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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2014

 

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

For the transition period from                      to                     

Commission file number 333-193951

 

 

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Tennessee   20-8839445

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

722 Columbia Avenue

Franklin, Tennessee

  37064
(Address of principal executive offices)   (Zip Code)

615-236-2265

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

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  x    No  ¨

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of the registrant’s common stock, no par value per share, as of November 10, 2014, was 7,739,644.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Cautionary Note Regarding Forward-Looking Statements

     1   

Item 1. Condensed Consolidated Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets

     2   

Condensed Consolidated Statements of Income

     3   

Condensed Consolidated Statements of Comprehensive Income

     4   

Condensed Consolidated Statement of Changes in Shareholders’ Equity

     5   

Condensed Consolidated Statements of Cash Flows

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     29   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     45   

Item 4. Controls and Procedures

     46   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     46   

Item 1A. Risk Factors

     47   

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

     47   

Item 3. Defaults Upon Senior Securities

     47   

Item 4. Mine Safety Disclosures

     47   

Item 5. Other Information

     47   

Item 6. Exhibits

     48   

SIGNATURES

     49   


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update such statements after this date.

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Amendment No. 3 to our Registration Statement on Form S-4 filed with the SEC on May 7, 2014 (“Form S-4”) and those described in Item 1A of Part II of this quarterly report on Form 10-Q.

 

1


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2014 and December 31, 2013

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

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     September 30,
2014
    December 31,
2013
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 36,657      $ 18,217   

Certificates of deposit at other financial institutions

     250        —     

Securities available for sale

     346,750        268,515   

Securities held to maturity (fair value 2014—$55,904 and 2013—$54,004)

     56,293        56,575   

Loans held for sale, at fair value

     25,652        10,694   

Loans

     719,275        421,304   

Allowance for loan losses

     (5,883     (4,900
  

 

 

   

 

 

 

Net loans

     713,392        416,404   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     5,349        3,032   

Premises and equipment, net

     13,113        4,138   

Accrued interest receivable

     3,426        2,396   

Bank owned life insurance

     11,579        8,232   

Deferred tax asset

     8,028        3,995   

Foreclosed assets

     1,690        181   

Servicing rights, net

     2,956        2,640   

Mortgage banking derivative asset

     368        464   

Goodwill

     9,121        157   

Core deposit intangible, net

     2,876        —    

Other assets

     1,079        734   
  

 

 

   

 

 

 

Total assets

   $ 1,238,579      $ 796,374   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 136,830      $ 52,686   

Interest bearing

     914,728        628,614   
  

 

 

   

 

 

 

Total deposits

     1,051,558        681,300   

Federal funds purchased and repurchase agreements

     34,238        24,291   

Federal Home Loan Bank advances

     33,000        23,000   

Accrued interest payable

     437        222   

Mortgage banking derivative liability

     54        —    

Other liabilities

     2,838        2,398   
  

 

 

   

 

 

 

Total liabilities

     1,122,125        731,211   

Shareholders’ equity

    

Senior non-cumulative preferred stock, no par value, $10,000 liquidation value: Series A, 1,000,000 shares authorized; 10,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     10,000        10,000   

Common stock, no par value; 10,000,000 shares authorized; 7,739,644 and 4,862,875 issued at September 30, 2014 and December 31 2013, respectively

     93,888        52,638   

Retained earnings

     12,562        7,058   

Accumulated other comprehensive income (loss)

     4        (4,533
  

 

 

   

 

 

 

Total shareholders’ equity

     116,454        65,163   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,238,579      $ 796,374   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2014 and 2013

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

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Interest income and dividends

        

Loans, including fees

   $ 10,168      $ 5,186      $ 22,466      $ 14,434   

Securities:

        

Taxable

     2,395        1,098        6,932        2,979   

Tax-Exempt

     20        17        60        46   

Dividends on restricted equity securities

     84        30        175        57   

Federal funds sold and other

     25        7        57        35   
  

 

 

   

 

 

   

 

 

   

 

 

 
     12,692        6,338        29,690        17,551   

Interest expense

        

Deposits

     1,446        874        3,808        2,733   

Federal funds purchased and repurchase agreements

     39        50        123        94   

Federal Home Loan Bank advances

     80        29        189        67   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,565        953        4,120        2,894   

Net interest income

     11,127        5,385        25,570        14,657   

Provision for loan losses

     664        225        1,489        457   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     10,463        5,160        24,081        14,200   

Noninterest income

        

Service charges on deposit accounts

     13        12        37        39   

Other service charges and fees

     600        270        1,149        868   

Net gains on sale of loans

     1,875        714        4,226        3,611   

Loan servicing fees, net

     73        (19     173        (317

Gain on sale of securities

     22        —         93        78   

Net gain (loss) on sale and write-down of foreclosed assets

     (3     (29     28        (250

Other

     694        369        1,419        1,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     3,274        1,317        7,125        5,182   

Noninterest expense

        

Salaries and employee benefits

     6,144        3,339        13,494        9,830   

Occupancy and equipment

     1,443        666        3,238        1,990   

FDIC assessment expense

     181        101        420        254   

Marketing

     224        70        470        193   

Professional fees

     961        79        1,594        322   

Other

     1,436        587        2,743        1,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     10,389        4,842        21,959        14,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     3,348        1,635        9,247        5,103   

Income tax expense

     1,333        625        3,668        1,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,015      $ 1,010      $ 5,579      $ 3,158   

Dividends paid on Series A preferred stock

     (25     (25     (75     (83
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 1,990      $ 985      $ 5,504      $ 3,075   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.26      $ 0.27      $ 0.94      $ 0.84   

Diluted

     0.25        0.26        0.91        0.82   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Nine Months Ended September 30, 2014 and 2013

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

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net income

   $ 2,015      $ 1,010      $ 5,579      $ 3,158   

Other comprehensive income (loss), net of tax:

        

Unrealized gains/losses on securities:

        

Unrealized holding gain (loss) arising during the period

     (623     819        7,445        (4,138

Reclassification adjustment for gains included in net income

     (22     —         (93     (78
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     (645     819        7,352        (4,216
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax effect

     247        (313     (2,815     1,614   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (398     506        4,537        (2,602
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,617      $ 1,516      $ 10,116      $ 556   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2014 and 2013

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

(Unaudited)

 

     Preferred
Stock
     Common
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance at December 31, 2012

   $ 10,000       $ 37,821      $ 2,606      $ 929      $ 51,356   

Exercise of common stock warrants, 2,775 shares

     —          33        —         —         33   

Exercise of common stock options, 5,755 shares

     —          58        —         —         58   

Issuance of 958,924 shares of common stock, net of stock offering costs of $601

     —          11,865        —         —         11,865   

Dividends paid on Series A preferred stock

     —          —         (83     —         (83

Stock based compensation expense

     —          261        —         —         261   

Stock issued in conjunction with 401(k) employer match, 17,596 shares

     —          229        —         —         229   

Stock issued in conjunction with stock option exchange, 32,814 shares

     —          (142     —         —         (142

Net income

     —          —         3,158        —         3,158   

Other comprehensive loss

     —          —         —         (2,602     (2,602
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 10,000       $ 50,125      $ 5,681      $ (1,673   $ 64,133   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 10,000       $ 52,638      $ 7,058      $ (4,533   $ 65,163   

Exercise of common stock options, 6,508 shares

     —          56        —         —         56   

Dividends paid on Series A preferred stock

     —          —         (75     —         (75

Stock based compensation expense

     —          457        —         —         457   

Stock issued in conjunction with 401(k) employer match, 20,345 shares

     —          275        —         —         275   

Stock (2,766,191 shares) and stock options (137,280 options) issued related to MidSouth Bank acquisition, net of stock issuance costs of $514

     —          40,462        —         —         40,462   

Net income

     —          —         5,579        —         5,579   

Other comprehensive income

     —          —         —         4,537        4,537   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 10,000       $ 93,888      $ 12,562      $ 4      $ 116,454   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2014 and 2013

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

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities

    

Net income

   $ 5,579      $ 3,158   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     616        492   

Accretion of purchase accounting adjustments

     (831     —     

Net amortization of securities

     1,928        3,497   

Amortization of loan servicing right asset

     547        991   

Amortization of core deposit intangible

     184        —    

Increase (decrease) in impairment of servicing asset

     —         (90

Provision for loan losses

     1,489        457   

Origination of loans held for sale

     (191,142     (244,491

Proceeds from sale of loans held for sale

     186,618        253,939   

Net gain on sale of loans

     (4,226     (3,611

Gain on sale of available for sale securities

     (93     (78

Income from bank owned life insurance

     (203     (204

(Gain) loss on sale and write down of foreclosed assets

     (28     250   

Stock-based compensation

     457        261   

Compensation expense related to common stock issued to 401(k) plan

     275        229   

Net change in:

    

Accrued interest receivable and other assets

     101        (688

Accrued interest payable and other liabilities

     (719     891   
  

 

 

   

 

 

 

Net cash from operating activities

     552        15,003   

Cash flows from investing activities

    

Available for sale securities:

    

Sales

     34,087        11,555   

Purchases

     (118,611     (88,211

Maturities, prepayments and calls

     69,465        67,289   

Held to maturity securities:

    

Purchases

     (8,601     (19,656

Maturities, prepayments and calls

     8,655        4,095   

Net change in loans

     (114,676     (79,196

Purchase of restricted equity securities

     (745     (664

Proceeds from sale of foreclosed assets

     634        1,870   

Purchases of premises and equipment, net

     (2,941     (978

Decrease in interest bearing deposits in financial institutions

     —         100   

Net cash acquired from acquisition (See Note 2)

     12,197        —    
  

 

 

   

 

 

 

Net cash from investing activities

     (120,536     (103,796

Cash flows from financing activities

    

Increase in deposits

     125,903        9,031   

(Decrease) increase in federal funds purchased and repurchase agreements

     9,054        37,995   

Proceeds from Federal Home Loan Bank advances

     4,000        21,449   

Proceeds from exercise of common stock warrants

     —         30   

Proceeds from exercise of common stock options

     56        58   

Cash paid in conjunction with stock option exchange

     —         (142

Proceeds from issuance of common stock, net of offering costs

     (514     11,868   

Dividends paid on preferred stock

     (75     (83
  

 

 

   

 

 

 

Net cash from financing activities

     138,424        80,206   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     18,440        (8,587

Cash and cash equivalents at beginning of period

     18,217        24,977   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 36,657      $ 16,390   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 3,905      $ 2,951   

Income taxes paid

     4,546        1,944   

Non-cash supplemental information:

    

Fair value of stock and stock options issued related to MidSouth Bank acquisition (See Note 2)

   $ 40,976      $ —    

Transfers from loans to foreclosed assets

     1,315        761   

Transfer from additional paid-in-capital to common stock

     —         426   

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Franklin Financial Network, Inc. (“FFN”), and its wholly owned subsidiaries, Franklin Synergy Bank and Banc Compliance Group, Inc. (collectively, the “Company”), have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by Regulation S-X, Rule 10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on May 15, 2014.

