seek repayment of funds loaned to that institution will take priority over the rights of all other creditors.

Future Legislation and Regulation

We are heavily regulated by regulatory agencies at the federal and state levels. In recent years, regulators have increased their focus on the regulation of the financial services industry, leading in many cases to greater uncertainty and compliance costs for regulated entities. For example, the provisions of the Dodd-Frank Act have required us to make material expenditures, particularly in the form of personnel training costs and additional compliance expenses. Furthermore, proposals that could substantially intensify the regulation of the financial services industry have been and may continue to be introduced in the United States Congress, in state legislatures, and by applicable regulatory authorities. These proposals may change banking statutes and regulations and the operating environment for financial services firms in substantial and unpredictable ways. If enacted, these proposals could increase the cost of doing business, limit permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of these proposals will be enacted and, if enacted, the effect that these proposals would have on our business, consolidated results of operations, financial condition, or cash flows.

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Website Information

The Bank maintains a website at www.nationalbankofcommerce.com. The Company does not maintain a separate website at this time; however, certain corporate governance information, SEC filings and other information of potential interest to our stockholders are available free of charge through the “Investor Relations” page of the Bank’s website. This includes our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We make this information available on our website as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. Information on, or accessible through, the Bank’s website is not part of or incorporated into this Annual Report on Form 10-K. We have included the website address only as an inactive textual reference and do not intend for it to be an active link to the website. We will provide paper copies of our periodic and current reports to stockholders free of charge upon written request to: National Commerce Corporation, Attention: Corporate Secretary, 600 Luckie Drive, Suite 350, Birmingham, Alabama 35223.

Item 1A.

Risk Factors.

Making or continuing an investment in our common stock involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company. Additional risks and uncertainties also could adversely affect our business and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of your common stock could decline and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes a forward-looking statement, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.

Risks Relating to the Merger

NCC faces litigation risks in connection with the Merger.

As is common in public company mergers and acquisitions, NCC faces a risk of potential lawsuits in connection with the Merger. Such potential lawsuits could prevent or delay completion of the Merger and result in substantial costs to NCC, including any costs associated with indemnification obligations of NCC. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is consummated may adversely affect the continuing corporation’s business, financial condition, results of operations, cash flows and market price.

Failure to complete the Merger could negatively impact NCC.

If the Merger is not completed, the ongoing business of NCC may be adversely affected, and NCC will be subject to several risks, including the following:

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NCC may be required, under certain circumstances, to pay CenterState a termination fee of $31.8 million under the Merger Agreement;

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NCC will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees;

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under the Merger Agreement, NCC is subject to certain restrictions on the conduct of the Company’s business prior to completing the Merger, which may adversely affect the Company’s ability to execute certain of its business strategies; and

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matters relating to the Merger may require substantial commitments of time and resources by NCC management, which could otherwise have been devoted to other opportunities that may have been beneficial to NCC as an independent company. For example, NCC’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger.

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In addition, if the Merger is not completed, NCC may experience negative reactions from the financial markets and from its customers and employees. NCC also could be subject to litigation related to any failure to complete the Merger or to proceedings commenced against NCC to perform its obligations under the Merger Agreement. If the Merger is not completed, NCC cannot assure its stockholders that the risks described above will not materialize and will not materially affect the business, financial results and stock prices of NCC.

The termination fees and the restrictions on third party proposals set forth in the Merger Agreement may discourage others from trying to acquire NCC.

The Merger Agreement contains provisions that make it more difficult for NCC to sell its business to a party other than CenterState. Until the completion of the Merger, with some exceptions, NCC is prohibited from initiating, soliciting, inducing, knowingly encouraging, or participating in any discussion of or otherwise considering any inquiries or proposals that may lead to a proposal to acquire NCC, such as a merger or other business combination transaction, with any person other than CenterState. In addition, NCC has agreed to pay to CenterState in certain circumstances a termination fee equal to approximately $31.8 million and has agreed to submit the Merger proposal to a vote of NCC’s stockholders even if the NCC board of directors changes its recommendation regarding of the Merger proposal in a manner adverse to CenterState. These provisions could discourage a potential competing acquiror from trying to acquire NCC even though this third party might be willing to offer greater value to NCC stockholders than CenterState has offered in the Merger. Similarly, such a competing company might propose a price lower than it might otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to CenterState in certain circumstances under the Merger Agreement. The payment of any termination fee could also have a material adverse effect on NCC’s financial condition.

NCC will be subject to business uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger on employees, customers, suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of NCC, which could negatively affect CenterState’s and NCC’s combined business operations. These uncertainties may impair NCC’s ability to attract, retain and motivate key personnel, depositors and borrowers pending the consummation of the Merger, as such personnel, depositors and borrowers may experience uncertainty about their future roles following the consummation of the Merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with NCC to seek to change existing business relationships with NCC or fail to extend an existing relationship with NCC. In addition, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the Merger.

The pursuit of the Merger and the preparation for the integration may place a burden on each company’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on NCC’s business, financial condition and results of operations. Retention of certain employees by NCC also may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with CenterState after the Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with NCC, NCC’s business could be harmed. In addition, in the Merger Agreement, NCC has agreed to operate its business in the ordinary course prior to closing and is restricted from taking certain actions without CenterState’s consent or non-objection while the Merger is pending. These restrictions may, among other matters, prevent NCC from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the Merger Agreement, entering into other transactions or making other changes to NCC’s business prior to consummation of the Merger or termination of the Merger Agreement. These restrictions could have a material adverse effect on NCC’s business, financial condition and results of operations.

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Failure of the Merger to be consummated, the termination of the Merger Agreement or a significant delay in the consummation of the Merger could negatively impact NCC.

If the Merger is not consummated, the ongoing business, financial condition and results of operations of NCC may be materially adversely affected and the market price of the Company’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Merger will be consummated. If the consummation of the Merger is delayed, the business, financial condition and results of operations of NCC may be materially adversely affected. If the Merger Agreement is terminated and NCC’s board of directors seeks another merger or business combination, NCC’s stockholders cannot be certain that NCC will be able to find a party willing to engage in a transaction on similar or more attractive terms than the Merger.

Risks Relating to Our Business

Our business is concentrated in, and largely dependent on, the continued growth and welfare of the general geographic markets in which we operate.

Our commercial banking operations are concentrated in the southeastern United States, particularly in Alabama, in central and northeast Florida, and in the Atlanta, Georgia metro area. As of December 31, 2018, approximately 92.4% of our total loans were to borrowers located in Alabama, Florida and Georgia. As a result, our financial condition and results of operations and cash flows are affected by changes in the economic conditions of those states or the regions of which they are a part. Our success depends to a significant extent on the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying loans, impact our ability to attract deposits and generally affect our financial condition and results of operations. Because of our geographic concentration, we may be less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduced demand for our products and services, which could have an adverse effect on our results of operations.

Economic recession or other economic problems, including those affecting our markets and regions, but also those affecting the United States or world economies, could have a material adverse impact on the demand for banking products and services. Since the conclusion of the last recession, economic growth has been uneven. If economic conditions deteriorate, or if there are negative developments affecting the domestic and international credit markets, the value of our loans and investments may be harmed, which in turn would have an adverse effect on our financial performance and condition, as it would for other banks. In addition, although deteriorating market conditions could adversely affect our financial condition, results of operations and cash flows, there can be no assurance that we would benefit from any market growth or favorable economic conditions, either in our primary market areas or nationally, even if they do occur.

Our small to medium-sized business and entrepreneurial customers may have fewer financial resources than larger entities to weather a downturn in the economy, which may impair our customers’ ability to repay their loans, and which could adversely affect our financial condition and results of operations.

We focus our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses and entrepreneurs. These small to medium-sized businesses and entrepreneurs may have fewer financial resources in terms of capital or borrowing capacity than larger entities. If economic conditions negatively impact our primary market areas in Alabama, central and northeast Florida, and the Atlanta, Georgia metro area generally, and small to medium-sized businesses are adversely affected, then our financial condition and results of operations may be negatively affected.

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Our financial performance will be negatively impacted if we are unable to execute our growth strategy.

Our current growth strategy is to grow organically and to supplement that growth with select acquisitions. Our ability to grow organically depends primarily on our ability to generate loans and deposits of acceptable risk and expense, and we may not be successful in continuing this organic growth. Our ability to identify appropriate markets for expansion, recruit and retain qualified personnel and fund growth at a reasonable cost depends on prevailing economic conditions, maintenance of sufficient capital, competitive factors and changes in banking laws, among other factors. Conversely, if we grow too quickly and are unable to control costs and maintain asset quality, such growth, whether organic or through select acquisitions, could materially and adversely affect our financial condition and results of operations.

External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation or other economic phenomena that could adversely affect our financial performance. The primary impact of inflation on our operations most likely will be reflected in increased operating costs. Conversely, deflation generally will tend to erode collateral values and diminish loan quality. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a significant impact on our performance. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.

Our profitability is vulnerable to interest rate fluctuations.

Our profitability depends substantially on our net interest income. Net interest income is the difference between the interest earned on assets (such as loans and securities held in our investment portfolio) and the interest paid for liabilities (such as interest paid on savings and money market accounts and time deposits).

Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates are events over which we have no control, and such changes may have an adverse effect on our net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and liabilities. For example, an increase in interest rates could, among other things, reduce the demand for loans and decrease loan repayment rates. Such an increase could also adversely affect the ability of our floating-rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs. Conversely, a decrease in the general level of interest rates could affect us by, among other things, leading to greater competition for deposits and incentivizing borrowers to prepay or refinance their loans more quickly or frequently than they otherwise would. The primary tool that management uses to measure interest rate risk is a simulation model that evaluates the impact of varying levels of prevailing interest rates on net interest income and the economic value of equity. As of December 31, 2018, this simulation analysis indicated that, if prevailing interest rates immediately decreased by 300 basis points, we would expect net interest income to decrease by approximately $23.4 million, or 13.4%, over the next 12 months, and a decline in the economic value of equity of $85.6 million, or 9.2%. We believe that this is unlikely based on current interest rate levels. Conversely, if prevailing interest rates immediately increased by 300 basis points, we would expect net interest income to increase by approximately $12.5 million, or 7.2%, over the next 12 months, and the economic value of equity to decrease by $774 thousand, or 0.08%. However, fluctuations in interest rates affect different classes of income-earning assets differently, and there can be no assurance as to the actual effect on our results of operations should such an increase or decrease occur.

Generally, the interest rates on our interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. Even assets and liabilities with similar maturities or re-pricing periods may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjustable rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the asset. Changes in interest rates could materially and adversely affect our financial condition and results of operations.

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Market interest rates for loans, investments and deposits are highly sensitive to many factors beyond our control.

Generally, interest rate spreads (the difference between interest rates earned on assets and interest rates paid on liabilities) have narrowed in recent years as a result of changing market conditions, policies of various government and regulatory authorities and competitive pricing pressures, and we cannot predict whether these rate spreads will narrow even further. This narrowing of interest rate spreads could adversely affect our financial condition and results of operations. In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income.

We attempt to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition in order to obtain the maximum spread between interest income and interest expense. However, there can be no assurance that we will be successful in minimizing the adverse effects of changes in interest rates. Depending on our portfolio of loans and investments, our financial condition and results of operations may be adversely affected by changes in interest rates.

We could suffer losses from a decline in the credit quality of the assets that we hold.

We could sustain losses if borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies that we believe are appropriate to minimize this risk, including the establishment and review of the allowance for credit losses, periodic assessment of the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our financial condition and results of operations. In particular, we face credit quality risks presented by past, current, and potential economic and real estate market conditions.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could negatively impact our business.

A significant portion of our loan portfolio is secured by either residential or commercial real estate. As of December 31, 2018, we had approximately $724.6 million in residential real estate loans and $1.53 billion in commercial real estate loans outstanding, representing approximately 21.8% and 46.0%, respectively, of our total loans outstanding on that date.

There are significant risks associated with real estate-based lending. Real estate collateral may deteriorate in value during the time that credit is extended, in which case we might not be able to sell such collateral for an amount necessary to satisfy a defaulting borrower’s obligation to us. In such an event, there could be a material adverse effect on our financial condition and results of operations. Additionally, commercial real estate loans are subject to unique risks. These types of loans are often viewed as having more risks than residential real estate or other consumer loans, primarily because relatively large amounts are loaned to a relatively small number of borrowers. Thus, the deterioration of even a small number of these loans could cause a significant increase in our loan loss allowance or loan charge-offs, which in turn could have a material adverse effect on our financial condition and results of operations. Furthermore, commercial real estate loans depend on cash flows from the property securing the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in a local economy in one of our markets or in occupancy rates where a property is located could increase the likelihood of default.

The foregoing risks are enhanced as a result of the limited geographic scope of our principal markets. Most of the real estate securing our loans is located in Alabama, in central and northeast Florida, and in the Atlanta, Georgia metro area. Because the value of this collateral depends on local real estate market conditions and is affected by, among other things, neighborhood characteristics, real estate tax rates, the cost of operating the properties and local governmental regulation, adverse changes in any of these factors in Alabama, central and northeast Florida or the Atlanta, Georgia metro area could cause a decline in the value of the collateral securing a significant portion of our loan portfolio. Further, the concentration of real estate collateral in these markets limits our ability to diversify the risk of such occurrences.