NOTE 2— ACQUISITIONS

Acquisition of MidSouth Bank

On July 1, 2014 the Company completed the acquisition of MidSouth Bank (“MidSouth”), pursuant to the terms of the Agreement and Plan of Reorganization and Bank Merger (the “merger agreement”) dated November 19, 2013.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $8,964, after consideration of a measurement period adjustment discussed below, which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

The Company acquired 100% of the outstanding preferred and common stock of MidSouth. The purchase price consisted of both cash and stock. MidSouth’s common shareholders received 0.425926 shares of FFN common stock for each share of MidSouth common stock. MidSouth’s preferred shareholders received 0.851852 shares of FFN common stock for each share of MidSouth preferred stock. Each MidSouth Series 2009A warrant holder received 0.18 shares of FFN common stock for each MidSouth Series 2009A warrant, and each Series 2011-A warrant holder received 0.146667 shares of FFN common stock for each MidSouth Series 2011-A warrant. In lieu of issuing fractional shares of FFN common stock, FFN paid former MidSouth shareholders an amount in cash determined by multiplying (i) $13.50 by (ii) the fraction of a share (rounded to the nearest ten thousandth when expressed in decimal form) of FFN common stock.

MidSouth common stock options were converted into options to purchase shares of FFN common stock based on the 0.425926 exchange ratio, with the new exercise price becoming the exercise price of the MidSouth options divided by the exchange ratio. On the date of the merger, 2,766,191 shares of FFN common stock were exchanged for the common and preferred stock, and common stock warrants of MidSouth in accordance with the proration and allocation procedures contained in the merger agreement and as noted above. Subsequently, cash totaling $100 was paid to dissenting MidSouth shareholders representing 7,427 shares of FFN common stock. In addition, $18 of cash was paid to MidSouth shareholders for fractional shares in accordance with the merger agreement.

 

7


Table of Contents

Based on a valuation of the FFN’s common stock as of July 1, 2014, the resulting purchase price was $41,094. The following table summarizes the purchase price calculation:

 

Number of shares of MidSouth common stock outstanding at July 1, 2014

     3,912,503         

Common stock per share exchange ratio

     0.425926         
  

 

 

       

Total FFN common shares issued, net of 1,048.5142 fractional shares

        1,662,641      

Number of shares of MidSouth preferred stock outstanding at July 1, 2014

     1,259,907         

Common stock per share exchange ratio

     0.851852         
  

 

 

       

Total FFN common shares issued, net of 203.1097 fractional shares

        1,068,366      

Number of MidSouth Series 2009A preferred warrants outstanding at July 1, 2014

     242,350         

Common stock per share exchange ratio

     0.180000         
  

 

 

       

Total FFN common shares issued, net of 50.3800 fractional shares

        34,157      

Number of MidSouth Series 2011-A preferred warrants outstanding at July 1, 2014

     7,141         

Common stock per share exchange ratio

     0.146667         
  

 

 

       

Total FFN common shares issued, net of 20.3482 fractional shares

        1,027      
     

 

 

    

Total FFN common shares issued, net of 1,322.3521 fractional shares and 2,747.2227 MidSouth dissenting converted common shares

           2,766,191   

Multiplied by FFN common stock value per share at July 1, 2014

         $ 14.50   
        

 

 

 

Total Stock Consideration—Fair value of FFN common stock issued

         $ 40,110   
        

 

 

 

FFN stock options granted to MidSouth option holders

        137,280      

Grant date fair value per share of FFN options at July 1, 2014

      $ 6.31      
     

 

 

    

Fair value of FFN stock options granted to MidSouth option holders

         $ 866   
        

 

 

 

Total MidSouth dissenting common shares

     6,450         

Common stock per share exchange ratio

     0.425926         
  

 

 

       

Total converted MidSouth dissenting common shares, including 5.2227 fractional shares

        2,747.2227      

Total MidSouth dissenting preferred shares

     5,500         

Preferred stock per share exchange ratio

     0.851852         
  

 

 

       

Total converted MidSouth dissenting preferred shares, including 0.1860 fractional shares

        4,685.1860      
     

 

 

    

Total converted MidSouth dissenting shares

        7,432.4087      

Multiplied by the cash consideration each MidSouth share was entitled to receive

      $ 13.50      
     

 

 

    

Cash consideration paid to dissenting shareholders

         $ 100   

Total fractional shares resulting from acquisition of MidSouth

        1,322.3521      

Multiplied by the cash consideration each MidSouth share was entitled to receive

      $ 13.50      
     

 

 

    

Cash consideration paid for fractional shares

         $ 18   
        

 

 

 

Total Cash Consideration

         $ 118   
        

 

 

 

Total Purchase Price

         $ 41,094   
        

 

 

 

 

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Table of Contents

The table below summarizes the preliminary estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the July 1, 2014 purchase date.

 

In Thousands

   Fair Value
Recorded
by FFN
 

Assets

  

Cash and due from banks

   $ 1,369   

Interest-bearing accounts at other financial institutions

     10,946   

Securities, available-for-sale

     57,431   

Loans held for sale

     7,071   

Loans

     184,345   

Certificates of deposit at other financial institutions

     250   

Restricted equity securities

     1,572   

Bank premises and equipment, net

     6,650   

Bank-owned life insurance

     3,144   

Accrued interest receivable

     728   

Foreclosed assets

     800   

Core deposit intangible

     3,060   

Deferred tax asset

     6,753   

Other assets

     747   
  

 

 

 

Total assets acquired

   $ 284,866   
  

 

 

 

Liabilities

  

Deposits

   $ (244,415

Short-term borrowings

     (6,893

Other liabilities

     (1,428
  

 

 

 

Total liabilities assumed

   $ (252,736
  

 

 

 

Net assets acquired

     32,130   

Total consideration paid

     41,094   
  

 

 

 

Goodwill

   $ 8,964   
  

 

 

 

In the acquisition, the Company purchased $184,345 of loans at fair value, net of $7,347, or 3.8%, estimated discount to the outstanding principal balance, representing 38.0% of the Company’s total loans at June 30, 2014. Of the total loans acquired, management identified loans totaling $5,527 as having credit deficiencies. All loans that were on non-accrual status and all loan relationships that were identified as substandard or impaired as of the acquisition date were considered by management to be credit-impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of July 1, 2014 for purchased credit-impaired (“PCI”) loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

Contractually required principal and interest

   $ 8,510   

Non-accretable difference

     (1,745
  

 

 

 

Cash flows expected to be collected

     6,765   

Accretable yield

     (1,238
  

 

 

 

Total purchased credit-impaired loans acquired

   $ 5,527   
  

 

 

 

 

9


Table of Contents

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance at acquisition date.

 

     Unpaid
Principal
Balance
     Fair
Value
 

Loans:

     

Residential real estate

   $ 39,425       $ 38,618   

Commercial real estate

     82,465         80,566   

Construction and land development

     43,766         42,454   

Commercial loans

     16,311         15,352   

Consumer and other loans

     1,865         1,828   

Purchased credit-impaired

     7,860         5,527   
  

 

 

    

 

 

 

Total earning assets

   $ 191,692       $ 184,345   
  

 

 

    

 

 

 

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $3,060, which will be amortized utilizing an accelerated amortization method over an estimated economic life of 8.2 years. When determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

Pro-forma information

Pro-forma data for the three and nine month periods ending September 30, 2013 listed in the table below presents pro-forma information as if the MidSouth acquisition occurred at the beginning of 2013. Because the MidSouth transaction closed on July 1, 2014, and its actual results are included in the Company’s actual operating results for the three-month period ending September 30, 2014, there is no pro-forma information for the three months ending September 30, 2014.

 

     Three months
ended Sept 30,
     Nine months
ended Sept 30,
 
     2013      2014      2013  

Net interest income

   $ 8,019       $ 30,014       $ 22,547   

Net income available to common shareholders

     1,411         5,790         4,115   

Earnings per share—basic

   $ 0.23       $ 0.61       $ 0.71   

Earnings per share—diluted

   $ 0.23       $ 0.60       $ 0.69   

Supplemental pro forma earnings for 2014 were adjusted to exclude $2,084 of acquisition-related costs incurred in 2014 and $665 of discount accretion and $124 of premium amortization related to the fair value adjustments to acquisition-date assets and liabilities. Supplemental pro forma earnings for 2013 were adjusted to include these items, as appropriate.

During the three and nine months ending September 30, 2014 the acquisition of MidSouth increased net interest income by approximately $2,994 and net income available to common shareholders by approximately $853.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at September 30, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income.

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

September 30, 2014

          

U.S. government sponsored entities and agencies

   $ 20,130       $ 232       $ (550   $ 19,812   

U.S. Treasury securities

     7,000         —          —         7,000   

Mortgage-backed securities: residential

     307,633         3,029         (2,776     307,886   

Mortgage-backed securities: commercial

     6,490         26         (49     6,467   

State and political subdivisions

     5,490         95         —         5,585   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 346,743       $ 3,382       $ (3,375   $ 346,750   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10


Table of Contents
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

December 31, 2013

          

U.S. government sponsored entities and agencies

   $ 16,029       $ —        $ (1,305   $ 14,724   

Mortgage-backed securities: residential

     259,831         1,560         (7,600     253,791   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 275,860       $ 1,560       $ (8,905   $ 268,515   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of the held to maturity securities portfolio at September 30, 2014 and December 31, 2013 and the corresponding amounts of gross unrecognized gains and losses were as follows:

 

     Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

September 30, 2014

          

U.S. government sponsored entities and agencies

   $ 6,546       $ 119       $ (167   $ 6,498   

Mortgage backed securities: residential

     40,524         417         (940     40,001   

State and political subdivisions

     9,223         275         (93     9,405   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 56,293       $ 811       $ (1,200   $ 55,904   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Gross
Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

December 31, 2013

          

U.S. government sponsored entities and agencies

   $ 8,225       $ 12       $ (484   $ 7,753   

Mortgage backed securities: residential

     39,043         293         (2,061     37,275   

State and political subdivisions

     9,307         89         (420     8,976   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 56,575       $ 394       $ (2,965   $ 54,004   
  

 

 

    

 

 

    

 

 

   

 

 

 

Sales of available for sale securities were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014     2013      2014     2013  

Proceeds

   $ 9,767      $ —        $ 34,087      $ 11,555   

Gross gains

     31        —          256        141   

Gross losses

     (9     —          (163     (63

The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

     September 30, 2014  
     Amortized
Cost
     Fair
Value
 

Available for sale

     

Three months or less

   $ 7,000       $ 7,000   

Over three months through one year

     —          —    

Over one year through five years

     259         263   

Over five years through ten years

     13,030         13,147   

Over ten years

     12,331         11,987   

Mortgage-backed securities: commercial

     6,490         6,467   

Mortgage-backed securities: residential

     307,633         307,886   
  

 

 

    

 

 

 

Total

   $ 346,743       $ 346,750   
  

 

 

    

 

 

 

 

11


Table of Contents
     September 30, 2014  
     Amortized
Cost
     Fair
Value
 

Held to maturity

     

Over three months through one year

   $ 251       $ 252   

Over one year through five years

     1,422         1,478   

Over five years through ten years

     1,106         1,116   

Over ten years

     12,990         13,057   

Mortgage-backed securities: residential

     40,524         40,001   
  

 

 

    

 

 

 

Total

   $ 56,293       $ 55,904   
  

 

 

    

 

 

 

Securities pledged at September 30, 2014 and December 31, 2013 had a carrying amount of $347,748 and $194,925 and were pledged to secure public deposits and repurchase agreements.

At September 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the securities with unrealized and unrecognized losses at September 30, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

September 30, 2014

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 1,048       $ (4   $ 8,063       $ (546   $ 9,111       $ (550

Mortgage-backed securities: commercial

     5,611         (49     —          —         5,611         (49

Mortgage-backed securities: residential

     82,851         (870     52,533         (1,906     135,384         (2,776
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 89,510       $ (923   $ 60,596       $ (2,452   $ 150,106       $ (3,375
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
 

Held to maturity

               

U.S. government sponsored entities and agencies

   $ —        $ —       $ 2,833       $ (167   $ 2,833       $ (167

Mortgage-backed securities: residential

     14,556         (449     11,189         (491     25,745         (940

State and political subdivisions

     509         —   (1)      3,950         (93     4,459         (93
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 15,065       $ (449   $ 17,972       $ (751   $ 33,037       $ (1,200
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)  Unrecognized loss for this category was less than $1 when rounded.

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

December 31, 2013

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 12,983       $ (1,128   $ 1,741       $ (177   $ 14,724       $ (1,305

Mortgage-backed securities: residential

     168,817         (6,762     11,721         (838     180,538         (7,600
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 181,800       $ (7,890   $ 13,462       $ (1,015   $ 195,262       $ (8,905
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

12


Table of Contents
     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
 

Held to maturity

               

U.S. government sponsored entities and agencies

   $ 6,168       $ (332   $ 848       $ (152   $ 7,016       $ (484

Mortgage-backed securities: residential

     19,952         (1,752     4,042         (309     23,994         (2,061

State and political subdivisions

     5,762         (342     422         (78     6,184         (420
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 31,882       $ (2,426   $ 5,312       $ (539   $ 37,194       $ (2,965
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Unrealized losses on debt securities have not been recognized into income because the issuers bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

NOTE 4—LOANS

Loans at September 30, 2014 and December 31, 2013 were as follows:

 

     September 30,
2014
    December 31,
2013
 

Loans that are not PCI loans

    

Construction and land development

   $ 213,975      $ 113,710   

Commercial real estate:

    

Nonfarm, nonresidential

     218,149        114,852   

Other

     5,671        10,350   

Residential real estate:

    

Closed-end 1-4 family

     128,693        98,615   

Other

     72,737        39,851   

Commercial and industrial

     68,693        36,397   

Consumer and other

     7,442        8,250   
  

 

 

   

 

 

 

Loans before net deferred loan fees

     715,360        422,025   

Deferred loan fees, net

     (873     (721
  

 

 

   

 

 

 

Total loans that are not PCI loans

     714,487        421,304   
  

 

 

   

 

 

 

PCI loans

    

Construction and land development

   $ 78      $ —    

Commercial real estate:

    

Nonfarm, nonresidential

     1,830        —    

Other

     532        —    

Residential real estate:

    

Closed-end 1-4 family

     842        —    

Other

     152        —    

Commercial and industrial

     1,352        —    

Consumer and other

     2        —    
  

 

 

   

 

 

 

Total PCI loans

     4,788        —    
  

 

 

   

 

 

 

Allowance for loan losses

     (5,883     (4,900
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 713,392      $ 416,404   
  

 

 

   

 

 

 

 

13


Table of Contents

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ending September 30, 2014 and 2013:

 

     Construction
and Land
Development
     Commercial
Real
Estate
    Residential
Real
Estate
    Commercial
and
Industrial
    Consumer
and
Other
    Total  

Three Months Ending September 30, 2014

             

Allowance for loan losses:

             

Beginning balance

   $ 1,910       $ 1,740      $ 1,560      $ 508      $ 53      $ 5,771   

Provision for loan losses

     231         173        192        72        (4     664   

Loans charged-off

     —          (540     (11     (4     —         (555

Recoveries

     —          —         3        —         —         3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 2,141       $ 1,373      $ 1,744      $ 576      $ 49      $ 5,883   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There was no allowance for loan losses for PCI loans for the three months ended September 30, 2014 or for the three months ended September 30, 2013.

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors. The impact of the three months ended activity based allowance disclosures was not material to the Company’s results of operations during the three months ended September 30, 2013.

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine month periods ending September 30, 2014 and 2013:

 

     Construction
and Land
Development
     Commercial
Real
Estate
    Residential
Real
Estate
    Commercial
and
Industrial
    Consumer
and
Other
    Total  

Nine Months Ending September 30, 2014

             

Allowance for loan losses:

             

Beginning balance

   $ 1,552       $ 1,511      $ 1,402      $ 337      $ 98      $ 4,900   

Provision for loan losses

     589         402        304        243        (49     1,489   

Loans charged-off

     —          (540     (11     (4     —         (555

Recoveries

     —          —         49        —         —         49   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 2,141       $ 1,373      $ 1,744      $ 576      $ 49      $ 5,883   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ending September 30, 2013

             

Allowance for loan losses:

             

Beginning balance

   $ 1,342       $ 1,267      $ 893      $ 275      $ 206      $ 3,983   

Provision for loan losses

     243         20        119        131        (56     457   

Loans charged-off

     —          —         (107     —         —         (107

Recoveries

     —          —         99        —         —         99   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 1,585       $ 1,287      $ 1,004      $ 406      $ 150      $ 4,432   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There was no allowance for loan losses for PCI loans for the nine months ended September 30, 2014 or for the nine months ended September 30, 2013.

 

14


Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.

 

     Construction
and Land
Development
     Commercial
Real
Estate
     Residential
Real
Estate
     Commercial
and
Industrial
     Consumer
and
Other
     Total  

September 30, 2014

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —        $ —        $ —        $ 39       $ —        $ 39   

Collectively evaluated for impairment

     2,141         1,373         1,744         537         49         5,844   

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,141       $ 1,373       $ 1,744       $ 576       $ 49       $ 5,883   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ —        $ 835       $ —        $ 59       $ —        $ 894   

Collectively evaluated for impairment

     213,975         222,985         201,430         68,634         7,442         714,466   

Purchased credit-impaired loans

     78         2,362         994         1,352         2         4,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 214,053       $ 226,182       $ 202,424       $ 70,045       $ 7,444       $ 720,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Construction
and Land
Development
     Commercial
Real
Estate
     Residential
Real
Estate
     Commercial
and
Industrial
     Consumer
and
Other
     Total  

December 31, 2013

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —        $ 455       $ 93       $ —        $ —        $ 548   

Collectively evaluated for impairment

     1,552         1,056         1,309         337         98         4,352   

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,552       $ 1,511       $ 1,402       $ 337       $ 98       $ 4,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ —        $ 3,361       $ 1,262       $ —        $ —        $ 4,623   

Collectively evaluated for impairment

     113,710         121,841         137,204         36,397         8,250         417,402   

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 113,710       $ 125,202       $ 138,466       $ 36,397       $ 8,250       $ 422,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans collectively evaluated for impairment reported at September 30, 2014 include certain loans acquired from MidSouth on July 1, 2014. The acquired loans were recorded at estimated fair value at date of acquisition, which included an estimated credit discount. On July 1, 2014, acquired non-PCI loans were recorded at an estimated fair value of $178,818, comprised of contractually unpaid principal totaling $183,832 net of estimated discounts totaling $5,014 which included both credit and interest rate discount components. Management evaluated these loans for credit deterioration since acquisition and determined that no allowance for loan losses was necessary at September 30, 2014.

 

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Table of Contents

The following table presents information related to impaired loans by class of loans as of September 30, 2014 and December 31, 2013:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

September 30, 2014

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,422       $ 835      $ —    

With an allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

     —          —          —    

Commercial and industrial

     59         59         39   
  

 

 

    

 

 

    

 

 

 

Subtotal

     59         59         39   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,481       $ 894       $ 39   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 1,986       $ 1,986       $ —    

Residential real estate:

        

1-4 family

     36         36         —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,022         2,022         —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,480       $ 1,375       $ 455   

Residential real estate:

        

1-4 family

     1,687         1,226         93   
  

 

 

    

 

 

    

 

 

 

Subtotal

     4,167         2,601         548   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,189       $ 4,623       $ 548   
  

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment of impaired loans by class of loans for the three and nine months ended September 30, 2014 and 2013:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Average Recorded Investment

   2014      2013      2014      2013  

With no allowance recorded:

           

Construction and land development

   $ —        $ —        $ —        $ —    

Commercial real estate:

           

Nonfarm, nonresidential

     211         —          71         —    

Residential real estate:

           

1-4 family

     —          36         —          36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     211         36         71         36   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction and land development

     —        $ 74         —          73   

Commercial real estate:

           

Nonfarm, nonresidential

     1,194         1,375         837         1,375   

Residential real estate:

           

1-4 family

     —          1,226         476         1,226   

Commercial and industrial

     64         —          65         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     1,258         2,675         1,378         2,694   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,469       $ 2,711       $ 1,449       $ 2,730   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended September 30, 2014 and 2013.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2014 and December 31, 2013:

 

     Nonaccrual      Loans Past Due
Over 90 Days
 

September 30, 2014

     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 1,628       $ —    

Other

     532         —    

Residential real estate:

     

Closed-end1-4 family

     337         411   

Other

     42         —    

Construction and land development

     78         —    

Commercial and industrial

     287         41   
  

 

 

    

 

 

 

Total

   $ 2,904       $ 452   
  

 

 

    

 

 

 

December 31, 2013

     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 1,375       $ —    

Residential real estate:

     

1-4 family

     1,226         —    
  

 

 

    

 

 

 

Total

   $ 2,601       $ —    
  

 