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Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take a charge to earnings and adversely impact our financial condition and results of operations.

We maintain an allowance for estimated loan losses that we believe is adequate to absorb any probable losses in our loan portfolio. Management determines the amount of the allowance based on an analysis of general market conditions, the credit quality of our loan portfolio and the performance of our customers relative to their financial obligations to us. We periodically evaluate the loan portfolio for risk grading, which can result in changes in the allowance. The amount of future losses is affected by changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control, and such losses may exceed the allowance for estimated loan losses. Although we believe that our allowance for estimated loan losses is adequate to absorb any probable losses on existing loans that may become uncollectible, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future. If actual losses exceed the estimate, the excess losses could adversely affect our net income and capital. Such excess could also lead to larger allowances for loan losses in future periods, which could in turn adversely affect new income and capital in those periods. If economic conditions differ substantially from the assumptions used in the estimate, or if the performance of our loan portfolio deteriorates, future losses may occur, and increases in the allowance may be necessary, either of which would have a negative effect on our financial condition and results of operations.

Additionally, federal banking regulators periodically review the adequacy of our allowance for estimated loan losses. These agencies may require additional allowances based on their judgment of the information available at the time of their examinations. If these regulatory agencies require us to increase our allowance for estimated loan losses, our financial condition and results of operations would be negatively affected.

We may be required to increase our allowance for loan losses as a result of a recent change to an accounting standard.

The measure of our allowance for loan losses depends in part on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board, or FASB, recently issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses. This ASU provides a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will apply to us beginning on January 1, 2020. CECL will require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, implementation of the CECL model will change our current method of providing allowances for loan losses, which would likely require us to increase our allowance for loan losses. Moreover, the CECL model likely would create more volatility in our level of allowance for loan losses. A material increase in our level of allowance for loan losses could adversely affect our business, financial condition and results of operations.

Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real property collateral.

In considering whether to make a loan secured by real property, we generally require an appraisal. However, an appraisal is only an estimate of the value of the property at the time that the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, then we may not realize an amount equal to the indebtedness secured by the property.

Any expansion into new markets or new lines of business might not be successful.

As part of our ongoing strategic plan, we may consider expansion into new geographic markets. Such expansion might take the form of the establishment of de novo branches or the acquisition of existing banks or bank branches. There are considerable costs associated with opening new branches, and new branches generally do not generate sufficient revenues to offset costs until they have been in operation for some time. Additionally, we may consider expansion into new lines of business through the acquisition of third parties or organic growth and development. There are substantial risks associated with such efforts, including risks that (i) revenues from such activities might not be sufficient to offset the development, compliance and other implementation costs; (ii) competing products and services and shifting market preferences might affect the profitability of such activities; and (iii) our internal controls might be inadequate to manage the risks associated with new activities. Furthermore, it is possible that our unfamiliarity with new markets or lines of business might adversely affect the success of such actions. If any such expansion into a new geographic or product market is not successful, there could be an adverse effect on our financial condition and results of operations.

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We have incurred, and expect to continue incurring, substantial expenses related to our recent acquisitions.

We have incurred, and expect to continue incurring, substantial expenses in connection with completing our recent acquisitions and integrating the operations of the acquired businesses with our operations. A number of factors beyond our control could affect the total amount or the timing of our transaction and integration expenses, and such expenses may exceed our initial projections. Many of the expenses that will be incurred by their nature are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with our recent acquisitions could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the acquired businesses.

Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies may be more difficult, costly, or time-consuming than expected.

Our business strategy focuses on both organic growth and growth through acquisitions of financial institutions located in the southeastern United States. Our pursuit of acquisitions may disrupt our business, and common stock that we issue as merger consideration may have the effect of diluting the value of your investment. In addition, we may fail to realize some or all of the anticipated benefits of completed acquisitions, including our acquisitions of Private Bancshares, Inc. (“Private Bancshares”) and Patriot Bank (“Patriot”) in 2017, and of FirstAtlantic, Premier and Landmark in 2018. We anticipate that the continued integration process for these entities and any other businesses that we may acquire in the future will be a time-consuming and expensive process, even if the integration process is effectively planned and implemented.

In addition, our acquisition activities could be material to our business and involve a number of significant risks, including the following:

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incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business;

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using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or the assets and liabilities that we seek to acquire;

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exposure to potential asset quality issues of the target company;

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intense competition from other banking organizations and other potential acquirers, many of which have substantially greater resources than we do;

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potential exposure to unknown or contingent liabilities of banks and businesses that we acquire, including, without limitation, liabilities for regulatory and compliance issues;

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inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits of the acquisition;

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incurring time and expense required to integrate the operations and personnel of the combined businesses;

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inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain relationships with customers and employees;

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experiencing higher operating expenses relative to operating income from the new operations;

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creating an adverse short-term effect on our results of operations;

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losing key employees and customers;

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significant problems relating to the conversion of the financial and customer data of the acquired entity;

	●	difficulties with integrating acquired customers into our financial and customer product systems;

	●	litigation risks;

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potential changes in banking or tax laws or regulations that may affect the target company; or

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risks of impairment to goodwill or other-than-temporary impairment of investment securities.

If difficulties arise with respect to the integration process, then the economic benefits expected to result from an acquisition might not occur. As with any merger of financial institutions, there also may be business disruptions that cause customers to move their business to other financial institutions. Failure to successfully integrate businesses that we acquire could have an adverse effect on our profitability, return on equity, return on assets or ability to implement our strategy, any of which, in turn, could have a material adverse effect on our business, financial condition and results of operation.

Our liquidity needs might adversely affect our financial condition and results of operations.

The primary sources of funds for the Bank are customer deposits and loan repayments. Loan repayments are subject to the credit risks described above. In addition, deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments and general economic conditions. Therefore, we may be required to rely from time to time on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations or support growth. The Bank has lines of credit in place with the FHLB and correspondent banks that management believes are adequate to meet our liquidity needs. However, there can be no assurance that these arrangements will be sufficient to meet future liquidity needs, particularly if loan demand grows faster than anticipated.

As a bank holding company, the sources of funds available to NCC are limited.

Any future constraints on liquidity at the holding company level could impair NCC’s ability to declare and pay dividends on its common stock. In some instances, notice to, or approval from, the Federal Reserve may be required prior to NCC’s declaration or payment of dividends. Further, our banking operations are conducted by NBC, which is subject to significant regulation. Federal banking laws restrict the payment of dividends by banks to their holding companies, and NBC is subject to these restrictions with respect to paying dividends to NCC. For example, NBC’s ability to pay dividends on its common stock to NCC without OCC approval is limited under federal banking laws such that the amount available for payment may not exceed NBC’s retained net income available to holders of its common stock to date for the then-current fiscal year, plus retained net income from the prior two fiscal years. Because NCC’s ability to receive dividends from NBC is restricted, its ability to pay dividends to its own stockholders is also restricted.

Additionally, the right of a bank holding company to participate in the assets of its subsidiary bank in the event of a bank-level liquidation or reorganization is subject to the claims of the bank’s creditors, including depositors, which take priority, except to the extent that the holding company may be a creditor with a recognized claim.

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Our largest loan relationships currently make up a material percentage of our total loan portfolio.

As of December 31, 2018, our ten largest loan relationships totaled more than $129.2 million in loan exposure, or 3.9% of our total loan portfolio. In general, the concentration risk associated with having a small number of large loan relationships is that, if one or more of these relationships were to become delinquent or suffer default, we could be at serious risk of material losses. Our allowance for loan losses may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would negatively affect our earnings and capital. Even if the loans are collateralized, the large increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute our business plan.

Several of our large depositors have relationships with each other, which creates a higher risk that one customer’s withdrawal of its deposit could lead to a loss of other deposits from customers within the relationship, which, in turn, could force us to fund our business through more expensive and less stable sources.

As of December 31, 2018, our ten largest non-brokered depositors accounted for $311.3 million in deposits, or approximately 9.1% of our total deposits. As of December 31, 2018, we had no brokered deposits. Several of our large depositors have business, family or other relationships with each other, which creates a risk that any one customer’s withdrawal of its deposit could lead to a loss of other deposits from customers within the relationship.

Withdrawals of deposits by any one of our largest depositors or by one of these related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a material adverse effect on our business, results of operations, financial condition and future prospects.

Our factoring services are concentrated in the transportation and automotive parts and services industry, and economic conditions or other factors negatively impacting the transportation and automotive parts and services industry could adversely affect our factoring business.

Factoring for transportation and automotive parts and services businesses constituted approximately 94.0% of our total factoring business as of December 31, 2018, calculated based on the gross purchases of invoices from such businesses compared to total gross purchases of factored receivables for December 2018. Given the concentration of our factoring business in the transportation and automotive parts and services industries, economic conditions or other factors that negatively impact these industries could impact our factoring revenues, as the revenues earned from purchasing invoices are directly correlated with the amount of revenue generated by our factoring clients (i.e., the volume of transportation and automotive parts and services invoices that they are able to generate by providing their services). Reductions in economic activity will typically cause a decrease in the volume of goods in commerce available to be transported by our factoring clients. Moreover, the operations of a large number of our factoring clients are susceptible to changing economic conditions in the energy industry. For example, fluctuations in prices of oil and diesel fuel may affect demand for transportation services, which may in turn affect the ability of such factoring clients to satisfy their obligations to us. Additionally, the factoring industry may not continue its historical growth, and we may face increased competition. A failure to compete effectively in our market could restrain our growth or cause a loss in market share. Any of these events could adversely impact the returns that we realize on our factoring activities or result in a decrease in the overall amount of our factoring activities and could have an adverse effect on our financial condition and results of operations.

Additional regulations and rulemaking impacting the transportation industry may have a disproportionate impact on the small to medium-sized trucking businesses that comprise our primary transportation factoring clients and adversely affect our factoring business.

Our primary transportation factoring clients are small to medium-sized owner-operators and trucking fleets. Recently implemented federal regulations, and regulations proposed to be implemented in the future, may significantly increase the costs and expenses associated with owning or operating a trucking fleet. These regulations include maximum hours of service limitations and other rules promulgated by the Federal Motor Carrier Safety Administration of the United States Department of Transportation, electronic log requirements, regulations proposed by the federal Food and Drug Administration (the “FDA”) requiring increased labeling and monitoring by carriers of any FDA-regulated commodity, and regulations regarding the amount of combined single-limit liability insurance coverage required of carriers. The costs and burdens of compliance with these requirements will have a disproportionate impact on the small to medium-sized trucking businesses that comprise our factoring client base and could force some or all of these businesses out of the market. Such an occurrence could adversely impact the returns that we realize on our factoring activities or result in a decrease in the overall amount of our factoring activities and could have an adverse effect on our business, financial condition and results of operations.

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Our asset-based lending and factoring products may expose us to an increased risk of fraud.

We rely on the structural features embedded in our asset-based lending and factoring products to mitigate the credit risk associated with such products. With respect to asset-based loans, we limit our lending to a percentage of the customer’s borrowing base assets that we believe can be readily liquidated in the event of financial distress of the borrower. With respect to factoring products, we purchase the underlying invoices of our customers and become the direct payee under such invoices, thus transferring the credit risk in such transactions from our customers to the underlying account debtors on such invoices. In the event that one or more customers fraudulently represents the existence or valuation of borrowing base assets in the case of an asset-based loan, or the existence or validity of a purchased invoice in the case of a factoring transaction, we may advance more funds to such customers than we otherwise would and lose the benefit of the structural protections of our products with respect to such advances. In such event, we could be exposed to material additional losses with respect to such loans or factoring products. Although we believe that we have adequate controls in place to monitor and detect fraud with respect to our asset-based lending and factoring products, there is no guarantee that such controls will be effective. Losses from such fraudulent activity could have a material adverse impact on our financial condition and results of operations.

We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could adversely affect our profitability.

As a part of the products and services that we offer, we make commercial business and real estate loans. The principal economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected by the strength of the relevant business market segment, local market conditions and general economic conditions. Additional factors related to the credit quality of commercial loans include the quality of the management of the business and the borrower’s ability both to properly evaluate changes in the supply and demand characteristics affecting the market for its products and services and to effectively respond to those changes. Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of management of the property. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have an adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may decrease our growth or profits.

Consumer and commercial banking are highly competitive industries. Our market areas contain not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions, as well as savings and loan associations, savings banks and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, commercial finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in our market areas, greater ties to local businesses and more expansive banking relationships, as well as more established depositor bases, fewer regulatory constraints and lower cost structures, than we do. Competitors with greater resources may possess an advantage through their ability to maintain numerous banking locations in more convenient sites, to conduct more extensive promotional and advertising campaigns, or to operate a more developed technology platform. Due to their size, many competitors may offer a broader range of products and services, as well as better pricing for certain products and services, than we can offer. For example, in the current low interest rate environment, competitors with lower costs of capital may solicit our customers to refinance their loans with a lower interest rate. Further, increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Technology has lowered barriers to entry and made it possible for banks to compete in our market areas without a retail footprint by offering competitive rates and for non-banks to offer products and services traditionally provided by banks.

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The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.

Our ability to compete successfully depends on a number of factors, including:

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our ability to develop, maintain, and build upon long-term customer relationships based on quality service and high ethical standards;

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our ability to attract and retain qualified employees to operate our business effectively;

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our ability to expand our market position;

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the scope, relevance, and pricing of products and services that we offer to meet customer needs and demands;

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the rate at which we introduce new products and services relative to our competitors;

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customer satisfaction with our level of service; and

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industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.

As a community bank, we have lower lending limits and different lending risks than certain of our larger, more diversified competitors.

We are a community banking institution that provides banking services to the local communities in the market areas in which we operate. Our ability to diversify our economic risks is limited by our own local markets and economies. We lend primarily to individuals and small to medium-sized businesses, which may expose us to greater lending risks than those of banks that lend to larger, better-capitalized businesses with longer operating histories. In addition, our legally mandated lending limits are lower than those of certain of our competitors that have more capital than we do. These lower lending limits may discourage borrowers with lending needs that exceed our limits from doing business with us. We may try to serve such borrowers by selling loan participations to other financial institutions; however, this strategy may not succeed.

Our financial projections are based on numerous assumptions about future events, and our actual financial performance may differ materially from our projections if our assumptions are inaccurate.

If the communities in which we operate do not grow, or if the prevailing economic conditions locally or nationally are less favorable than we have assumed, then our ability to reduce our non-performing loans and other real estate owned portfolios and to implement our business strategies may be adversely affected, and our actual financial performance may be materially different from our projections.

Moreover, there can be no assurance that we will benefit from any market growth or favorable economic conditions in our market areas even if they do occur. If our senior management team is unable to provide the effective leadership necessary to implement our strategic plan for the Bank, then our actual financial performance may be materially adversely different from our projections. Additionally, to the extent that any component of our strategic plan requires regulatory approval, if we are unable to obtain necessary approval, we will be unable to completely implement our strategy, which may adversely affect our actual financial results. A failure to successfully implement our strategic plan could adversely affect the price of our common stock.

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Our recent acquisitions may make it difficult for investors to evaluate our business, financial condition and results of operations and may also impair our ability to accurately forecast our future performance.

We acquired United Group Banking Company of Florida, Inc. and a controlling interest in CBI in 2014, Reunion Bank of Florida in 2015, Private Bancshares and Patriot in 2017, and FirstAtlantic, Premier and Landmark in 2018. Our limited history operating these businesses and the lack of combined historical financial information relating to the more recent acquisitions may not provide an adequate basis for investors to evaluate our business, financial condition and results of operations or to assess trends that may be affecting the acquired businesses or our business as a whole. Our future operating results depend on a number of factors, including our ability to continue to integrate these acquisitions, manage our growth, retain the respective customer bases and successfully identify and respond to emerging trends affecting our primary product lines and markets. As a result of these uncertainties, predictions about our future financial performance may not be as accurate as they would be if we had a longer operating history, which in turn may affect the trading price and volatility of our common stock.

Because our business success depends significantly on key management personnel, the departure of such personnel could impair operations.

We depend heavily on our senior management team. The loss of the services of a member of our senior management team, or an inability to attract other experienced banking personnel, could adversely affect our business. Some of these adverse effects could include the loss of personal contacts with existing or potential customers, as well as the loss of special technical knowledge, experience and skills of such individuals who are responsible for our operations.

We may be adversely affected by the lack of soundness of other financial institutions.

Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions or market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence, and could lead to losses or defaults by us or by other institutions.

We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other financial information, as well as representations of customers and counterparties as to the accuracy and completeness of that information. With respect to financial statements, we may rely on reports of independent auditors. In deciding whether to extend credit or engage in other business transactions, we may rely on our customers’ representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate, or fraudulent information.

We are subject to environmental risk in our lending activities.

Because a significant portion of our loan portfolio is secured by real property, we may foreclose on and take title to such property in the ordinary course of business. If hazardous substances are found on such property, we could be liable for remediation costs, as well as for personal injury and property damage. Environmental laws might require us to incur substantial expenses, materially reduce the property’s value or limit our ability to use or sell the property. Although management has policies requiring environmental reviews before loans secured by real property are made and before foreclosure is commenced, it is still possible that environmental risks might not be detected and that the associated costs might have a material adverse effect on our financial condition and results of operations.

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We continually encounter technological change and may have fewer resources than our competitors to invest in technological improvements.

The banking and financial services industries are undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to enhancing the level of service provided to customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience and create additional efficiencies in operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.

Our information systems may experience a failure or interruption.

We rely heavily on communications and information systems to conduct our business. Any failure or interruption in the operation of these systems could impair or prevent the effective operation of our customer relationship management, general ledger, deposit, lending or other functions. While we have policies and procedures designed to prevent or limit the effect of a failure or interruption in the operation of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions impacting our information systems could damage our reputation, result in a loss of customer business and expose us to additional regulatory scrutiny, civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

We use information technology in our operations and offer online banking services to our customers, and unauthorized access to our or our customers’ confidential or proprietary information as a result of a cyber-attack or otherwise could expose us to reputational harm and litigation and adversely affect our ability to attract and retain customers.

Information security risks for financial institutions have generally increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. We are under a continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels to transact business. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of confidential, proprietary, and other information of ours, our employees, our customers, or of third parties, damage our systems or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations.

Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels and our plans to develop additional remote connectivity solutions to serve our customers. Therefore, the secure processing, transmission and storage of information in connection with our online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access, computer viruses and other malware, phishing schemes or other security failures. In addition, our customers may use personal smartphones, tablets or other mobile devices that are beyond our control systems in order to access our products and services. Our technologies, systems and networks, as well as our customers’ devices, may become the target of cyber-attacks, electronic fraud or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to protect against these threats or to alleviate or investigate problems caused by such threats. To the extent that our activities or the activities of our customers involve the processing, storage or transmission of confidential customer information, any breaches or unauthorized access to such information could present significant regulatory costs and expose us to litigation and other possible liabilities. Any inability to prevent these types of security threats could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and ability to generate deposits. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber-attack or information security breach could result in potential legal liability, reputational harm, damage to our competitive position and the disruption of our operations, all of which could adversely affect our financial condition or results of operations.

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We depend on outside third parties for the processing and handling of our records and data, which exposes us to additional risk for cybersecurity breaches or regulatory actions.

We rely on software and internet-based platforms developed by third-party vendors to process various transactions. In some cases, we have contracted with third parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, loan and deposit processing, and securities portfolio accounting. If these third-party service providers experience difficulties, are subject to cybersecurity breaches or terminate their services, and we are unable to replace them with other service providers on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected. While we perform a review of controls instituted by the applicable vendors over these programs in accordance with industry standards and perform our own testing of user controls, we must rely on the continued maintenance of controls by these third-party vendors, including safeguards over the security of customer data. In addition, we maintain, or contract with third parties to maintain, daily backups of key processing outputs in the event of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct business or process transactions, or damage to our reputation, if the third-party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a disruption or breach of security may have a material adverse effect on our business.

In addition, federal regulators have issued guidance outlining their expectations for third-party service provider oversight and monitoring by financial institutions. Any failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against us, which could adversely affect our business, financial condition and results of operations.

Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR may adversely affect our results of operations.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.

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The internal controls that we have implemented to mitigate risks inherent to the business of banking might fail or be circumvented.

Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If there were a failure of such a system, or if a system were circumvented, there could be a material adverse effect on our financial condition and results of operations.

Changes in accounting standards could materially impact our financial statements.

From time to time, the FASB or the Securities and Exchange Commission (“SEC”) may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in new or different accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or to apply an existing standard differently, also retrospectively, in each case resulting in a need to revise or restate prior period financial statements.

Adverse weather or manmade events could negatively affect our core markets or disrupt our operations, which could have an adverse effect on our business and results of operations.

Our market areas are susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events related flooding and wind damage and manmade disasters, such as the 2010 oil spill in the Gulf of Mexico. We cannot predict whether or to what extent damage that may be caused by future weather or manmade events will affect our operations or the economies in our current or future market areas, but such events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, destruction of properties securing our loans, damage to our banking facilities and offices, and an increase in foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters. Further, severe weather, natural disasters, acts of war or terrorism, and other external events could adversely affect us in a number of ways, including an increase in delinquencies, bankruptcies or defaults that could result in a higher level of non-performing assets, net charge-offs, and provision for loan losses. Such risks could also impair the value of collateral securing our outstanding loans and hurt our deposit base.

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We may become involved from time to time in suits, legal proceedings, information-gathering requests, investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse consequences.

Many aspects of the banking business involve some risk of legal liability. From time to time, we may be named or threatened to be named as defendants in lawsuits arising from our business activities (and in some cases from the activities of companies that we have acquired). In addition, from time to time, we could become the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations, proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business or reputational harm.

Risks Relating to the Regulation of the Banking Industry

We are subject to extensive regulation in the conduct of our business, which imposes additional costs on us and adversely affects our profitability.

As a financial holding company, NCC is subject to federal regulation under the BHCA and the examination and reporting requirements of the Federal Reserve. As a national banking association, NBC is subject to federal regulation under the National Bank Act and the examination and reporting requirements of the OCC. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules and standards, may limit our operations significantly and control the methods by which we conduct business. Banking regulations are primarily intended to protect depositors, deposit insurance funds and the banking system as a whole, and not stockholders or creditors. These regulations affect lending practices, capital structure, investment practices, dividend policy and overall growth, among other things. For example, federal and state consumer protection laws and regulations limit the manner in which we may offer and extend credit. In addition, the laws governing bankruptcy generally favor debtors, making it more expensive and more difficult to collect from customers who become subject to bankruptcy proceedings.

The Federal Reserve and OCC periodically conduct examinations of our business, including our compliance with applicable laws and regulations. Accommodating such examinations may require management to reallocate resources that would otherwise be used in our day-to-day operations. If, as a result of an examination, any such banking agency was to determine that the financial condition, capital resources, allowance for loan losses, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation, such banking agency may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict our growth, to assess civil monetary penalties against us and our officers and directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such a regulatory action, it could have a material adverse effect on our business, financial condition and results of operations.

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FDIC deposit insurance assessments may continue to materially increase in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, NBC is assessed a quarterly deposit insurance premium. In the aftermath of the most recent recession, a number of bank failures led to a depletion of the FDIC’s Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. The FDIC has adopted a Deposit Insurance Fund Restoration Plan, which requires the Deposit Insurance Fund to attain a 1.35% reserve ratio by September 30, 2020. As a result of this requirement, NBC could be required to pay significantly higher premiums or additional special assessments that would adversely affect its earnings, thereby reducing the availability of funds to pay dividends to NCC (subject to the other limitations discussed herein).

We are subject to certain capital requirements by our regulators.

Applicable regulations require us to maintain specific capital standards in relation to the credit risks of our assets and off-balance sheet exposures. Various components of these requirements are subject to qualitative judgments by regulators. Both NCC and NBC are “well capitalized” under the current regulatory framework. A failure to remain “well capitalized” could affect our customers’ confidence, which could adversely affect our ability to do business. In addition, a failure to maintain such status could also result in restrictions imposed by regulatory authorities on our growth and other activities. Any such effect on customers or restrictions by regulators could have a material adverse effect on our financial condition and results of operations.

We may need to raise additional capital in the future, including as a result of potential increased minimum capital thresholds established by regulators, but that capital may not be available when it is needed or may be dilutive to stockholders.

We are required by federal and state regulatory authorities to maintain adequate capital levels to support our operations. New regulations implementing minimum capital standards could require financial institutions to maintain higher minimum capital ratios and may place a greater emphasis on common equity as a component of “Tier 1 Capital,” which consists generally of shareholders’ equity and qualifying preferred stock, less certain goodwill items and other intangible assets. In order to support operations and comply with regulatory standards, we may need to raise capital in the future, and in some cases, NCC may be required to contribute capital to NBC. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on a successful execution of our growth strategy. Accordingly, there can be no assurance that any additional needed capital will be available on favorable terms. The capital and credit markets have experienced significant volatility in recent years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If we have to raise capital in the form of debt, we may have to pledge our assets, including our stock in NBC. If we cannot raise additional capital when needed, our financial condition and results of operations may be adversely affected, and banking regulatory authorities may subject us to regulatory enforcement action, including receivership. Furthermore, an issuance of additional shares of our common stock could dilute the economic ownership interest of our stockholders.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The United States Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on merger and acquisition activities, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and future prospects.

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We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or unauthorized disclosure of such information could damage our reputation and otherwise adversely affect our operations and financial condition.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal data, such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act, which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires us to provide certain disclosures to customers about our information collection, sharing and security practices and to afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires us to develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches.

Various state and federal banking regulators and state legislatures have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. The federal bank regulatory agencies have proposed enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including us and the Bank, and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.

If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to unauthorized persons, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under applicable laws and regulations. Concerns about the effectiveness of our measures to safeguard personal information could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.

We are subject to the Bank Secrecy Act and other anti-money laundering statutes and regulations, and any deemed deficiency by our regulators with respect to these laws could result in significant liability.

Federal law requires financial institutions to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports when appropriate. In addition to other bank regulatory agencies, the Financial Crimes Enforcement Network of the United States Department of the Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with state and federal banking regulators, as well as the United States Department of Justice, CFPB, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny with regard to our compliance with the rules enforced by the Office of Foreign Assets Control regarding, among other things, the prohibition on transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the United States. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including acquisition activities. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and future prospects.