 

    

 

 

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of September 30, 2014 and December 31, 2013 by class of loans:

 

     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
Than
89 Days
Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

September 30, 2014

                 

Construction and land development

   $ —        $ —        $ 78       $ 78       $ 213,897       $ 213,975   

Commercial real estate:

                 

Nonfarm, nonresidential

     —          —          1,628         1,628         216,521         218,149   

Other

     —          —          532         532         5,139         5,671   

Residential real estate:

                 

Closed-end 1-4 family

     861         —          748         1,609         127,084         128,693   

Other

     —          —          42         42         72,695         72,737   

Commercial and industrial

     —          32         328         360         68,333         68,693   

Consumer and other

     1         —          —          1         7,441         7,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 862       $ 32       $ 3,356       $ 4,250       $ 711,110       $ 715,360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                   Greater                       
     30-59
Days
Past Due
     60-89
Days
Past Due
     Than
89 Days
Past Due
     Total
Past Due
     Loans
Not
Past Due
     Total  

December 31, 2013

                 

Construction and land development

   $ —        $ —        $ —        $ —        $ 113,710       $ 113,710   

Commercial real estate:

                 

Nonfarm, nonresidential

     1,985         —          1,375         3,360         111,492         114,852   

Other

     —          —          —          —          10,350         10,350   

Residential real estate:

                 

Closed end 1-4 family

     245         —          1,226         1,471         97,144         98,615   

Other

     —          —          —          —          39,851         39,851   

Commercial and industrial

     —          —          —          —          36,397         36,397   

Consumer and other

     —          —          —          —          8,250         8,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,230       $ —        $ 2,601       $ 4,831       $ 417,194       $ 422,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans as well as non-homogeneous residential real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of September 30, 2014 and December 31, 2013:

 

     Pass      Special
Mention
     Substandard      Total  

September 30, 2014

           

Construction and land development

   $ 213,772       $ 125       $ 78       $ 213,975   

Commercial real estate:

           

Nonfarm, nonresidential

     214,202         726         3,221         218,149   

Other

     5,142         —          529         5,671   

Residential real estate:

           

Closed-end 1-4 family

     125,676         355         2,662         128,693   

Other

     72,502         87         148         72,737   

Commercial and industrial

     66,462         886         1,345         68,693   

Consumer and other

     7,442         —          —          7,442   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 705,198       $ 2,179       $ 7,983       $ 715,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Pass      Special
Mention
     Substandard      Total  

December 31, 2013

           

Construction and land development

   $ 113,710       $ —        $ —        $ 113,710   

Commercial real estate:

           

Nonfarm, nonresidential

     110,938         —          3,914         114,852   

Other

     10,350         —          —          10,350   

Residential real estate:

           

1-4 family

     96,823         —          1,792         98,615   

Other

     39,851         —          —          39,851   

Commercial and industrial

     36,397         —          —          36,397   

Consumer and other

     8,250         —          —          8,250   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 416,319       $ —        $ 5,706       $ 422,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Purchased Credit-impaired (“PCI”) loans

Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount has been recognized as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of September 30, 2014. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     September 30,
2014
 

Contractually required principal and interest

   $ 7,535   

Non-accretable difference

     (1,629
  

 

 

 

Cash flows expected to be collected

     5,906   

Accretable yield

     (1,118
  

 

 

 

Carrying value of acquired loans

     4,788   

Allowance for loan losses

     —    
  

 

 

 

Carrying value less allowance for loan losses

   $ 4,788   
  

 

 

 

For the three and nine months ended September 30, 2014, the Company recognized $120 in accretion income from the accretable yield related to acquired PCI loans.

Troubled Debt Restructurings

The Company’s loan portfolio contains no loans that have been modified in a troubled debt restructuring.

 

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Table of Contents

NOTE 5—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at September 30, 2014 and December 31, 2013 are as follows:

 

     September 30,
2014
     December 31,
2013
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 398,161       $ 348,121   

Other

     4,473         5,088   

The components of net loan servicing fees for the three and nine months ended September 30, 2014 and 2013 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Loan servicing fees, net:

        

Loan servicing fees

   $ 253      $ 217      $ 720      $ 584   

Amortization of loan servicing fees

     (180     (326     (547     (991

Decrease in impairment

     —         90        —         90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 73      $ (19   $ 173      $ (317
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of servicing rights was estimated by management to be approximately $4,104 at September 30, 2014. Fair value for 2014 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.1%. At December 31, 2013, the fair value of servicing rights was estimated by management to be approximately $3,714. Fair value for 2013 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 8.8%.

The weighted average amortization period is 6.66 years. Estimated amortization expense for each of the next three years is:

 

2014

   $ 444   

2015

     444   

2016

     444   

 

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Table of Contents

NOTE 6—SHARE-BASED PAYMENTS

In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant allows the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will be exercisable in whole or in part up to seven years following the date of issuance. The warrants are detachable from the common stock. There were 2,500 warrants exercised during the nine months ended September 30, 2013, for which the Company received cash proceeds of $30. The exercised warrants had an intrinsic value of $3 at the date of exercise. No warrants have been exercised during 2014. At September 30, 2014, there were 31,877 outstanding warrants associated with the 2010 offering.

In the event the common stock of the Company is to be registered under the Securities Act or is traded on a national securities exchange at $15.00 or more for forty-five (45) consecutive days, the Company may redeem the 2010 warrants at any time thereafter with not less than thirty (30) days’ written notice to the holder of such 2010 warrant, in whole or in part, at a redemption price of $1.00 per warrant; provided, however, that the holder of the 2010 warrant may exercise the 2010 warrant, in whole or in part, during such thirty (30) day period.

Stock Option Plan: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved, permitted the grant of share options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan, and to increase the number of authorized shares to 1,500,000. The Company believes that such awards better align the interests of its employees with those of its shareholders. In June 2014, shareholders approved to amend the Plan to increase the number of authorized shares to 2,000,000. At September 30, 2014, there were 604,551 authorized shares available for issuance.

Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have a vesting period of 3 to 5 years and have a 10-year contractual term. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or as non-qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other grants are expected to be treated as non-qualified.

During 2007, the Company granted 33,750 options to its organizers under the Plan. These options were granted in accordance with each organizer’s financial contribution to the Company during its organization period, and will vest over a five year period. No service element was included in the criteria used for determining grant awards. Accordingly, these options are not being expensed as stock-based compensation.

During 2013, the Company granted employees the option to acquire common shares of the Company, plus a cash award, in exchange for existing vested options held by the employee. Options that were exchanged were surrendered and considered cancelled. As part of this exchange, a total of 166,448 options were cancelled in exchange for 32,814 shares of common stock and cash awards totaling $142.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of a peer group. The Company uses historical data to estimate option exercise and post-vesting termination behavior.

The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

On the date of the merger, 322,300 MidSouth common stock options were converted into 137,280 options to purchase shares of FFN common stock with an exercise price of $8.57 per option pursuant to the terms of the merger agreement (see Note 2). Using the Black-Scholes option valuation model, the grant date fair value was estimated to be $6.31 per converted option based on the $14.50 fair value per share of FFN common stock at July 1, 2014.

 

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Table of Contents

The fair value of options granted was determined using the following weighted-average assumptions as of grant date.

 

     September 30,
2014
    September 30,
2013
 

Risk-free interest rate

     1.81     1.65

Expected term

     5.9 years        7.5 years   

Expected stock price volatility

     10.85     12.63

Dividend yield

     0.23     0.99

The weighted average fair value of options granted for the nine months ended September 30, 2014 and 2013 were $4.12 and $1.92, respectively.

A summary of the activity in the stock option plans for the nine months ended September 30, 2014 follows:

 

     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at beginning of year

     946,644      $ 11.27         6.81       $ 1,635   

Granted

     316,960        11.36         

Exercised

     (6,508     8.63         

Forfeited, expired, or cancelled

     (19,134     11.71         
  

 

 

         

Outstanding at period end

     1,237,962      $ 11.30         6.93       $ 2,076   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,176,064      $ 11.30         6.93       $ 1,972   

Exercisable at period end

     807,599      $ 10.61         6.10       $ 1,630   
  

 

 

   

 

 

    

 

 

    

 

 

 

As of September 30, 2014, there was $740 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.7 years.

Restricted Share Award Plan: Additionally, the Company’s 2007 Omnibus Equity Incentive Plan provides for the granting of restricted share awards and other performance related incentives. During 2014, the Company awarded 87,374 restricted common shares to employees of the Company. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.

A summary of activity for non-vested restricted share awards for the nine months ended September 30, 2014 is as follows:

 

Non-vested Shares

   Shares     Weighted-Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2013

     28,685      $ 13.00   

Granted

     87,374        14.12   

Vested

     (9,166     13.00   

Forfeited

     (3,649     14.32   
  

 

 

   

Non-vested at September 30, 2014

     103,244      $ 13.91   
  

 

 

   

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of September 30, 2014, there was $931 of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 4.02 years.

 

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Table of Contents

NOTE 7—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of September 30, 2014, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2014, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. Actual and required capital amounts and ratios are presented below as of September 30, 2014 and December 31, 2013 for the Company and Bank.

 

     Actual     Required
For Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2014

               

Company Total Capital to risk weighted assets

   $ 110,328         13.05   $ 67,643         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

   $ 104,445         12.35   $ 33,821         4.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

   $ 104,445         8.83   $ 47,319         4.00     N/A         N/A   

Bank Total Capital to risk weighted assets

   $ 109,810         12.99   $ 67,629         8.00   $ 84,537         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 103,927         12.29   $ 33,815         4.00   $ 50,722         6.00

Bank Tier 1 (Core) Capital to average assets

   $ 103,927         8.79   $ 47,311         4.00   $ 59,139         5.00

December 31, 2013

               

Company Total Capital to risk weighted assets

   $ 74,430         14.81   $ 40,209         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

   $ 69,530         13.83   $ 20,105         4.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

   $ 69,530         9.78   $ 28,449         4.00     N/A         N/A   

Bank Total Capital to risk weighted assets

   $ 73,305         14.59   $ 40,192         8.00   $ 50,239         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 68,405         13.62   $ 20,096         4.00   $ 30,144         6.00

Tier 1 (Core) Capital to average assets

   $ 68,405         9.62   $ 28,455         4.00   $ 35,569         5.00

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2014 the Bank could declare, without prior approval, dividends of approximately $9,190 plus any 2014 net profits retained to the date of declaration.