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Risks Related to Ownership of Our Common Stock

The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volumes, prices, or times desired.

The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various factors, including:

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actual or anticipated fluctuations in our operating results, financial condition, or asset quality;

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market conditions in the broader stock market in general, or in the financial services industry in particular;

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publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;

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future issuances of our common stock or other securities;

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significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;

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additions or departures of key personnel;

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trades of large blocks of our stock;

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economic and political conditions or events;

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proposed or adopted changes in laws, regulations or policies affecting us;

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other regulatory developments; and

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other news, announcements, or disclosures (whether by us or others) related to us, our competitors, our core markets, or the financial services industry.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.

We have not historically paid dividends to our stockholders and cannot guarantee that we will pay dividends to our stockholders in the future.

Holders of our common stock will receive dividends if and when declared by our board of directors out of legally available funds. Our board of directors has not declared a dividend on our common stock since our inception. Any future determination relating to our dividend policy will be made at the discretion of the board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant.

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Our principal business operations are conducted through NBC. Cash available to pay dividends to stockholders of NCC is derived primarily, if not entirely, from dividends paid by NBC to NCC. The ability of NBC to pay dividends to NCC, and therefore NCC’s ability to pay dividends to its stockholders, will continue to be subject to, and limited by, certain legal and regulatory restrictions. Further, any lenders making loans to us may impose financial covenants that may be more restrictive with respect to dividend payments than regulatory requirements.

A future issuance of stock could dilute the value of our common stock.

Our certificate of incorporation provides that we may issue up to 30,000,000 shares of common stock. As of March 1, 2019, 20,813,165 shares of our common stock were issued and outstanding. Those shares outstanding do not include the potential issuance, as of March 1, 2019, of (i) 302,915 shares of our common stock subject to issuance upon the exercise of outstanding options and warrants to purchase our common stock, (ii) 166,822 shares of our common stock potentially issuable pursuant to outstanding performance awards (based on projections of the earned percentages of the respective awards as of such date), or (iii) approximately 105,473 shares that have been earned but deferred (and therefore not yet issued) under the National Commerce Corporation Deferral of Compensation Plan for Key Employees and Non-Employee Directors. Any future issuance of new shares could cause further dilution in the value of outstanding shares of our common stock.

Our directors and executive officers beneficially own a significant portion of our outstanding common stock and have substantial influence over us.

Our directors and executive officers, as a group, beneficially owned approximately 11.95% of our common stock as of March 1, 2019. As a result of this level of ownership, our directors and executive officers have the ability, by taking coordinated action, to exercise significant influence over our affairs and policies. The interests of our directors and executive officers may not be consistent with your interests as a stockholder. This influence may also have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of the Company.

Shares of our common stock are not insured deposits and may lose value.

Shares of our common stock are not savings or deposit accounts and are not insured by the FDIC or any other agency or private entity. Such shares are subject to investment risk, including the possible loss of some or all of the value of your investment.

The laws that regulate our operations are designed for the protection of depositors and the public, not our stockholders.

The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities and generally have been promulgated to protect depositors and the Deposit Insurance Fund maintained by the FDIC, and not for the purpose of protecting stockholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change.

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We are an emerging growth company under the JOBS Act, and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are therefore permitted to, and intend to, take advantage of exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we have total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of our merger with United Group Banking Company of Florida, Inc. (December 31, 2019); (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed a “large accelerated filer,” as defined under the federal securities laws. For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on certain executive compensation matters, such as “say on pay” and “say on frequency.” As a result, our stockholders may not have access to certain information that they may deem important. Although we intend to rely on certain of the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies.

We cannot predict whether investors will find our common stock less attractive as a result of our decision to take advantage of these exemptions. If some investors find our common stock less attractive, there may be a less active trading market for our common stock, and our stock price may be more volatile.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an emerging growth company under the JOBS Act.

Since October 28, 2014, we have been required to comply with the regulatory and reporting requirements of the SEC, and since March 19, 2015, we have been subject to the listing requirements of the Nasdaq Global Select Market. Complying with these reporting and other requirements is time consuming, results in increased costs to us and could have a material adverse effect on our business, financial condition and results of operations.

As a public company, we are subject to the requirements of the Exchange Act and the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires us to maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we must commit significant resources and management oversight. We continue to implement procedures and processes to address the standards and requirements applicable to public companies. Sustaining our growth also requires us to commit additional resources to maintain appropriate operational and financial systems to adequately support our expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As an emerging growth company under the JOBS Act, we are permitted to, and intend to, take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. When these exemptions cease to apply, we expect to incur additional expenses and to devote increased management effort toward ensuring compliance with these reporting requirements.

We cannot predict or estimate the amount of additional costs that we may continue to incur as a result of being a public company or the timing of such costs.

Our internal controls over financial reporting may not be effective, and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

We are currently required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. However, pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting until we are no longer an emerging growth company.

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When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that management can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of the completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigations by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and hiring additional personnel. Any such action could negatively affect our results of operations and cash flows.

Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover more difficult.

Certain provisions of our certificate of incorporation and bylaws, and corporate and federal banking laws, could make it more difficult for a third party to acquire control of us or conduct a proxy contest, even if those events were perceived by many of our stockholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:

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empower our board of directors, without stockholder approval, to issue preferred stock, the terms of which, including voting power, are set by the board;

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only permit our board of directors or the chairman thereof to call a special stockholders’ meeting;

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require at least 120 days’ advance notice of nominations for the election of directors and the presentation of stockholder proposals at meetings of stockholders; and

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require prior regulatory application and approval of any transaction involving control of us.

These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including under circumstances in which our stockholders might otherwise receive a premium over the market price of our common stock.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

NCC owns no real property. NBC owns our headquarters and the main office of NBC located at 600 Luckie Drive, Suite 350, Birmingham, Alabama 35223. Including the main office, we operate 36 full-service banking offices through NBC: seven in Alabama, 24 in central and northeast Florida and five in the Atlanta, Georgia metro area. We own 24 and lease 12 of these offices. We also operate a loan production office that we lease. We also lease space for our mortgage operations center, located in Mountain Brook, Alabama. The sole office of both CBI and Corporate Billing, which Corporate Billing owns, is located at 239 Johnson Street, S.E., Decatur, Alabama 35601. See Note 5 to the Notes to the Consolidated Financial Statements included in this report and the information under the heading “Contractual Obligations” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” portion of this report for more information regarding our office premises. We believe that our banking and non-banking offices are in good condition and are suitable to our needs.

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Item 3.

Legal Proceedings.

We are subject to various pending and threatened litigation actions in the ordinary course of business. Although it is not possible to determine with certainty at this point in time what liability, if any, we will have as a result of such litigation, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on our financial condition and results of operations.

Item 4.

Mine Safety Disclosures.

Not applicable.

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PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Our Common Stock

Our common stock is listed and trades on the Nasdaq Global Select Market under the symbol “NCOM.”

Holders

As of March 1, 2019, there were 20,813,165 shares of our common stock outstanding and approximately 1,057 record holders of our common stock (excluding any participants in any clearing agency and “street name” holders).

Dividends

Holders of our common stock receive dividends if and when declared by our board of directors out of legally available funds. Our board of directors has not declared, and we have not paid, a dividend since our inception, and our board of directors does not expect to declare a dividend in the foreseeable future. Any future determination or change relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant at that time. In addition, the payment of dividends by NBC to NCC and by NCC to its stockholders is subject to certain regulations that may limit or prohibit such payments in certain circumstances. See “Supervision and Regulation – Dividend Restrictions” in Part I, Item 1 of this Annual Report on Form 10-K. No assurances can be given that any dividends on NCC’s common stock will be declared in the future or, if declared, what the amount of such dividends will be or whether such dividends will continue for future periods.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to Item 12 of this Annual Report on Form 10-K.

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Performance Graph

The following information in Part II, Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on our common stock (based on the last reported sales price of the respective year) with the cumulative total return of the Russell 2000 Index and the SNL U.S. Bank Index ($1 billion to $5 billion in assets) from March 18, 2015 (the date on which our common stock was first traded on the Nasdaq Global Select Market) through December 31, 2018. The following is based on an investment of $100 on March 18, 2015 in our common stock, the Russell 2000 Index and the SNL U.S. Bank Index ($1 billion to $5 billion in assets), with dividends reinvested where applicable.

			*Period Ending*
*Index*	03/18/15		12/31/15		12/31/16		12/31/17		12/31/18
National Commerce Corporation		100.00		128.46		190.51		206.61		184.62
Russell 2000 Index		100.00		91.75		111.31		127.61		113.55
SNL U.S. Bank $1B-$5B Index		100.00		113.43		163.19		173.97		152.42

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Item 6.

Selected Financial Data.

	SUMMARY CONSOLIDATED FINANCIAL DATA
	As of and for the Year Ended December 31,
(Dollars in thousands, except per share information)	2018			2017			2016			2015			2014
Statement of Income Data
Interest income	$	171,658		$	109,791		$	74,563		$	54,845		$	31,342
Interest expense		21,437			10,367			7,381			4,796			2,869
Net interest income		150,221			99,424			67,182			50,049			28,473
Provision for loan losses		4,723			3,894			3,248			1,113			978
Gain (loss) on sale of securities		193			(91	)		-			-			(33	)
Other noninterest income⁽¹⁾		19,088			19,802			13,956			8,459			5,065
Merger/conversion-related expenses		6,645			2,320			479			764			662
Other noninterest expense⁽²⁾		100,430			70,875			48,600			39,481			22,791
Income before income taxes		57,704			42,046			28,811			17,150			9,074
Income tax expense		12,791			13,840			9,394			5,476			3,159
Deferred tax asset write-down		-			6,231			-			-			-
Total income tax expense		12,791			20,071			9,394			5,476			3,159
Net income before minority interest		44,913			21,975			19,417			11,674			5,915
Net income attributable to minority interest		2,469			1,907			1,564			2,069			512
Net income to common shareholders		42,444			20,068			17,853			9,605			5,403
Balance sheet (at period end)
Cash and cash equivalents	$	217,130		$	235,288		$	217,293		$	212,457		$	123,435
Total investment securities		212,561			111,396			99,709			80,863			34,932
Mortgage loans held-for-sale		15,031			29,191			15,373			15,020			9,329
Acquired purchased credit-impaired loans		39,536			25,696			11,975			12,690			9,077
Acquired non-purchased credit-impaired loans		1,198,058			538,276			313,399			368,625			143,981
Nonacquired loans held for investment ⁽³⁾		1,953,685			1,455,376			1,076,209			870,471			653,063
CBI loans (factoring receivables)		126,686			118,710			83,901			67,628			82,600
Total gross loans held for investment		3,317,965			2,138,058			1,485,484			1,319,414			888,721
Allowance for loan losses		18,176			14,985			12,113			9,842			9,802
Total intangibles		267,984			117,849			52,803			53,474			30,591
Total assets		4,210,541			2,737,676			1,950,784			1,763,369			1,138,426
Total deposits		3,432,289			2,285,831			1,667,710			1,514,458			971,060
FHLB and other borrowings		20,851			7,000			7,000			22,000			22,000
Subordinated debt		37,235			24,553			24,500			-			-
Total liabilities		3,513,483			2,337,718			1,713,740			1,546,733			1,002,265
Minority interest		7,655			7,348			7,309			7,372			7,239
Common stock		208			148			109			108			75
Total shareholders' equity		697,058			399,958			237,044			216,636			136,161
Tangible common equity		428,353			281,695			183,866			162,724			105,265
Selected Performance Ratios
Return on average assets (ROAA)⁽⁴⁾		1.19	%		0.81	%		1.00	%		0.72	%		0.66	%
Return on average equity (ROAE)		7.23			5.65			7.89			5.55			5.55
Return on average tangible common equity (ROATCE)		11.47			8.14			10.32			6.96			6.07
Net interest margin - taxable equivalent		4.75			4.44			4.15			4.13			3.76
Efficiency ratio		63.24			61.39			60.49			68.79			69.93
Operating efficiency ratio⁽²⁾		59.32			59.45			59.90			67.48			67.96
Noninterest income / average assets		0.53			0.80			0.78			0.64			0.62
Noninterest expense / average assets		2.99			2.95			2.76			3.03			2.88
Yield on loans		5.76			5.40			5.06			5.17			4.68
Cost of total deposits		0.66			0.41			0.40			0.39			0.35
Per Share Outstanding Data
Net earnings per share	$	2.26		$	1.45		$	1.64		$	1.04		$	0.92
Diluted net earnings per share		2.21			1.41			1.61			1.02			0.91
Common shares outstanding at period end		20,762,084			14,788,436			10,934,541			10,824,969			7,541,541
Weighted average diluted shares		19,230,190			14,193,433			11,093,987			9,395,741			5,960,199
Book value per share		33.57			27.05			21.68			20.01			18.05
Tangible book value per share		20.63			19.05			16.82			15.03			13.96
Nonperforming assets
Nonacquired
Non-accrual loans	$	4,807		$	82		$	69		$	187		$	2,276
Other real estate and repossessed assets		75			-			2,068			3,873			823
Loans past due 90 days or more and still accruing		818			677			581			252			217
Total nonacquired nonperforming assets		5,700			759			2,718			4,312			3,316
Acquired
Non-accrual loans		5,612			2,640			2,768			3,508			2,589
Other real estate and repossessed assets		899			1,094			-			92			557
Loans past due 90 days or more and still accruing		-			-			-			-			80
Total acquired nonperforming assets		6,511			3,734			2,768			3,600			3,226

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	As of and for the Year Ended December 31,
(Dollars in thousands, except per share information)	2018			2017			2016			2015			2014
Asset Quality Ratios
Nonperforming assets / Assets		0.29	%		0.16	%		0.28	%		0.45	%		0.57	%
Nonperforming assets / Loans + OREO + repossessed assets		0.37			0.21			0.37			0.60			0.73
Nonacquired nonperforming assets / Nonacquired loans + nonacquired OREO + nonacquired repossessed assets⁽³⁾		0.29			0.05			0.25			0.49			0.51
Net charge-offs to average loans		0.05			0.05			0.07			0.11			0.05
Allowance for loan losses to total loans		0.55			0.70			0.82			0.75			1.10
Allowance for loan losses / (Nonacquired non-accrual loans + nonacquired loans past due 90 days or more and still accruing)		323.13			1,974.31			1,863.54			2,241.91			393.18
Additional Information: Allowance for Loan Losses
Allowance for loan losses excluding CBI loans (factoring receivables)	$	17,576		$	14,385		$	11,613		$	9,342		$	8,847
Nonacquired loans held for investment ⁽³⁾		1,953,685			1,455,376			1,076,209			870,471			653,063
Allowance for loan losses allocated to CBI loans (factoring receivables)		600			600			500			500			955
CBI loans (factoring receivables)		126,686			118,710			83,901			67,628			82,600
Capital ratios (at period end)
Tier 1 leverage ratio		10.87	%		10.89	%		9.57	%		9.68	%		10.68	%
Tier 1 common capital ratio		13.10			12.54			11.46			11.18			10.66
Tier 1 risk-based capital ratio		13.10			12.54			11.46			11.18			10.66
Total risk-based capital ratio		14.82			14.37			13.90			11.91			11.75
Equity / Assets		16.56			14.61			12.15			12.29			11.96
Tangible common equity to tangible assets		10.86			10.75			9.69			9.52			9.50
Composition of Loans Held for Investment
Owner-occupied commercial real estate	$	646,863		$	378,525		$	254,099		$	215,021		$	132,126
Non-owner occupied commercial real estate		879,572			509,764			352,677			294,191			198,658
Commercial and industrial loans		408,166			258,577			150,268			171,160			113,788
Factored commercial receivables		126,686			118,710			83,901			67,628			82,600
Construction, land development and other land loans		361,263			231,030			155,813			152,862			83,663
1-4 family		724,614			508,935			387,342			333,761			221,222
Multifamily		89,551			60,054			47,060			31,128			23,420
Consumer and other		81,250			72,463			54,324			53,663			33,244
Deposit Composition
Demand	$	929,820		$	697,144		$	429,030		$	382,946		$	217,643
NOW		692,725			362,266			262,261			202,649			154,816
Money market and savings		1,315,337			951,846			703,289			611,887			392,394
Retail time		91,652			63,044			64,364			87,069			74,367
Jumbo time⁽⁵⁾		402,755			211,531			208,766			229,907			131,840
Mortgage Metrics
Total production ($)	$	490,770		$	507,563		$	322,909		$	281,706		$	207,269

(1) Excludes securities gains (losses)

(2) Excludes merger/conversion-related expenses

(3) Excludes CBI loans

(4) Net income to common shareholders / average assets

(5) Jumbo time deposits defined as time deposits greater than $100,000

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GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

Some of the financial measures included in NCC’s selected historical consolidated financial data table and other data are not measures of financial performance recognized by generally accepted accounting principles in the United States (“non-GAAP financial measures”). These non-GAAP financial measures include tangible common equity, tangible book value per share, return on average tangible common equity, efficiency ratio and operating efficiency ratio. NCC’s management uses the non-GAAP financial measures set forth below in its analysis of the Company’s performance.

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“Tangible common equity” is total stockholders’ equity less goodwill, other intangible assets and minority interest not included in intangible assets.

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“Tangible book value per share” is defined as tangible common equity divided by total common shares outstanding. This measure is important to investors interested in changes from period to period in book value per share exclusive of changes in intangible assets.

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“Average tangible common equity” is defined as the average of tangible common equity for the applicable period.

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“Return on average tangible common equity,” or ROATCE, is defined as net income available to common stockholders divided by average tangible common equity.

NCC’s management believes that the measures above, each of which utilizes the concept of tangible common equity rather than total common equity, provide useful information to management and investors because they eliminate the impact of goodwill and other intangible assets created in an acquisition. These measures are commonly used by investors when assessing financial institutions.

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“Efficiency ratio” is defined as noninterest expense divided by operating revenue (which is equal to net interest income plus noninterest income), excluding one-time gains and losses on sales of securities. This measure is important to investors looking for a measure of efficiency in productivity based on the amount of revenue generated for each dollar spent.

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“Operating efficiency ratio” is defined as noninterest expense divided by operating revenue, excluding one-time gains and losses on sales of securities and one-time gains and expenses related to merger and acquisition activities. This measure is important to investors looking for a measure of efficiency in productivity based on the amount of revenue generated for each dollar spent.

NCC’s management believes that these non-GAAP financial measures provide useful information to management and investors that is supplementary to NCC’s financial condition, results of operations and cash flows computed in accordance with GAAP; however, management acknowledges that the non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and these disclosures are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides more detailed analysis of these non-GAAP financial measures.

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	NON-GAAP RECONCILIATION
	As of and for the Year Ended December 31,
(Dollars in thousands, except per share information)	2018			2017			2016			2015			2014
Total shareholders' equity	$	697,058		$	399,958		$	237,044		$	216,636		$	136,161
Less: Intangible assets		267,984			117,849			52,803			53,474			30,591
Less: minority interest not included in intangible assets		721			414			375			438			305
Tangible common equity	$	428,353		$	281,695		$	183,866		$	162,724		$	105,265
Common shares outstanding at year end or period end		20,762,084			14,788,436			10,934,541			10,824,969			7,541,541
Tangible book value per share	$	20.63		$	19.05		$	16.82		$	15.03		$	13.96
Total assets at end of period	$	4,210,541		$	2,737,676		$	1,950,784		$	1,763,369		$	1,138,426
Less: Intangible assets		267,984			117,849			52,803			53,474			30,591
Adjusted total assets at end of period		3,942,557			2,619,827			1,897,981			1,709,895			1,107,835
Tangible common equity to tangible assets		10.86	%		10.75	%		9.69	%		9.52	%		9.50	%
Total average shareholders' equity		586,977			355,378			226,351			172,954			97,325
Less: average intangible assets		216,658			108,638			53,136			34,628			8,244
Less: average minority interest not included in intangible assets		399			332			264			267			136
Average tangible common equity	$	369,920		$	246,408		$	172,951		$	138,059		$	88,945
Net income to common shareholders		42,444			20,068			17,853			9,605			5,403
Return on average tangible common equity (ROATCE)		11.47	%		8.14	%		10.32	%		6.96	%		6.07	%
Efficiency ratio:
Net interest income	$	150,221		$	99,424		$	67,182		$	50,049		$	28,473
Total noninterest income		19,281			19,711			13,956			8,459			5,032
Less: gain (loss) on sale of securities		193			(91	)		-			-			(33	)
Operating revenue	$	169,309		$	119,226		$	81,138		$	58,508		$	33,538
Expenses:
Total noninterest expenses	$	107,075		$	73,195		$	49,079		$	40,245		$	23,453
Efficiency ratio		63.24	%		61.39	%		60.49	%		68.79	%		69.93	%
Operating efficiency ratio:
Net interest income	$	150,221		$	99,424		$	67,182		$	50,049		$	28,473
Total noninterest income		19,281			19,711			13,956			8,459			5,032
Less: gain (loss) on sale of securities		193			(91	)		-			-			(33	)
Operating revenue	$	169,309		$	119,226		$	81,138		$	58,508		$	33,538
Expenses:
Total noninterest expenses	$	107,075		$	73,195		$	49,079		$	40,245		$	23,453
Less: merger/conversion-related expenses		6,645			2,320			479			764			662
Adjusted noninterest expenses	$	100,430		$	70,875		$	48,600		$	39,481		$	22,791
Operating efficiency ratio		59.32	%		59.45	%		59.90	%		67.48	%		67.96	%

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Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences are discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements except as required by law.

The following discussion pertains to our historical results, on a consolidated basis. However, because we conduct all of our material business operations through our subsidiaries, the discussion and analysis relates to activities primarily conducted at the subsidiary level.

All dollar amounts in the tables in this section are in thousands of dollars, except per share data or when specifically identified.

Our Business

We (the “Company” or “NCC”) are a financial holding company headquartered in Birmingham, Alabama. We operate one subsidiary bank, National Bank of Commerce (“NBC” or the “Bank”). Through NBC, we provide a broad array of financial services for commercial and consumer customers through seven full-service banking offices in Alabama, twenty-four full-service banking offices in Florida and five full-service banking offices in the Atlanta, Georgia metro area. National Bank of Commerce conducts business under a number of trade names unique to its local markets, including United Legacy Bank, Reunion Bank of Florida, Private Bank of Buckhead, Private Bank of Decatur, PrivatePlus Mortgage, Patriot Bank, FirstAtlantic Bank, Premier Community Bank of Florida and First Landmark Bank.

We also own a 70% equity interest in CBI Holding Company, LLC (“CBI”), which owns Corporate Billing LLC (“Corporate Billing”), a transaction-based finance company headquartered in Decatur, Alabama, that provides factoring, invoicing, collection and accounts receivable management services to transportation companies and automotive parts and service providers throughout the United States and Canada.

2018 Acquisitions

FirstAtlantic Financial Holdings, Inc.

On January 1, 2018, we acquired FirstAtlantic Financial Holdings, Inc. (“FirstAtlantic”), a savings and loan holding company headquartered in Jacksonville, Florida, through the merger of FirstAtlantic with and into NCC and of FirstAtlantic’s wholly-owned subsidiary, FirstAtlantic Bank, with and into NBC. The former offices of FirstAtlantic Bank continue to operate as a division of NBC under the trade name “FirstAtlantic Bank.”

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In connection with the merger, each share of common stock of FirstAtlantic issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.44 shares of NCC common stock and cash in the amount of $17.25. We paid approximately $12.8 million in cash and issued 2,393,382 shares of common stock as consideration in the merger. The aggregate estimated value of the consideration was $110.0 million.

We marked FirstAtlantic’s assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $489.0 million in assets at fair value from FirstAtlantic and added eight banking centers with approximately $303.8 million in loans and approximately $374.3 million in deposits. We recorded goodwill of $51.3 million and a core deposit intangible asset of $6.3 million as a result of the merger.

Premier Community Bank of Florida

On July 1, 2018, we acquired Premier Community Bank of Florida (“Premier”), headquartered in Bradenton, Florida, through the merger of Premier with and into NBC. NBC continues to operate the former offices of Premier under the trade name “Premier Community Bank of Florida, a division of National Bank of Commerce.”

In connection with the merger, each share of common stock of Premier issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.4218 shares of NCC common stock and $0.93 in cash. We paid approximately $2.3 million in cash and issued 1,028,092 shares of NCC common stock as consideration in the merger. The aggregate estimated value of the consideration was $51.4 million.

We marked Premier’s assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $275.2 million in assets at fair value from Premier and added four banking centers with approximately $168.8 million in loans and approximately $205.1 million in deposits. We recorded goodwill of $28.5 million and a core deposit intangible asset of $3.5 million as a result of the merger.

Landmark Bancshares, Inc.

On August 1, 2018, we acquired Landmark Bancshares, Inc. (“Landmark”), a bank holding company headquartered in Marietta, Georgia, through the merger of Landmark with and into NCC and of Landmark’s wholly-owned subsidiary, First Landmark Bank, with and into NBC. The former offices of First Landmark Bank continue to operate as branch offices of NBC under the trade name “First Landmark Bank, a division of National Bank of Commerce.”

In connection with the merger, each share of Landmark common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.5961 shares of NCC common stock and $1.33 in cash. We paid approximately $5.2 million in cash and issued 2,334,385 shares of NCC common stock as consideration in the merger. The aggregate estimated value of the consideration was $111.9 million.

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We marked Landmark’s assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $622.1 million in assets at fair value from Landmark and added three banking centers with approximately $460.7 million in loans and approximately $480.2 million in deposits. We recorded goodwill of $56.5 million and a core deposit intangible asset of $8.4 million as a result of the merger.

2017 Acquisitions

Patriot Bank

On August 31, 2017, we acquired Patriot Bank, headquartered in Trinity, Florida, through the merger of Patriot Bank with and into NBC. The former offices of Patriot Bank continue to operate as a division of NBC under the trade name “Patriot Bank.”

In connection with the merger, each share of Patriot Bank common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive 0.1711 shares of NCC common stock and $0.725 in cash. We paid approximately $3.0 million in cash and issued 706,702 shares of our common stock as consideration in the merger. The aggregate estimated value of the consideration was $31.1 million.