NOTE 8—FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

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The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability:

Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently based on changing circumstances as part of the aforementioned quarterly evaluation.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Loans Held For Sale: During 2014 the Company elected the fair value option for loans held for sale to align with other accounting policies related to mortgage banking, such as mortgage banking derivatives. These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices for similar transactions adjusted for specific attributes of that loan.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

 

     Fair Value Measurements at
September 30, 2014 Using:
 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets

        

Securities available for sale

        

U.S. government sponsored entities and agencies

   $ 1,739       $ 18,073       $ —    

U.S. Treasury Bills

     7,000         —          —    

Mortgage-backed securities-residential

     —          307,886         —    

Mortgage-backed securities-commercial

     —          6,467         —    

State and political subdivisions

     —          5,585         —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 8,739       $ 338,011       $ —    
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ —         $ 25,652       $ —     
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 368       $ —    
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —        $ 54       $ —    
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Fair Value Measurements at
December 31, 2013 Using:
 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets

        

Securities available for sale

        

U.S. government sponsored entities and agencies

   $ —        $ 14,724       $ —    

Mortgage-backed securities-residential

     —          253,791         —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —        $ 268,515       $ —    
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 464       $ —    
  

 

 

    

 

 

    

 

 

 

As of September 30, 2014, the unpaid principal balance of loans held for sale was $24,897 resulting in an unrealized gain of $755 included in gains on sale of loans. For the three and nine months ended September 30, 2014, the change in fair value related to loans held for sale, which is included in gain on sale of loans, has increased $217 and $755, respectively. None of these loans are 90 days or more past due or on nonaccrual as of September 30, 2014. There were no loans held for sale carried at fair value as of December 31, 2013.

There were no transfers between level 1 and 2 during 2014 and 2013.

Assets measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements at
September 30, 2014 Using:
 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans with specific allocations

        

Commercial and industrial

     —          —          20   

Foreclosed assets

        

Construction and land development

     —          —          800   

 

     Fair Value Measurements at
December 31, 2013 Using:
 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans with specific allocations

        

Real estate:

        

Residential

   $ —        $ —        $ 1,133   

Commercial

     —          —          920   

Impaired loans with specific allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $59, with a valuation allowance of $39 at September 30, 2014, resulting in provision for loan losses totaling ($7) and $39 for the three and nine month periods ending September 30, 2014. At December 31, 2013, impaired loans with specific allocations had a carrying amount of $2,601, with a valuation allowance of $548. For the three and nine months ended September 30, 2013, no additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $1,690 and $181 as of September 30, 2014 and December 31, 2013, respectively. There were no properties at September 30, 2014 that had required write-downs to fair value resulting in no write downs for the three and nine month periods ending September 30, 2014. Foreclosed assets measured at fair value less costs to sell were written down to fair value resulting in a write-down of $190 for the nine month period ending September 30, 3013. There were no write downs to fair value for the three month period ending September 30, 2013.

 

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Table of Contents

The following table presents quantitative information about recurring Level 3 fair value measurements at September 30, 2014:

 

     Fair
Value
     Valuation
Technique(s)
     Unobservable
Input(s)
   Range
(Weighted
Average)
 

Foreclosed assets

           

Construction and land development

   $ 800         Sales comparison       Adjustment for
differences between
comparable sales
     0%-40%(40%)   

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013:

 

     Fair
Value
     Valuation
Technique(s)
     Unobservable
Input(s)
   Range
(Weighted
Average)
 

Impaired loans:

           

Residential real estate

   $ 1,133         Sales comparison       Adjustment for
differences between
comparable sales
     3%-27%(16%)   

Commercial real estate

   $ 920         Sales comparison       Adjustment for
differences between
comparable sales
     0%-16%(16%)   

The carrying amounts and estimated fair values of financial instruments, at September 30, 2014 and December 31, 2013 are as follows:

 

            Fair Value Measurements at  
     Carrying
Amount
     September 30, 2014 Using:  
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 36,657       $ 36,657       $ —        $ —         $ 36,657   

Securities available for sale

     346,750         8,739         338,011         —          346,750   

Certificates of deposit held at other financial institutions

     250         —          250         —          250   

Securities held to maturity

     56,293         —          55,904         —          55,904   

Loans held for sale

     25,652         —          25,652         —          25,652   

Net loans

     713,392         —          —          709,009         709,009   

Restricted equity securities

     5,349         n/a         n/a         n/a         n/a   

Servicing rights, net

     2,956         —          4,104         —          4,104   

Accrued interest receivable

     3,426         13         1,400         2,013         3,426   

Financial liabilities

              

Deposits

   $ 1,051,558       $ 719,293       $ 334,629       $ —        $ 1,053,922   

Federal funds purchased and repurchase agreements

     34,238         —          34,238         —          34,238   

Federal Home Loan Bank advances

     33,000         —          33,181         —          33,181   

Accrued interest payable

     437         35         402         —          437   

 

     Carrying
Amount
     Fair Value Measurements at
December 31, 2013 Using:
 
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 18,217       $ 18,217       $ —        $ —        $ 18,217   

Securities available for sale

     268,515         —          268,515         —          268,515   

Securities held to maturity

     56,575         —          54,004         —          54,004   

Loans held for sale

     10,694         —          10,694         —          10,694   

Net loans

     416,404         —          —          415,515         415,515   

Restricted equity securities

     3,032         n/a         n/a         n/a         n/a   

Mortgage servicing rights

     2,640         —          3,714         —          3,714   

Accrued interest receivable

     2,396         —           1,145         1,251         2,396   

Financial liabilities

              

Deposits

   $ 681,300       $ 480,000       $ 202,300       $ —        $ 682,300   

Federal funds purchased and repurchase agreements

     24,291         —          24,291         —          24,291   

Federal Home Loan Bank advances

     23,000         —          23,023         —          23,023   

Accrued interest payable

     222         17         205         —          222   

 

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The methods and assumptions not previously described used to estimate fair value are described as follows:

(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c) Restricted Equity Securities: It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve Bank stock due to restrictions placed on its transferability.

(d) Mortgage Servicing Rights: Fair value of mortgage servicing rights is based on valuation models that calculate the present value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market participants would use in estimating future net cash flows resulting in a Level 2 classification.

(e) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Federal Funds Purchased and Repurchase Agreements: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(g) Federal Home Loan Bank Advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(h) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or Level 2 classification based on the asset/liability that they are associated with.

(i) Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

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Table of Contents

NOTE 9—EARNINGS PER SHARE

The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2014     2013     2014     2013  

Basic

        

Net income available to common shareholders

   $ 1,990      $ 985      $ 5,504      $ 3,075   

Less: earnings allocated to participating securities

     (27     (8     (57     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocated to common shareholders

   $ 1,963      $ 977      $ 5,447      $ 3,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding including participating securities

     7,737,710        3,704,437        5,840,620        3,655,722   

Less: Participating securities

     (105,129     (30,105     (60,840     (13,564
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

     7,632,581        3,674,332        5,779,780        3,642,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.26      $ 0.27      $ 0.94      $ 0.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2014      2013      2014      2013  

Diluted

           

Net income allocated to common shareholders

   $ 1,963       $ 977       $ 5,447       $ 3,064   

Weighted average common shares outstanding for basic earnings per common share

     7,632,581         3,674,332         5,840,620         3,642,158   

Add: Dilutive effects of assumed exercises of stock options

     272,634         85,987         170,470         105,052   

Add: Dilutive effects of assumed exercises of stock warrants

     7,559         2,485         5,033         2,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares and dilutive potential common shares

     7,912,774         3,762,804         6,016,123         3,749,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive earnings per common share

   $ 0.25       $ 0.26       $ 0.91       $ 0.82   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2013, stock options for 57,952 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 274,132 and 57,952 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2014 and 2013 because they were antidilutive.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the financial statements and accompanying notes included in the Company’s prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on May 15, 2014, which includes additional information about critical accounting policies and practices and risk factors, and Item 1A of Part II of this report, which updates those risk factors. All amounts are in thousands, except per share data or unless otherwise indicated.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair value of financial instruments are particularly subject to change.

The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Principles of Consolidation

The consolidated financial statements include Franklin Financial Network, Inc. and its wholly owned subsidiaries, Franklin Synergy Bank and Banc Compliance Group, Inc., together referred to as “the Company.” The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Purchased loans

The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the MidSouth acquisition, we did not establish an allowance for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the MidSouth transaction and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by MidSouth for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

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Table of Contents

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All loans classified by management as substandard or worse are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history from the Bank’s peer group over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Mortgage Servicing Rights

When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of loans. Fair value is based on market prices for comparable servicing contracts. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with loan servicing fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement as loan servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against mortgage loan servicing fee income.

 

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Table of Contents

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2014 AND 2013

Overview

The Company reported net income of $2,015 and $5,579 for the three and nine months ended September 30, 2014, respectively, compared to $1,010 and $3,158 for the three and nine months ended September 30, 2013. After the payment of preferred dividends on the senior preferred stock issued to the Treasury pursuant to Small Business Lending Fund (“SBLF”), the Company’s net earnings available to common shareholders for the three and nine months ended September 30, 2014 was $1,990 and $5,504, respectively, compared to $985 and $3,075 for the same periods in 2013. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 30, 2014, was increased interest income on loans and investment securities due to significant organic growth in each of these portfolios over the same periods in 2013 and due to the acquisition of MidSouth Bank (“MidSouth”), which added $184.3 million in loans and $57.4 million in securities available for sale, after considering the effect of purchase accounting entries.

MidSouth Bank Acquisition

The acquisition of MidSouth increased the Company’s total revenue by approximately $3,401 and increased net income before taxes by approximately $1,383 for both the three- and nine-month periods ended September 30, 2014. The earnings growth was offset somewhat by an increase in non-interest expenses related to the Company’s acquisition of MidSouth. Salaries expense totaled $6,144 and $13,494 for the three and nine months ended September 30, 2014, compared to $3,339 and $9,830 for the same periods in 2013, an increase of $2,805 and $3,664 between the respective periods, most of which is attributed to the addition of the MidSouth personnel. Expenses related to the Company’s acquisition of MidSouth totaled $603 and $853 for the three and nine months ended September 30, 2014, respectively. These expenses were related to the systems conversions and various professional fees for legal, accounting and investment banking consultants. These and other factors that contributed to the Company’s earnings results for the periods indicated are discussed in more detail below.

On July 1, 2014, the acquisition of MidSouth was completed, expanding the Company’s presence in in the Nashville-Davidson-Murfreesboro-Franklin, TN Metropolitan Statistical Area, specifically in the Rutherford County market. Headquartered in Murfreesboro, Tennessee and founded in 2004, MidSouth had five branches located throughout Rutherford County, which is adjacent to Williamson County. As of June 30, 2014, MidSouth had total assets of $281 million, total loans of $192 million and total deposits of $244 million. MidSouth held a loan portfolio that was primarily comprised of real estate loans. Immediately prior to the closing of the acquisition, for the six-month period ended June 30, 2014, MidSouth’s balance of nonperforming loans totaled 1.82% and net recoveries to average loans, on an annualized basis, was 0.17%.

As a result of the MidSouth acquisition, the Company:

 

    grew consolidated total assets from $872 million to $1.17 billion as of July 1, 2014, after giving effect to purchase accounting;

 

    increased total loans from $502 million to $686 million as of July 1, 2014;

 

    increased total deposits from $747 million to $989 million as of July 1, 2014; and

 

    expanded its employee base from 126 full time equivalent employees to 227 full time equivalent employees as of July 1, 2014.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets, less interest expense. Net interest income for the three and nine months ended September 30, 2014, totaled $11,127 and $25,570, respectively, compared to $5,385 and $14,657 for the same periods in 2013, an increase of $5,742 and $10,913 between the respective periods. For the three and nine months ended September 30, 2014, interest income increased $6,354 and $12,139, respectively, due to growth in both the loan and investment securities portfolios, offset by increases in interest expense totaling $612 and $1,226 as a result of increases in both interest-bearing deposits and borrowings.

Interest-earning assets averaged $1,143,401 and $938,406 during the three and nine months ended September 30, 2014 compared to $614,222 and $592,991 for the same periods in 2013, an increase of $529,179 and $345,415, or 86.2% and 58.2%, respectively. This increase was due primarily to the recent acquisition of MidSouth. Average loans increased 94.8% and 63.5% and investment securities increased 64.5% and 51.3% for the three and nine months ended September 30, 2014 and 2013, respectively. The yield on average interest-earning assets increased 27 basis points to 4.23% during the nine month period ending September 30, 2014, compared to 3.96% for the same period in 2013. For the three months ended September 30, 2014 and 2013, the

 

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yield on average interest earning assets increased 31 basis points to 4.40% compared to 4.09% for the same period during 2013. A decrease in the yield on average loans between the nine month periods was more than offset by an increase in the yield on average securities available for sale between the periods. For the three months ended September 30, 2014 and 2013, the yield on available for sale securities was 2.45% and 1.78%, respectively. The primary driver for the increase was the slowing of prepayment amortization during the three months ended September 30, 2014, as compared to the same period during 2013. During the three months ended September 30, 2014, prepayment amortization of available for sale securities was $828, which represented a yield reduction of 102 basis points. During the three months ended September 30, 2013, prepayment amortization of available for sale securities was $927, which represented a yield reduction of 196 basis points. For the nine months ended September 30, 2014 and 2013, the yield on available for sale securities was 2.62% and 1.51%, respectively. The primary driver for the increase was the slowing of prepayment amortization during the nine months ended September 30, 2014, as compared to the same period during 2013. During the nine months ended September 30, 2014, prepayment amortization of available for sale securities was $1,942, which represented a yield reduction of 88 basis points. During the nine months ended September 30, 2013, prepayment amortization of available for sale securities was $3,263, which represented a yield reduction of 227 basis points.

Interest-bearing liabilities averaged $952,871 and $797,635 during the three and nine month periods ending September 30, 2014 compared to $522,695 and $506,179 for the same periods in 2013, an increase of $430,176 and $291,456, or 82.3% and 57.6%, respectively. Total average interest-bearing deposits grew $270,627 and $107,975, including increases in average brokered Certificates of deposit outstanding of $58,492 and $44,051 for the three and nine month periods ending September 30, 2014 as compared to the same periods during 2013. Rapid growth in the loan portfolio also resulted in an increase in average Federal Home Loan Bank advances of $7,728 and $14,454. Average federal funds purchased increased $604 for the nine month period ending September 30, 2014 and decreased $13,576 for the three month period ending September 30, 2014 as compared to the same periods during 2013. The decrease in average fed funds purchased for the three month period was due to the timing of funding received from the MidSouth acquisition and the addition of public fund deposits. The cost of average interest-bearing liabilities decreased seven basis points to 0.69% during the nine months ended September 30, 2014, compared to 0.76% for the same period in 2013. This favorable decline was primarily due to decreases in the rates paid on money market accounts and time deposits. The effect of the $291,456 increase in average interest-bearing liabilities, offset somewhat by the seven basis points decrease in cost of average interest-bearing liabilities, resulted in the $1,226 increase in interest expense between the two nine month periods. For the three month periods ending September 30, 2014 and 2013, the cost of average interest-bearing liabilities decreased seven basis points to 0.65% from 0.72%. The decline was primarily due to decreases in the cost of funds for money market and time deposit accounts that offset increases in the rates paid on brokered certificates of deposit, Federal Home Loan Bank advances, and federal funds purchased. The $430,176 increase in average interest-bearing liabilities for the three month period ending September 30, 2014, as compared to the same period during 2013, resulted in an increase in interest expense of $612 between the two three-month periods.

(This space intentionally left blank)

 

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The tables below summarize average balances, yields, cost of funds, and the analysis of changes in interest income and interest expense for the three-and nine-month periods ended September 30, 2014 and 2013:

Average Balances (7)—Yields & Rates

(Dollars are in thousands)

 

     Three Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans (1)(6)

   $ 719,155      $ 10,168         5.61   $ 369,112      $ 5,186         5.57

Securities available for sale (6)

     324,574        2,007         2.45     189,255        847         1.78

Securities held to maturity

     57,611        407         2.80     43,169        268         2.46

Certificates of deposit at other financial institutions

     250        1         1.59     —          —           0.00

Federal funds sold and other (2)

     41,811        109         1.03     12,686        37         1.15
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 1,143,401      $ 12,692         4.40   $ 614,222      $ 6,338         4.09

Allowance for loan losses

     (5,862          (4,318     

All other assets

     60,508             25,203        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 1,198,047           $ 635,107        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 190,294      $ 111         0.23   $ 93,114      $ 67         0.29

Money market

     355,488        567         0.63     215,736        415         0.76

Savings

     27,253        32         0.47     14,500        18         0.49

Time deposits

     322,329        736         0.91     151,242        374         0.98

Federal Home Loan Bank advances

     33,065        80         0.96     25,337        29         0.45

Federal funds purchased and other (3)

     24,442        39         0.63     22,766        50         0.88
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 952,871      $ 1,565         0.65   $ 522,695      $ 953         0.72

Demand deposits

     128,982             59,643        

Other liabilities

     2,290             1,868        

Total shareholders’ equity

     113,904             50,901        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,198,047           $ 635,107        

NET INTEREST SPREAD (4)

          3.75          3.37

NET INTEREST INCOME

     $ 11,127           $ 5,385      

NET INTEREST MARGIN (5)

          3.86          3.48

 

(1) Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.
(2) Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank.
(3) Includes repurchase agreements.
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income (annualized) divided by total average earning assets.
(6) Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.
(7) Averages balances are average daily balances.

 

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Table of Contents

Average Balances (7)—Yields & Rates

(Dollars are in thousands)

 

     Nine Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans (1)(6)

   $ 552,157      $ 22,466         5.44   $ 337,810      $ 14,434         5.71

Securities available for sale (6)

     295,602        5,793         2.62     191,982        2,170         1.51

Securities held to maturity

     58,522        1,199         2.74     42,062        821         2.60

Certificates of deposit at other financial institutions

     84        2         3.18     —          —           0.00

Federal funds sold and other (2)

     32,041        230         0.96     21,137        126         0.79
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 938,406      $ 29,690         4.23   $ 592,991        17,551         3.96

Allowance for loan losses

     (5,466          (4,178     

All other assets

     39,574             23,496        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 972,514           $ 612,309        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 191,248      $ 408         0.29   $ 116,067      $ 283         0.33

Money market

     280,870        1,465         0.70     215,939        1,313         0.81

Savings

     22,572        83         0.49     12,528        46         0.49

Time deposits

     253,191        1,852         0.98     132,721        1,091         1.10

Federal Home Loan Bank advances

     28,791        189         0.88     14,337        67         0.62

Federal funds purchased and other (3)

     20,962        123         0.78     14,587        94         0.86
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 797,635      $ 4,120         0.69   $ 506,179      $ 2,894         0.76

Demand deposits

     84,908             52,707        

Other liabilities

     4,905             1,849        

Total shareholders’ equity

     85,066             51,574        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 972,514           $ 612,309        

NET INTEREST SPREAD (4)

          3.54          3.20

NET INTEREST INCOME

     $ 25,570           $ 14,657      

NET INTEREST MARGIN (5)

          3.64          3.30

 

(1) Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.
(2) Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank.
(3) Includes repurchase agreements.
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income (annualized) divided by total average earning assets.
(6) Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.
(7) Averages balances are average daily balances.

 

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Table of Contents

The tables below detail the components of the changes in net interest income for the periods indicated. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volume and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

Analysis of Changes in Interest Income and Expenses

 

     Net change three months ended
September 30, 2014 versus September 30, 2013
 
     Volume      Rate     Net Change  

INTEREST INCOME

       

Loans

   $ 4,918       $ 64      $ 4,982   

Securities available for sale

     607         554        1,161   

Securities held to maturity

     89         49        138   

Certificates of deposit at other financial institutions

     1         —          1   

Federal funds sold and other

     85         (13     72   
  

 

 

    

 

 

   

 

 

 

TOTAL INTEREST INCOME

   $ 5,700       $ 654      $ 6,354   
  

 

 

    

 

 

   

 

 

 

INTEREST EXPENSE

       

Deposits

       

Interest checking

   $ 70       $ (26   $ 44   

Money market accounts

     269         (117     152   

Savings

     16         (2     14   

Time deposits

     423         (61     362   

Federal Home Loan Bank advances

     9         42        51   

Other borrowed funds

     4         (15     (11
  

 

 

    

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

   $ 791       $ (179   $ 612   
  

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

   $ 4,909       $ 833      $ 5,742   
  

 

 

    

 

 

   

 

 

 

 

     Net change nine months ended
September 30, 2014 versus September 30, 2013
 
     Volume      Rate     Net Change  

INTEREST INCOME

       

Loans

   $ 9,159       $ (1,127   $ 8,032   

Securities available for sale

     1,172         2,450        3,622   

Securities held to maturity

     334         11        345   

Certificates of deposit at other financial institutions

     2         —          2   

Federal funds sold and other

     47         91        138   
  

 

 

    

 

 

   

 

 

 

TOTAL INTEREST INCOME

   $ 10,714       $ 1,425      $ 12,139   
  

 

 

    

 

 

   

 

 

 

INTEREST EXPENSE

       

Deposits

       

Interest checking

   $ 183       $ (58   $ 125   

Money market accounts

     395         (243     152   

Savings

     37               37   

Time deposits

     990         (229     761   

Federal Home Loan Bank advances

     68         54        122   

Other borrowed funds

     41         (12     29   
  

 

 

    

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

   $ 1,714       $ (488   $ 1,226   
  

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

   $ 9,000       $ 1,913      $ 10,913   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for probable losses incurred in the loan portfolio. The allowance is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

The provision for loan losses was $664 and $225 for the three months ended September 30, 2014 and 2013, respectively, and $1,489 and $457 for the nine months ended September 30, 2014 and 2013, respectively. The higher provision for the nine months ended September 30, 2014, compared to the same period in 2013 is due primarily to higher loan growth during the three and nine months ended September 30, 2014, compared to the same periods in 2013. Nonperforming loans at September 30, 2014 totaled $3,356 compared to $2,601 at December 31, 2013, representing 0.5% and 0.6% of total loans, respectively.