We marked Patriot Bank’s assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $160.3 million in assets at fair value from Patriot Bank and added four banking centers with approximately $121.7 million in loans and approximately $127.7 million in deposits. We recorded goodwill of $14.7 million and a core deposit intangible asset of $899 thousand as a result of the merger.

Private Bancshares, Inc.

On January 1, 2017, we acquired Private Bancshares, Inc. (“Private Bancshares”), a bank holding company headquartered in Atlanta, Georgia, through the merger of Private Bancshares with and into NCC and of Private Bancshares’ wholly-owned subsidiary, Private Bank of Buckhead, with and into NBC. The former offices of Private Bank of Buckhead continue to operate as a division of NBC under the trade names “Private Bank of Buckhead,” “Private Bank of Decatur” and “PrivatePlus Mortgage.”

In connection with the merger, each share of Private Bancshares common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive either 0.85417 shares of our common stock or $20.50 in cash. We paid approximately $8.3 million in cash and issued 1,809,189 shares of our common stock as consideration in the merger. The aggregate estimated value of the consideration was $79.9 million.

We marked Private Bancshares’ assets and liabilities to fair value based on information available at the time of acquisition. We acquired approximately $371.1 million in assets at fair value from Private Bancshares and added two banking centers with approximately $260.0 million in loans and approximately $286.2 million in deposits. We recorded goodwill of $47.9 million and a core deposit intangible asset of $3.0 million as a result of the merger.

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Additional information regarding the FirstAtlantic, Premier, Landmark, Patriot Bank and Private Bancshares acquisitions is included in Note 2, “Business Combinations,” of the Notes to Consolidated Financial Statements provided herein.

Overview of 2018 Results

Our net income was $42.4 million in 2018, compared to $20.1 million in 2017. Our 2017 results include a write-down of our deferred tax asset (“DTA”) due to the enactment of the Tax Cuts and Jobs Act of 2017, increasing income tax expense for the year by $6.2 million. The primary factors leading to the increase in our 2018 net income and other highlights include the following:

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We acquired FirstAtlantic on January 1, 2018, Premier on July 1, 2018 and Landmark on August 1, 2018 (collectively “the 2018 acquisitions”). As a result, our 2018 results include an entire year of revenue and expenses attributable to FirstAtlantic and six months and five months of revenue and expenses attributable to Premier and Landmark, respectively.

●

Average loans outstanding in 2018 were $2.80 billion, compared to $1.92 billion in 2017, an increase of approximately 46.1%. The higher loan balance led to an increase in net interest income from $99.4 million in 2017 to $150.2 million in 2018. In addition to organic growth, 2018 balances include a full year of loans attributable to FirstAtlantic and six months and five months of loans attributable to Premier and Landmark, respectively.

●

Loan yields in 2018 averaged 5.76%, compared to 5.40% for 2017, leading to an increase in earning asset yields to 5.42% in 2018 compared to 4.90% in 2017. Interest-bearing liability costs were 1.01% in 2018, compared to 0.70% in 2017. As a result, our net interest spread increased from 4.20% in 2017 to 4.41% in 2018. Average noninterest-bearing deposits grew from $621.8 million in 2017 to $833.8 million in 2018, reducing our overall funding cost. The combination of higher loan yields and an increase in noninterest-bearing deposits led to an expansion in our net interest margin from 4.42% in 2017 to 4.74% in 2018.

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Average deposits in 2018 were $2.92 billion, compared to $2.08 billion in 2017, an increase of approximately 40.8%. In addition to organic growth, the increase in the 2018 balances was driven by a full year of deposits attributable to FirstAtlantic and six months and five months of deposits attributable to Premier and Landmark, respectively.

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Our higher net interest income in 2018 was partially offset by higher operating expenses, which grew to $107.1 million in 2018 from $73.2 million in 2017. The largest category of operating expense increase was salaries and employee benefits. The higher operating expenses resulted primarily from our expansion activities and the inclusion of expenses attributable to our 2018 acquisitions.

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During 2018, our noninterest income reduced to $19.3 million from $19.7 million in 2017. Merchant sponsorship revenue and service charge income each increased during 2018 but the increase was offset by a reduction in mortgage origination and fee income.

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On November 23, 2018, we entered into a definitive agreement with CenterState Bank Corporation (“CenterState”), whereby NCC will be merged with and into CenterState, and our wholly owned subsidiary bank, National Bank of Commerce, will merge with and into CenterState’s wholly owned subsidiary bank, CenterState Bank, N.A. Each share of our common stock outstanding at the effective time of merger will be entitled to receive 1.65 shares of CenterState common stock. The transaction is expected to close during the second quarter of 2019.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the Notes to Consolidated Financial Statements for the year ended December 31, 2018, which are contained elsewhere in this report. Certain of these policies require estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or future periods. The use of estimates, assumptions and judgments is necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.

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

Allowance for Loan Losses

We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management. Some of the more critical judgments supporting our allowance for loan losses include judgments about the creditworthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions and other factors impacting the level of inherent losses. Under different conditions or using different assumptions, the actual or estimated credit losses that we ultimately realize may be different from our estimates. In determining the allowance, we estimate losses on individual impaired loans or on groups of loans that are not impaired when the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses, and the impacts of local, regional, national and global economic factors on the quality of the loan portfolio. Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see Note 1 to our Consolidated Financial Statements for the year ended December 31, 2018.

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Investment Securities Impairment

We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a security with respect to which there is an unrealized loss is impaired on an other-than-temporary basis. In each instance, we consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and, for debt securities, external credit ratings and recent downgrades. Securities with respect to which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value. The credit portion of the impairment, if any, is recognized as a realized loss in current earnings. Management performed its quarterly analysis as of December 31, 2018 and concluded that no securities were impaired. The Company did not recognize an impairment loss in 2018, 2017 or 2016.

Income Taxes

Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events recognized in the financial statements. A valuation allowance may be established to the extent necessary to reduce the deferred tax asset to a level at which it is “more likely than not” that the tax asset or benefit will be realized. Realization of tax benefits requires (1) having sufficient taxable income, available tax loss carrybacks or credits in future periods to permit the application of the tax benefit, (2) that the reversal of taxable temporary differences and/or tax planning strategies within the reversal period facilitate the utilization of the tax benefits, and (3) that then-current tax law allows for the realization of recorded tax benefits.

Business Combinations

Assets purchased and liabilities assumed in a business combination are recorded at their fair value. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of the purchased assets or assumed liabilities. When the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as non-accretable difference. We must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows related to the loans will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield, which will have a positive impact on interest income.

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In determining the initial fair value of purchased loans without evidence of credit deterioration at the date of acquisition, we include an adjustment to reflect an appropriate market rate of interest given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

We record goodwill and other intangible assets as a result of acquisitions accounted for under the acquisition method of accounting. Under the acquisition method, we are required to allocate the consideration paid for an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess cost over the fair value of net assets acquired and is not amortized but is tested for impairment. Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable. In the event of an impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings. The Company performs its annual test of impairment in the fourth quarter of each year. The measurement of any actual impairment loss requires management to calculate the implied fair value of goodwill by deducting the fair value of all tangible and separately identifiable intangible net assets (including unrecognized intangible assets) from the fair value of the reporting unit. The fair value of net tangible assets is calculated using the methodologies described in Note 2 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2018.

Our other intangible assets consist of core deposit premiums acquired in connection with business combinations and are based on the established value of acquired customer deposits. The core deposit premium is initially recognized based on a valuation performed as of the consummation date and is amortized over an estimated useful life of three to ten years. Amortization periods are reviewed annually in connection with the annual impairment testing of goodwill.

The process of evaluating goodwill and other intangibles for impairment involves highly subjective or complex judgments, estimates and assumptions regarding the fair value of the assets. As a result, changes to these judgments, estimates and assumptions in future periods could result in materially different results.

Comparison of Results of Operations for the Years Ended December 31, 2018, 2017 and 2016

The following is a narrative discussion and analysis of significant changes in our results of operations for the years ended December 31, 2018, 2017 and 2016.

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Net Income

2018 vs. 2017

During the year ended December 31, 2018, our net income was $42.4 million, compared to $20.1 million for the year ended December 31, 2017, an increase of 111.5%. The primary reason for the increase in net income in 2018 compared to 2017 was an increase in net interest income, which resulted from higher levels of loan balances and other earning assets, higher levels of noninterest-bearing deposits, and a resulting increase in our net interest margin and lower income tax expense during 2018. Noninterest income decreased by $430 thousand during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increased net interest income was partially offset by an increase in noninterest expense of $33.9 million during 2018 compared to 2017. Income tax expense during 2018 was lower due to the reduction of the corporate tax rate from 36% to 21% implemented by the Tax Cuts and Jobs Act of 2017 and 2017 included a $6.2 million write-down of our DTA to reflect the lower tax rates. Overall noninterest income decreased during 2018. The reason for this decrease was reduction in revenue from the mortgage division. During the year ended December 31, 2018, mortgage origination and fee income totaled $7.9 million, compared to $11.5 million for the year ended December 31, 2017, a decrease of 31.8%. Other noninterest expense increased by $33.9 million during the year ended December 31, 2018. Each category of noninterest expense increased in large part as a result of a full year of activity from FirstAtlantic, which we acquired on January 1, 2018, and six months and five months of activity from Premier and Landmark acquired on July 1, 2018 and August 1, 2018, respectively. The growth of our franchise in the markets in which we operate and the expenses associated with our acquisition activities also contributed to the overall increase in noninterest expense during 2018.

A majority of the changes in our net interest income, noninterest income and noninterest expense for the year ended December 31, 2018 compared to the year ended December 31, 2017 resulted from the additional revenues and expenses attributable to the addition of our 2018 acquisitions. The following table details the amounts that each of our 2018 acquisitions contributed to the change in selected consolidated totals for the year ended December 31, 2018.

	For The Year Ended December 31, 2018
	FirstAtlantic		Premier		Landmark		Patriot Bank		Total
Net interest income	$	16,307		5,101		11,373		4,718		37,499
Noninterest income	$	1,792		193		4,056		112		6,153
Noninterest expense (1)	$	10,801		3,582		8,849		2,069		25,301

(1) Excludes merger-related expense of $2.4 million attributable to FirstAtlantic.

2017 vs. 2016

During the year ended December 31, 2017, our net income was $20.1 million, compared to $17.9 million for the year ended December 31, 2016, an increase of 12.4%. The primary reason for the increase in net income in 2017 compared to 2016 was an increase in net interest income, which resulted from higher levels of loan balances and other earning assets, higher levels of noninterest-bearing deposits, and a resulting increase in our net interest margin. In addition to higher net interest income, noninterest income increased by $5.8 million during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increased net interest income and noninterest income were partially offset by an increase in noninterest expense of $24.1 million during 2017 compared to 2016 and the $6.2 million write-down of our DTA due to the lower corporate tax rate implemented by the Tax Cuts and Jobs Act of 2017. The largest increase in noninterest income during 2017 was in revenue from the mortgage division. During the year ended December 31, 2017, mortgage origination and fee income totaled $11.5 million, compared to $7.0 million for the year ended December 31, 2016, an increase of 65.3%. Other noninterest expense increased by $24.1 million during the year ended December 31, 2017. Each category of noninterest expense increased in large part as a result of a full year of activity from Private Bancshares, which we acquired on January 1, 2017, and four months of activity from Patriot Bank, which we acquired on August 31, 2017. The growth of our franchise in the markets in which we operate and the expenses associated with our acquisition activities also contributed to the overall increase in noninterest expense during 2017.

A majority of the changes in our net interest income, noninterest income and noninterest expense for the year ended December 31, 2017 compared to the year ended December 31, 2016 resulted from the additional revenues and expenses attributable to the addition of Private Bancshares and Patriot Bank, which we acquired on January 1, 2017 and August 31, 2017, respectively. The following table details the amounts that Private Bancshares and Patriot Bank contributed to the change in selected consolidated totals for the year ended December 31, 2017.