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2014 was $3,274 and $7,125 compared to $1,317 and $5,182 for the same periods in 2013. The following is a summary of the components of non-interest income (in thousands):

 

    

Three Months Ended

September 30,

   

$

Increase

   

%

Increase

 
     2014     2013     (Decrease)     (Decrease)  

Service charges on deposit accounts

   $ 13      $ 12      $ 1        8.3

Other service charges and fees

     600        270        330        122.2

Net gains on sale of loans

     1,875        714        1,161        162.6

Loan servicing fees, net

     73        (19     92        484.2

Gain on sale of investment securities, net

     22        —          22        100.0

Net gain (loss) on sale of foreclosed assets

     (3     (29     26        89.7

Compliance consulting fees

     117        124        (7     (5.6 %) 

Other

     577        245        332        135.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 3,274      $ 1,317      $ 1,957        148.6
  

 

 

   

 

 

   

 

 

   

 

 

 
    

Nine Months Ended

September 30,

   

$

Increase

   

%

Increase

 
     2014     2013     (Decrease)     (Decrease)  

Service charges on deposit accounts

   $ 37      $ 39      $ (2     (5.1 %) 

Other service charges and fees

     1,149        868        281        32.4

Net gains on sale of loans

     4,226        3,611        615        17.0

Loan servicing fees, net

     173        (317     490        154.6

Gain on sale of investment securities, net

     93        78        15        19.2

Net gain (loss) on sale of foreclosed assets

     28        (250     278        111.2

Compliance consulting fees

     412        457        (45     (9.8 %) 

Other

     1,007        696        311        44.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 7,125      $ 5,182      $ 1,943        37.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Other service charges and fees for the nine months ending September 30, 2014 increased $281, or 32.4%, from the same period in 2013 due primarily to the MidSouth acquisition, which contributed to increases in ATM fees and investment management fees. Net gains on the sale of loans include net gains realized from the sales of mortgage loans and Small Business Administration (“SBA”) loans. Net gains on the sale of mortgage loans are based, in part, on differences between the carrying value of loans being sold to third-party investors and the selling price. Also included are changes in the fair value of mortgage banking derivatives entered into by the Company to hedge the change in interest rates on loan commitments prior to their sale in the secondary market. Fluctuations in mortgage interest rates, changes in the demand for certain loans by investors, and whether servicing rights associated with the loans being sold are retained or released all affect the net gains on mortgage loan sales. Net gains for the nine months ending September 30, 2014 were $4,226, an increase of $615, or 17.0%, from the same period in 2013. The increase was primarily due to the growth in mortgage loan volumes during 2014 and from the addition of the mortgage lending team from the MidSouth acquisition. Residential refinancing activity that began to surge during the second half of 2011 in response to historically low interest rates remained significant into 2013 but began to decrease in the second half of that year. Net gains for the three months ending September 30, 2014 were $1,875, an increase of $1,161, or 162.6%, from the same period during 2013. The increase was primarily due to volume of mortgage loans originated and the sales related to those loans.

 

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Table of Contents

Loan servicing fees are fees earned for servicing residential mortgages and SBA loans offset by the amortization of mortgage servicing rights. These mortgage servicing rights are initially recorded at fair value and then amortized in proportion to, and over the period of, the estimated life of the underlying loans. In addition, impairment to the mortgage servicing rights may be recognized through a valuation allowance, and adjustments to the allowance can affect the net loan servicing fees. For the three and nine months ending September 30, 2014, net loan servicing fees were $73 and $173 compared to ($19) and ($317) for the three and nine months ending September 30, 2013. The favorable increase to loan servicing fees was primarily related to a decrease in amortization as a result of a decrease in residential refinancing activity.

Net gain (loss) on foreclosed assets consists of gains or losses on the sale of Other Real Estate Owned (“OREO”) properties and other foreclosed assets and valuation adjustments against the carrying costs of foreclosed assets. For the nine months ended September 30, 2014, there was a gain on the sale of OREO of $28 compared to a loss of $250 for the nine months ended September 30, 2013. For the three months ended September 30, 2014 and 2013, there were net losses of $3 and $29, respectively.

Compliance consulting fees are from activities engaged by Banc Compliance Group, Inc., a wholly-owned subsidiary of Franklin Financial Network, Inc. (the “Banc Compliance Group”). These fees are consulting fees paid by banking institutions unaffiliated with the Company for the services provided by Banc Compliance Group. The loss of one client contributed to the slight decline in these fees during the periods presented.

Non-interest Expense

Non-interest expense for the three and nine months ended September 30, 2014 was $10,389 and $21,959 compared to $4,842 and $14,279 for the same periods in 2013. This increase was the result of the following components listed in the table below (in thousands):

 

    

Three Months Ended

September 30,

    

$

Increase

    

%

Increase

 
     2014      2013      (Decrease)      (Decrease)  

Salaries and employee benefits

   $ 6,144       $ 3,339       $ 2,805         84.0

Occupancy and equipment

     1,443         666         777         116.7

FDIC assessment expense

     181         101         80         79.2

Marketing

     224         70         154         220.0

Professional fees

     961         79         882         1116.5

Other

     1,436         587         849         144.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 10,389       $ 4,842       $ 5,547         114.6
  

 

 

    

 

 

    

 

 

    

 

 

 
    

Nine Months Ended

September 30,

    

$

Increase

    

%

Increase

 
     2014      2013      (Decrease)      (Decrease)  

Salaries and employee benefits

   $ 13,494       $ 9,830       $ 3,664         37.3

Occupancy and equipment

     3,238         1,990         1,248         62.7

FDIC assessment expense

     420         254         166         65.4

Marketing

     470         193         277         143.5

Professional fees

     1,594         322         1,272         395.0

Other

     2,743         1,690         1,053         62.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 21,959       $ 14,279       $ 7,680         53.8
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in non-interest expense noted in the table above is indicative of the Company’s overall growth during this time. Two primary increases for the three and nine months ending September 30, 2014, were in salaries and occupancy, as the Bank has added six branches, five of which were added with the acquisition of MidSouth, and expanded its headquarters offices in downtown Franklin, Tennessee from one period to the next. Staffing increased from 123 full-time equivalent employees as of September 30, 2013, to 228 as of September 30, 2014. The increased staffing is due to the retention of the majority of the MidSouth employees to continue to support the branches as well as additional operational staff needed to handle the growth in loans and deposits.

The increase in professional fees during the nine months ending September 30, 2014, is primarily from fees associated with the acquisition of MidSouth. These expenses totaled $1,594 for the nine months ended September 30, 2014, compared to $322 for the

 

37


Table of Contents

same period in 2013, and included consulting fees and various legal and accounting fees. For the three months ended September 30, 2014, professional fees increased to $961, an increase of $882, or 1116.5%, from the same period during 2013. The increase for the three months ended September 30, 2014 as compared to the same period during 2013 can be attributed to expenses associated with the acquisition of MidSouth and various consulting, legal, and accounting fees.

Income Tax Expense

The Company recognized an income tax expense for the three and nine months ended September 30, 2014, of $1,333 and $3,668, respectively, compared to $625 and $1,945 for three and nine months ended September 30, 2013, respectively. The Company’s year-to-date income tax expense for the period ended September 30, 2014 reflects an effective income tax rate of 39.7% compared to 38.1% for the same period in 2013. This increase in the effective tax rate resulted from unfavorable permanent differences arising from expenses associated with the MidSouth acquisition and from stock based compensation expense incurred from the vesting of incentive stock options as a result of employee retirement.

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

Overview

The Company’s total assets increased by $442,214, or 55.5%, from December 31, 2013 to September 30, 2014. The increase in total assets has primarily been the result of the acquisition of MidSouth along with growth in the loan portfolio. In addition, a portion of the proceeds from a private placement of the Company’s common stock in September 2013, were used to increase capital at the Bank and to support continued earnings growth at the Bank through purchases of investment securities and the funding of loans.

The MidSouth acquisition added approximately $293,830 of assets and $252,736 of liabilities to the Company’s consolidated balance sheet as of the acquisition date. The Company issued approximately 2.8 million common shares as purchase consideration in connection with the acquisition which added approximately $41,094 to consolidated shareholders’ equity at the transaction date.

Loans

Lending-related income is the most important component of the Company’s net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at September 30, 2014 and December 31, 2013 were $719,275 and $421,304, respectively, an increase of $297,971, or 70.7%. This growth in the loan portfolio is due to the acquisition of MidSouth, increased market penetration and a healthy local economy, as well as the addition of experienced lending officers.

The table below provides a summary of the loan portfolio composition for the periods noted.

 

Types of Loans    September 30, 2014     December 31, 2013  
     Amount      % of Total
Loans
    Amount      % of Total
Loans
 

Total loans, excluding PCI loans

          

Real estate:

          

Residential

   $ 201,430         28.0   $ 138,466         32.8

Construction and land development

     213,975         29.7     113,710         26.9

Commercial

     223,820         31.1     125,202         29.7

Commercial and industrial

     68,693         9.7     36,397         8.6

Consumer and other

     7,442         1.0     8,250         2.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans—gross, excluding PCI loans

     715,360         99.3     422,025         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Types of Loans    September 30, 2014     December 31, 2013  
     Amount     % of Total
Loans
    Amount     % of Total
Loans
 

Total PCI loans (note 1)

        

Real estate:

        

Residential

   $ 994        0.1   $ —         —   

Construction and land development

     78        NM        —         —   

Commercial

     2,362        0.3     —         —   

Commercial and industrial

     1,352        0.2     —         —   

Consumer and other

     2        NM        —         —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans—gross PCI loans

     4,788        0.7     —         —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross loans

     720,148        100.0     422,025        100.0
    

 

 

     

 

 

 

Less: deferred loan fees, net

     (873       (721  

Allowance for loan losses

     (5,883       (4,900  
  

 

 

     

 

 

   

Total loans, net allowance for loan losses

   $ 713,392          416,404     
  

 

 

     

 

 

   

note 1: PCI accounted for pursuant to ASC Topic 310-30.