	For The Year Ended December 31, 2017
	Private Bancshares		Patriot Bank		Total
Net interest income	$	17,868		2,004		19,872
Noninterest income	$	4,364		82		4,446
Noninterest expense	$	13,819		1,210		15,029

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Net Interest Income and Net Interest Margin Analysis

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

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

AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS

	For the Year Ended December 31,
(Dollars in thousands)	2018							2017							2016
Assets	Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
Loans (1)	$	2,802,374	$	161,512		5.76	%	$	1,918,634	$	103,539		5.40	%	$	1,397,681	$	70,761		5.06	%
Mortgage loans held-for-sale		18,617		834		4.48			18,779		679		3.62			13,031		489		3.75
Securities:
Taxable securities		176,050		5,654		3.21			89,492		2,627		2.94			75,110		1,813		2.41
Tax-exempt securities (1)		24,562		1,005		4.09			25,420		1,243		4.89			26,004		1,273		4.90
Cash balances in other banks		148,391		2,911		1.96			198,689		2,187		1.10			118,438		723		0.61
Funds sold		726		10		1.38			-		-		0.00			-		-		0.00
Total interest-earning assets		3,170,720	$	171,926		5.42			2,251,014	$	110,275		4.90			1,630,264	$	75,059		4.60
Noninterest-earning assets		406,140							230,482							150,703
Total assets	$	3,576,860						$	2,481,496						$	1,780,967

Liabilities and shareholders' equity
Interest-bearing transaction accounts		548,630		2,815		0.51	%		330,057		944		0.29	%		216,271		521		0.24
Savings and money market deposits		1,123,078		11,005		0.98			834,664		4,848		0.58			617,527		2,964		0.48
Time deposits		415,958		5,385		1.29			288,851		2,738		0.95			287,641		2,642		0.92
Federal Home Loan Bank advances		4,849		190		3.92			7,000		283		4.04			7,985		294		3.68
Securities sold under agreements to repurchase		9,452		121		1.28			651		1		0.15			-		-		0.00
Subordinated debt		29,873		1,921		6.43			24,527		1,553		6.33			15,200		960		6.32
Total interest-bearing liabilities		2,131,840	$	21,437		1.01			1,485,750	$	10,367		0.70			1,144,624	$	7,381		0.64
Noninterest-bearing deposits		833,781							621,819							396,925
Total funding sources		2,965,621							2,107,569							1,541,549
Noninterest-bearing liabilities		24,262							18,549							13,067
Shareholders' equity		586,977							355,378							226,351
Total liabilities and shareholders' equity	$	3,576,860						$	2,481,496						$	1,780,967
Net interest rate spread						4.41	%						4.20	%						3.96	%
Net interest income/margin (taxable equivalent)				150,489		4.75	%				99,908		4.44	%				67,678		4.15	%
Tax equivalent adjustment				268							484							496
Net interest income/margin			$	150,221		4.74	%			$	99,424		4.42	%			$	67,182		4.12	%

(1) Yields on tax-exempt loans and securities have been computed on a tax-equivalent basis using an income tax rate of 25.25% for the 2018 year and 37.00% for the 2017 and 2016 years.

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Comparison of Net Interest Income for the Years Ended December 31, 2018 and 2017

Net interest income increased by $50.8 million, or 51.1%, to $150.2 million for the year ended December 31, 2018, compared to $99.4 million for 2017. The increase was due to an increase in interest income of $61.9 million, resulting from higher levels of loan volume and investment securities from organic growth and the acquisitions of Landmark, Premier and FirstAtlantic. The increase in interest income was partially offset by an $11.1 million increase in interest expense. The increase in interest income was primarily due to a 46.1% increase in average loans outstanding and a 74.6% increase in average investment securities during 2018 compared to 2017. The resulting net interest margin for 2018 rose to 4.74%, from 4.42% during 2017. Higher loan yields during 2018, coupled with a change in our interest-earning asset mix during 2018, also contributed to the increased net interest margin during 2018. A larger portion of our earning assets were in invested loans and securities which earn higher rates than other interest-earning assets. During 2018, noninterest-bearing deposits averaged $833.8 million, compared to $621.8 million during 2017, an increase of $212.0 million, or 34.1%.

Interest-earning assets averaged $3.17 billion for 2018, compared to $2.25 billion for 2017, an increase of $919.7 million, or 40.9%. The yield on average interest-earning assets increased by 0.52% to 5.42% during 2018, compared to 4.90% for 2017. During 2018, loan yields increased by 0.37% to 5.76%. The increase in loan yield was attributable to recent increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR and increased accretion on our acquired loan portfolios due to early pay-offs and higher balances of acquired loans with associated accretable discounts due to the Landmark, Premier and FirstAtlantic acquisitions. The 2018 acquisitions contributed average loan balances of $668.1 million.

Interest-bearing liabilities averaged $2.13 billion for 2018, compared to $1.49 billion for 2017, an increase of $646.1 million, or 43.5%. The average rate paid on interest-bearing liabilities was 1.01% for 2018, compared to 0.70% for 2017. Each category of interest-bearing liabilities experienced rate increases during 2018. Interest-bearing liability costs increased due to increased rates on deposit accounts, primarily as a result of the effect of increases in short-term rate indices, such as the prime rate, and some resultant competitive pricing pressure in certain account types. The increase in interest-bearing and noninterest-bearing average deposits was due to organic deposit production and the inclusion of deposit balances from our 2018 acquisitions. Our 2018 acquisitions contributed average deposit balances of $720.3 million during 2018.

Comparison of Net Interest Income for the Years Ended December 31, 2017 and 2016

Net interest income increased by $32.2 million, or 48.0%, to $99.4 million for the year ended December 31, 2017, compared to $67.2 million for 2016. The increase was due to an increase in interest income of $35.2 million, resulting from higher levels of loan volume, investment securities and cash balances in banks, which was partially offset by a $3.0 million increase in interest expense. The increase in interest income was primarily due to a 37.3% increase in average loans outstanding, a 13.6% increase in average investment securities and a 67.8% increase in average cash balances in other banks during 2017 compared to 2016. The resulting net interest margin for 2017 rose to 4.42%, from 4.12% during 2016. Higher loan yields during 2017, coupled with higher rates earned on cash balances in other banks, also contributed to the increased net interest margin during 2017. During 2017, noninterest-bearing deposits averaged $621.8 million, compared to $396.9 million during 2016, an increase of $224.9 million, or 56.7%.

Interest-earning assets averaged $2.25 billion for 2017, compared to $1.63 billion for 2016, an increase of $620.8 million, or 38.1%. The yield on average interest-earning assets increased by 0.30% to 4.90% during 2017, compared to 4.60% for 2016. During 2017, loan yields increased by 0.34% to 5.40%. The increase in loan yield was primarily attributable to recent increases in short-term interest rate indices, such as the prime rate and 30-day LIBOR, increased accretion on our acquired loan portfolios due to early pay-offs and higher rates on loans acquired from Private Bancshares and Patriot Bank. Private Bancshares and Patriot Bank contributed average loan balances of $276.4 million and $42.6 million, respectively, during 2017.

Interest-bearing liabilities averaged $1.49 billion for 2017, compared to $1.14 billion for 2016, an increase of $341.1 million, or 29.8%. The average rate paid on interest-bearing liabilities was 0.70% for 2017, compared to 0.64% for 2016. Each category of interest-bearing liabilities experienced small rate increases. The rate increase on deposit accounts was primarily due to the effect of increases in short-term rate indices, such as the prime rate, and some resultant competitive pricing pressure in certain account types, as well as the fact that rates paid on Private Bancshares’ and Patriot Bank’s interest-bearing deposits were generally higher than the rates paid on our other deposits. The increase in interest-bearing and noninterest-bearing average deposits was due to organic deposit production and the inclusion of Private Bancshares’ and Patriot Bank’s deposits in our results during 2017. Private Bancshares and Patriot Bank contributed average deposit balances of $304.8 million and $40.7 million, respectively, during 2017.

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

ANALYSIS OF CHANGES IN NET INTEREST INCOME

	For the Year Ended December 31,
(Dollars in thousands)	2018 vs. 2017									2017 vs. 2016
	Variance due to									Variance due to
Interest-earning assets	Volume			Yield/Rate			Total			Volume			Yield/Rate			Total
Loans	$	50,516			7,457			57,973			27,852			4,926			32,778
Mortgage loans held-for-sale		(6	)		161			155			209			(19	)		190
Securities:
Taxable securities		2,759			268			3,027			382			432			814
Tax-exempt securities		(41	)		(197	)		(238	)		(29	)		(1	)		(30	)
Cash balances in other banks		(660	)		1,384			724			670			794			1,464
Funds sold		10			-			10			-			-			-
Total interest-earning assets	$	52,578			9,073			61,651			29,084			6,132			35,216

Interest-bearing liabilities
Interest-bearing transaction accounts	$	850			1,021			1,871			312			111			423
Savings and money market deposits		2,060			4,097			6,157			1,179			705			1,884
Time deposits		1,446			1,201			2,647			11			85			96
Federal Home Loan Bank advances		(84	)		(9	)		(93	)		(12	)		2			(10	)
Securities sold under agreements to repurchase		78			42			120			-			-			-
Subordinated debt		344			24			368			591			2			593
Total interest-bearing liabilities	$	4,694			6,376			11,070			2,081			905			2,986

Net interest income
Net interest income (taxable equivalent)		47,884			2,697			50,581			27,003			5,227			32,230
Taxable equivalent adjustment		(197	)		(19	)		(216	)		(6	)		(6	)		(12	)
Net interest income	$	48,081			2,716			50,797			27,009			5,223			32,242

Provision for Loan Losses

During the year ended December 31, 2018, we recorded a provision for loan losses of $4.7 million, compared to $3.9 million during the year ended December 31, 2017 and $3.2 million during the year ended December 31, 2016. The provision for 2018 and 2017 was a result of overall loan growth rather than declining asset quality metrics, and we incurred net charge-offs of $344 thousand and $995 thousand in the factored receivables portfolio that required additional provision expense during 2018 and 2017, respectively. During 2018, we incurred significantly higher charge-offs in our commercial and industrial loan portfolio which led to additional 2018 provision expense. The provision expense for 2016 was primarily attributable to growth in our overall loan portfolio, specifically our “real estate-mortgage” portfolio and the impact of uncertainty in the national and international economies on our local markets. We also incurred net charge-offs of $923 thousand in the factored receivables portfolio that required provision expense during 2016.

Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses (which is a charge to earnings) and loan recoveries, and is decreased by charge-offs. In determining the adequacy of our allowance for loan losses, we consider our historical loan loss experience, the general economic environment, the overall portfolio composition and other information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated and an impairment is deemed necessary, the impaired portion of the loan amount generally is charged off. As of December 31, 2018 and 2017, $10 thousand and $24 thousand, respectively, of our allowance was related to impaired loans.

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Noninterest Income

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

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

NONINTEREST INCOME

	For the Year Ended December 31,
(Dollars in thousands)	2018		2017			2016
Service charges and fees on deposit accounts	$	4,372		2,711			2,019
Mortgage origination and fee income		7,864		11,529			6,975
Merchant sponsorship revenue		2,979		2,560			2,168
Income from bank-owned life insurance		1,225		855			810
Wealth management fees		73		47			49
Gain on sale of other real estate, net		56		44			244
Gain on sale of investments available-for-sale		193		(91	)		-
Other noninterest income		2,519		2,056			1,691
Total noninterest income	$	19,281		19,711			13,956

Noninterest income for the years ended December 31, 2018 and 2017 was $19.3 million and $19.7 million, respectively. Each category of noninterest income (except for mortgage origination and fee income) increased during 2018. The inclusion of the 2018 acquisitions in our results of operations increased our noninterest income by $6.2 during the year ended December 31, 2018.

Mortgage division income decreased by $3.7 million during 2018 and totaled $7.9 million for the year, compared to $11.5 million during 2017. Mortgage division production decreased during 2018 and totaled $490.8 million, compared to $507.6 million during the year ended December 31, 2017, which led to a decrease in mortgage division income. Recent interest rate increases have negatively impacted our mortgage loan pricing and led to lower mortgage division income. Additionally, our mortgage production totals include mortgage loans purchased by the Bank for its loan portfolio. When such loans are originated, they become Bank portfolio loans and no gain on sale is recognized. We record interest income over the life of the loan. During 2018, the Bank purchased approximately 37.5% of the mortgage origination volume compared to 21.0% during 2017, contributing to the decline in 2018 mortgage division fee income. During the year ended December 31, 2018, refinance activity accounted for approximately 24.3% of production volume, identical to the 24.3% during 2017.

Merchant sponsorship revenue totaled $3.0 million during the year ended December 31, 2018, compared to $2.6 million during the year ended December 31, 2017. The increase was due to growth in the volume of transactions that we processed.

Service charges and fees on deposit accounts increased by $1.7 million to $4.4 million for 2018. The addition of the 2018 acquisitions contributed $888 thousand of the increase for 2018. The remaining portion of this increase was a result of an increase in the number of deposit accounts, as we continue to open new accounts and gain market share in our markets.

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During the year ended December 31, 2018, we recorded income from bank-owned life insurance totaling $1.2 million, compared to $855 thousand during the year ended December 31, 2017. The increase during 2018 was due to the bank-owned life insurance acquired in the 2018 acquisitions and a $3.2 million investment in bank-owned life insurance by the company during the fourth quarter of 2018.

During the year ended December 31, 2018, we recorded gains on the sale of other real estate totaling $56 thousand, compared to a gain of $44 thousand on such sales during 2017.

Other noninterest income increased by $463 thousand and totaled $2.5 million during the year ended December 31, 2018. Most of the increase was attributable to non-recurring income, such as interest rate swap income.

Noninterest income for the years ended December 31, 2017 and 2016 was $19.7 million and $14.0 million, respectively. The primary reason for the increase in noninterest income was higher revenue from the mortgage division in 2017. Mortgage division income increased by $4.6 million during 2017 and totaled $11.5 million for the year, compared to $7.0 million during 2016. Mortgage division production totaled $507.6 million during 2017, compared to $322.9 million during the year ended December 31, 2016, which led to the increased mortgage division income. During the year ended December 31, 2017, refinance activity accounted for approximately 24.3% of production volume, compared to approximately 26.6% during 2016. A large portion of this increased income during 2017 was due to the acquisition of Private Bancshares, which had a sizable mortgage operation that we acquired through the transaction.

Merchant sponsorship revenue totaled $2.6 million during the year ended December 31, 2017, compared to $2.2 million during the year ended December 31, 2016. Service charges and fees on deposit accounts increased by $692 thousand to $2.7 million for 2017. The addition of Private Bancshares and Patriot Bank contributed $272 thousand of the increase for 2017. The remaining portion of this increase was a result of an increase in the number of deposit accounts, as we continue to open new accounts and gain market share in our markets. Other noninterest income increased by $365 thousand and totaled $2.1 million during the year ended December 31, 2017. Most of the increase was attributable to premiums earned on SBA loans and wire transfer fees.

Noninterest Expense

Our total noninterest expense increase reflects our continued growth of the Company (organic growth and growth through acquisitions), as well as the expansion of our operational framework, employee base and facilities infrastructure as we build the foundation to support our growth strategies.

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

NONINTEREST EXPENSE

	For the Year Ended December 31,
(Dollars in thousands)	2018		2017		2016
Salaries and employee benefits	$	58,166		39,556		27,735
Commission-based compensation		6,955		6,855		4,091
Occupancy and equipment expense, net		8,994		6,209		4,640
Data processing expenses		9,065		4,368		2,425
Advertising and marketing expenses		1,265		1,453		705
Legal fees		2,041		849		646
FDIC insurance assessments		1,037		1,162		1,000
Property and casualty insurance premiums		924		834		574
Accounting and audit expenses		1,383		1,109		962
Consulting and other professional expenses		3,903		2,412		958
Telecommunications expenses		1,101		775		559
Other real estate owned, repossessed asset and other collection expenses		281		422		331
Core deposit intangible amortization		4,249		1,455		756
Other noninterest expense		7,711		5,736		3,697
Total noninterest expense	$	107,075		73,195		49,079

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Noninterest expense for the years ended December 31, 2018 and 2017 was $107.1 million and $73.2 million, respectively. During 2018, we incurred $5.1 million of merger and conversion related charges, of which approximately $2.1 million was associated with the termination of a data processing contract for FirstAtlantic. We expect to incur additional merger related expenses in 2019 in connection with our pending merger with CenterState. The inclusion of the 2018 acquisitions in our results of operations accounted for approximately $25.3 million of the $33.9 million increase in noninterest expense recorded during the year ended December 31, 2018.

The largest components of noninterest expense are related to employee costs shown in the table above as salaries and employee benefits expense and commission-based compensation expense. Salaries continue to increase as we grow and expand our presence in the markets that we serve. Higher incentive compensation accruals and a larger workforce have contributed to the increase in salaries and employee benefits during 2018. The Company recorded additional incentive compensation expense in the fourth quarter totaling $3.8 million, which included payments made to certain executive officers in December 2018 in lieu of equity incentive awards that would otherwise be granted in January 2019 in accordance with the Company’s annual equity grant schedule, which awards will not be granted due to the pending merger with CenterState. Commission-based compensation expense is directly related to mortgage loan origination activity and certain production activity at Corporate Billing. Total commission-based compensation increased during 2018 compared to 2017. Although mortgage origination volume was down slightly in 2018, activity at Corporate Billing increased and led to higher total commission-based compensation expense. Additionally, salaries and benefits for the 2018 acquisitions contributed approximately $14.1 million of the $18.6 million increase in salaries and employee benefits expense recorded during 2018.

All categories of noninterest expense increased except for advertising, FDIC Insurance and other real estate expenses during the year ended December 31, 2018. This was largely a result of the additional expenses associated with our 2018 acquisitions and the fact that we are a larger company as a result of acquisitions, organic growth and the expenses associated with our mergers and core conversion related activities. Our other noninterest expenses continue to increase as the size and complexity of our Company grows.

Occupancy and equipment expense increased by 44.9% in 2018 compared to 2017, primarily due to the inclusion of $2.9 million in expenses relating to the operation of offices of our 2018 acquisitions. In August 2017, we acquired our current headquarters building and after renovations, we occupied the building during August 2018. The expenses associated with our new headquarters also contributed to the increased occupancy expense during 2018.

Noninterest expense for the years ended December 31, 2017 and 2016 was $73.2 million and $49.1 million, respectively. The inclusion of Private Bancshares and Patriot Bank in our results of operations accounted for approximately $15.0 million of the $24.4 million increase in noninterest expense recorded during the year ended December 31, 2017.

During the year ended December 31, 2017, salaries continued to increase as we grew and expanded our presence. Higher incentive compensation accruals during 2017 and a larger workforce contributed to the increase in salaries and employee benefits. Commission-based compensation expense is directly related to mortgage loan origination activity and certain production activity at Corporate Billing. The higher levels of revenue for the mortgage division, specifically revenue from the addition of Private Bancshares, contributed to an increase of $2.1 million in commission-based compensation during 2017 compared to 2016. Additionally, salaries and benefits expense and commission-based compensation expense for Private Bancshares and Patriot Bank employees contributed approximately $10.1 million of the $14.6 million increase in salaries and employee benefits expense and commission-based compensation expense recorded during 2017 compared to 2016.

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All categories of noninterest expense increased during the year ended December 31, 2017. This was largely a result of the additional expenses associated with the operations of Private Bancshares and Patriot Bank and the fact that we are a larger company as a result of acquisitions and organic growth. Our other noninterest expenses continue to increase as the size and complexity of our Company grows.

Income Tax Provision

Income tax expense of $12.8 million, $20.1 million and $9.4 million was recognized during the years ended December 31, 2018, 2017 and 2016, respectively. The effective tax rate during 2018 benefitted from the lower tax rate enacted by the Tax Cut and Jobs Act enacted on December 22, 2017, which reduced the corporate tax rate from a maximum tax rate of 35% to a flat tax rate of 21% for the tax years beginning after December 31, 2017. As a result, our effective tax rate during 2018 was 22.2% (23.2% including the minority interest).

The increase in income tax expense during 2017 was due to an increase in pre-tax income as well as the impact of the Tax Cut and Jobs Act. Pursuant to ASC 740-10-30-2 Income Taxes, deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. As a result, the Company revalued its deferred tax assets and liabilities as of December 31, 2017 and recorded the effect of this change as a component of income tax expense. The income tax expense related to the change in the enacted federal tax rate as of December 31, 2017 was $6.2 million. The combination of higher pre-tax income and the write-down of our deferred tax asset resulted in a 2017 effective tax rate of 47.7% (50.0% including the minority interest).

The effective tax rate for 2016 was 32.6% (34.5% including the minority interest). Our effective tax rate generally is expected to increase with higher levels of taxable income. The effective tax rates are affected by items of income and expense that are not subject to federal and state taxation.

Comparison of Balance Sheets at December 31, 2018, 2017 and 2016

Overview

Our total assets increased by $1.47 billion, or 53.8%, from $2.74 billion at December 31, 2017 to $4.21 billion at December 31, 2018. Loans increased by $1.18 billion, or 55.2%, from $2.14 billion at December 31, 2017 to $3.32 billion at December 31, 2018. Our total investment securities increased by $101.2 million, or 90.8%, from $111.4 million at December 31, 2017 to $212.6 million at December 31, 2018, and cash and cash equivalents decreased $18.2 million during 2018 and totaled $217.1 million at December 31, 2018. The 2018 acquisitions added total assets and loans of $1.39 billion and $933.3 million, respectively.

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Deposits at December 31, 2018 totaled $3.43 billion, an increase of $1.15 billion compared to December 31, 2017. The 2018 acquisitions added $1.06 billion in deposits. Deposit production is one of our primary focuses, as deposits serve as a low-cost funding source. The competition for deposits has increased as competitors in our markets increase rates paid on deposits.

Our total assets increased by $786.9 million, or 40.3%, from $1.95 billion at December 31, 2016 to $2.74 billion at December 31, 2017. Loans increased by $652.6 million, or 43.9%, from $1.49 billion at December 31, 2016 to $2.14 billion at December 31, 2017. Our total investment securities increased by $11.7 million, or 11.7%, from $99.7 million at December 31, 2016 to $111.4 million at December 31, 2017, and cash and cash equivalents increased $18.0 million during 2017 to $235.3 million at December 31, 2017. The Private Bancshares and Patriot Bank acquisitions added total assets and loans of $531.4 million and $381.7 million, respectively. Deposits at December 31, 2017 totaled $2.29 billion, an increase of $618.1 million compared to December 31, 2016. The Private Bancshares and Patriot Bank acquisitions added $414.0 million in deposits.

Loans

Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that we attempt to control and counterbalance. Total loans averaged $2.80 billion during the year ended December 31, 2018, or 88.4% of average earning assets, compared to $1.92 billion, or 85.2% of average earning assets, for the year ended December 31, 2017. At December 31, 2018, total loans, net of unearned income, were $3.32 billion, compared to $2.14 billion at December 31, 2017, an increase of $1.18 billion, or 55.2%. Excluding the loans acquired in the 2018 acquisitions, loans increased by $246.6 million, or 11.5%, during 2018.

Total loans averaged $1.92 billion during the year ended December 31, 2017, or 85.2% of average earning assets, compared to $1.40 billion, or 85.7% of average earning assets, for the year ended December 31, 2016. At December 31, 2017, total loans, net of unearned income, were $2.14 billion, compared to $1.49 billion at December 31, 2016, an increase of $652.6 million, or 43.9%. Excluding the loans acquired in the Private Bancshares and Patriot Bank transactions, loans increased by $270.8 million, or 18.2%, during 2017.

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

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

COMPOSITION OF LOAN PORTFOLIO

	As of December 31,
(Dollars in thousands)	2018						2017						2016						2015						2014
	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total
Construction, land development and other land loans	$	361,263			10.88	%	$	231,030			10.80	%	$	155,813			10.49	%	$	152,862			11.58	%	$	83,663			9.41	%
Secured by farmland		23,382			0.70			17,726			0.83			15,036			1.01			7,455			0.56			1,842			0.21
Secured by 1-4 family residential properties		724,614			21.83			508,935			23.80			387,342			26.07			333,761			25.29			221,222			24.88
Secured by multifamily (5 or more) residential properties		89,551			2.70			60,054			2.81			47,060			3.17			31,128			2.36			23,420			2.63
Secured by nonfarm nonresidential properties		1,526,435			45.99			888,289			41.53			606,776			40.83			509,212			38.58			330,784			37.20
Loans secured by real estate		2,725,245			82.11			1,706,034			79.77			1,212,027			81.57			1,034,418			78.37			660,931			74.33
Commercial and industrial loans		408,166			12.30			258,577			12.09			150,268			10.11			171,160			12.97			113,788			12.80
Factored commercial receivables		126,686			3.82			118,710			5.55			83,901			5.65			67,628			5.12			82,600			9.29
Consumer loans		31,192			0.94			26,314			1.23			19,060			1.28			21,116			1.60			13,962			1.57
Other loans		27,871			0.83			29,082			1.36			20,717			1.39			25,572			1.94			17,869			2.01
Total gross loans		3,319,160			100.00	%		2,138,717			100.00	%		1,485,973			100.00	%		1,319,894			100.00	%		889,150			100.00	%
Unearned income		(1,195	)					(659	)					(489	)					(480	)					(429	)
Total loans, net of unearned income		3,317,965						2,138,058						1,485,484						1,319,414						888,721
Allowance for loan losses		(18,176	)					(14,985	)					(12,113	)					(9,842	)					(9,802	)
Total net loans	$	3,299,789					$	2,123,073					$	1,473,371					$	1,309,572					$	878,919

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

The principal component of our loan portfolio is loans secured by real estate. At December 31, 2018, this category totaled $2.73 billion and represented 82.1% of the total loan portfolio, compared to $1.71 billion, or 79.8%, and $1.21 billion, or 81.6%, of the total loan portfolio at December 31, 2017 and 2016, respectively.

Loans secured by nonfarm nonresidential properties (“commercial mortgage loans”) increased by $638.1 million, or 71.8%, to $1.53 billion at December 31, 2018, compared to $888.3 million at December 31, 2017. Excluding the loans acquired in the 2018 acquisitions, commercial mortgage loans increased by $175.9 million, or 19.8%, during 2018. Commercial mortgage loans increased by $281.5 million, or 46.4%, to $888.3 million at December 31, 2017, compared to $606.8 million at December 31, 2016. Excluding the acquired Private Bancshares and Patriot Bank loans, commercial mortgage loans increased by $99.6 million, or 16.4%, during 2017. Commercial mortgage loans are the single largest category of loans, and, at December 31, 2018, accounted for 46.0% of the portfolio. Our management team has a great deal of experience and expertise in commercial mortgages, and this loan type has traditionally represented a large portion of our loan portfolio. Of the $1.53 billion in total commercial mortgage loans at December 31, 2018, approximately $646.9 million were loans secured by owner-occupied properties.

The following table provides a summary of our non-owner occupied commercial mortgage loans as of the dates indicated.

	As of December 31,
(Dollars in thousands)	2018		2017		2016		2015		2014
Office	$	199,989		122,554		101,639		81,543		67,173
Retail		328,001		203,647		131,807		114,841		29,103
Industrial/Warehouse		107,007		51,852		32,608		32,412		74,424
Other		244,575		131,711

National Commerce Corp 10-K