As presented in the above table, gross loans increased 70.6% during the first nine months of 2014, primarily due to completing the acquisition of MidSouth, which initially added $184.3 million to the Company’s loan portfolio, after applying purchase accounting adjustments. During this period, the Company experienced growth in real estate loans of 70.3% with the majority of the growth occurring in the construction and land development (88.2%), commercial real estate (78.9%) and residential real estate (46.2%) segments. The Company also experienced strong growth of 92.4% in the commercial and industrial segment during the first nine months of 2014.

Real estate loans comprised 89.2% of the loan portfolio at September 30, 2014. All three categories of real estate loans, residential, construction and land development and commercial real estate, were nearly equal in their respective percentages of the total portfolio. The largest portion of this portfolio as of September 30, 2014, was commercial real estate loans, which totaled 34.9% of real estate loans. Commercial real estate loans totaled $226,182 at September 30, 2014, and comprised 31.4% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market. Residential real estate loans increased 46.2% during the first nine months of 2014 and comprised 31.7% of real estate loans and 28.1% of total loans at September 30, 2014.

Construction and land development loans totaled $214,053 at September 30, 2014, and comprised 33.5% of real estate loans and 29.7% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.

Commercial and industrial loans grew 92.4% during the first nine months of 2014, primarily due to the acquisition of MidSouth and comprised 9.7% of total loans at September 30, 2014, as compared to 8.6% as of December 31, 2013. The commercial and industrial classification primarily consists of commercial loans to small-to-medium sized businesses.

 

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The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans maturing within specific intervals at September 30, 2014, excluding unearned net fees and costs.

Loan Maturity Schedule

 

     September 30, 2014  
     One year
or less
     Over one
year to five
years
     Over five
years
     Total  

Real estate:

           

Residential

   $ 20,864       $ 99,693       $ 81,867       $ 202,424   

Construction and land development

     163,857         34,175         16,021         214,053   

Commercial

     23,243         96,153         106,786         226,182   

Commercial and industrial

     21,323         39,656         9,066         70,045   

Consumer and other

     2,458         4,472         514         7,444   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231,745       $ 274,149       $ 214,254         720,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed interest rate

   $ 121,014       $ 236,260       $ 109,963       $ 467,237   

Variable interest rate

     110,731         37,889         104,291         252,911   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 231,745       $ 274,149       $ 214,254       $ 720,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that management believes is adequate to absorb the probable incurred losses inherent in the Company’s loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased by loan charge-offs net of recoveries of prior period loan charge-offs. The level of the allowance is determined on a quarterly basis, although management is engaged in monitoring the adequacy of the allowance on a more frequent basis. In estimating the allowance balance, the following factors are considered:

 

    past loan experience;

 

    the nature and volume of the portfolio;

 

    risks known about specific borrowers;

 

    underlying estimated values of collateral securing loans;

 

    current and anticipated economic conditions; and

 

    other factors which may affect the allowance for probable incurred losses.

The allowance for loan losses consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired and (2) a general component which covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

The following loan portfolio segments have been identified: (1) Construction and land development loans, (2) Commercial real estate loans, (3) Residential real estate, (4) Commercial and industrial loans, and (5) Consumer and other loans. Management evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions, and the borrower’s cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available to provide for probable incurred loan losses in the entire portfolio.

 

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In the table below, the components, as discussed above, of the allowance for loan losses are shown at September 30, 2014 and December 31, 2013.

 

     September 30, 2014     December 31, 2013     increase (decrease)  
     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
    ALLL
Balance
       

Non impaired loans

   $ 539,595       $ 5,844        1.08 %   $ 417,402      $ 4,352        1.03 %   $ 122,193     $ 1,492       5 bps   

MidSouth loans (note 1)

     174,871        —          —    %     —          —          —    %     174,871       —         —     

Impaired loans

     894        39        4.36  %     4,623        548        1.19 %     (3,729 )     (509 )     317 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Non-PCI loans

     715,360        5,883        0.82 %     422,025        4,900        1.16 %     293,335       983       -34 bps   

PCI loans

     4,788        —            —          —            4,788       —         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 720,148      $ 5,883        0.82 %*   $ 422,025      $ 4,900        1.16 %   $ 298,123     $ 983        -34 bps   

 

* The significant decrease in this ratio compared to the prior period end is primarily due to the addition of the MidSouth loans, since the MidSouth loans were purchased at discounts.

 

note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $7,347, or approximately 3.8% of the outstanding aggregate loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on July 1, 2014, no allowance for loan loss was recorded at September 30, 2014 related to the acquired loans.

At September 30, 2014, the allowance for loan losses was $5,883, compared to $4,900 at December 31, 2013. The allowance for loan losses as a percentage of total loans was 0.82% and 1.16% at September 30, 2014 and December 31, 2013, respectively. Loan growth during this period is the primary reason for the increase in the allowance amount. The decrease in the allowance for loan losses as a percentage of total loans is due to the required accounting for bank mergers and acquisitions which requires banks to use purchase accounting and to record transactions at fair value. Therefore, the loans acquired through the merger have been evaluated and a fair value adjustment was recorded. A portion of the fair value adjustment included a credit valuation allowance and any additional loan loss reserve needed for these loans was included in the fair value adjustment.

The table below sets forth the activity in the allowance for loan losses for the periods presented.

 

     Nine Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2013
 

Beginning balance

   $ 4,900      $ 3,983   

Loans charged-off:

    

Residential real estate

     12        (107

Construction & land development

     —         —    

Commercial real estate

     540        —    

Commercial & industrial

     4        —    

Consumer

     —         —    
  

 

 

   

 

 

 

Total loans charged-off

     556        (107

Recoveries on loans previously charged-off:

    

Residential real estate

     50        99   

Construction & land development

     —         —    

Commercial real estate

     —         —    

Commercial & industrial

     —         —    

Consumer

     —         —    
  

 

 

   

 

 

 

Total loan recoveries

     50        99   

Net recoveries (charge-offs)

     (506     (8

Provision for loan losses charged to expense

     1,489        457   
  

 

 

   

 

 

 

Total allowance at end of period

   $ 5,883      $ 4,432   
  

 

 

   

 

 

 

Total loans, gross, at end of period (1)

   $ 720,148      $ 378,622   
  

 

 

   

 

 

 

Average gross loans (1)

   $ 541,105      $ 326,150   
  

 

 

   

 

 

 

Allowance to total loans

     0.82     1.17
  

 

 

   

 

 

 

Net charge-offs (recoveries) to average loans, annualized

     0.13     0.00
  

 

 

   

 

 

 

 

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Table of Contents
(1) Loan balances exclude loans held for sale

While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes the allocation of allowance for loan losses by loan category and loans in each category as a percentage of total loans, for the periods presented.

 

     September 30, 2014     December 31, 2013  
     Amount      % of
Allowance
to Total
    % of Loan
Type to
Total
Loans
    Amount      % of
Allowance
to Total
    % of loan
Type to
Total
Loans
 

Real estate loans:

       

Residential

   $ 1,744         29.7     28.1   $ 1,402         28.6     32.8

Construction and land development

     2,141         36.4     30.0     1,497         30.5     26.9

Commercial

     1,373         23.3     31.1     1,566         32.0     29.7

Total real estate

     5,258         89.4     89.2     4,465         91.1     89.4

Commercial and industrial

     576         9.8     9.8     337         6.9     8.6

Consumer and other

     49         0.8     1.0     98         2.0     2.0

Nonperforming Assets

Non-performing loans consist of non-accrual loans and loans that are past due 90 days or more and still accruing interest. Non-performing assets consist of non-performing loans plus OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure). Loans are placed on non-accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The primary component of non-performing loans is non-accrual loans, which as of September 30, 2014 totaled $2,904. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed on non-accrual status unless they are both well-secured and in the process of collection. There were outstanding loans totaling $452 that were past due 90 days or more and still accruing interest at September 30, 2014.

The table below summarizes non-performing loans and assets for the periods presented.

 

     September 30,
2014
    December 31,
2013
 

Non-accrual loans

   $ 2,904      $ 2,601   

Past due loans 90 days or more and still accruing interest

     452        —    
  

 

 

   

 

 

 

Total non-performing loans

     3,356        2,601   

Foreclosed real estate (“OREO”)

     1,690        181   
  

 

 

   

 

 

 

Total non-performing assets

     5,046        2,782   

Total non-performing loans as a percentage of total loans

     0.5     0.6

Total non-performing assets as a percentage of total assets

     0.4     0.3

Allowance for loan losses as a percentage of non-performing loans

     175     188

 

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As of September 30, 2014, there were 21 loans on non-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

 

     Total Amount      Percentage of Total
Non-Accrual Loans
    Number of
Non-Accrual
Loans
 

Residential real estate

   $ 379         13.1     8   

Construction & land development

     78         2.7     1   

Commercial real estate

     2,161         74.4     7   

Commercial & industrial

     286         9.8     5   

Consumer

     —          —         —    
  

 

 

    

 

 

   

 

 

 

Total non-accrual loans

   $ 2,904         100.0     21   
  

 

 

    

 

 

   

 

 

 

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were $347,000 at September 30, 2014, compared to $268,515 at December 31, 2013, an increase of $78,485 or 29.2%. The increase in available-for-sale securities was primarily attributed to the third quarter acquisition of MidSouth.

The held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $56,293 at September 30, 2014, compared to $56,575 at December 31, 2013, a decrease of $282 or 0.5%.

The combined portfolios represented 32.6% and 40.8% of total assets at September 30, 2014, and December 31, 2013, respectively. At September 30, 2014, the Company had no securities that were classified as having Other Than Temporary Impairment.

The Company also had other investments of $5,349 and $3,032 at September 30, 2014, and December 31, 2013, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

Bank Premises and Equipment

Bank premises and equipment totaled $13,113 at September 30, 2014 compared to $4,138 at December 31, 2013, an increase of $8,975 or 207.9%. This increase was primarily the result of the acquisition of MidSouth, which included six buildings, along with all the related furniture and equipment. Also contributing to the increase were leasehold improvements and furniture purchases related to an addition to the Company’s main office in downtown Franklin, Tennessee and the relocation of one branch in the second quarter of 2014 and another branch in the third quarter of 2014, which includes the build-out and furnishing of these newly leased offices.

Deposits

Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds, money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.

At September 30, 2014, total deposits were $1,051,557, an increase of $370,257, or 54.3%, compared to $681,300 at December 31, 2013. Most of the growth in deposits is attributable to the acquisition of MidSouth, which added $244,415 to total deposits. Included in the Company’s funding strategy are brokered deposits. Total brokered deposits increased from $40,401 at December 31, 2013 to $74,628 at September 30, 2014, primarily due to the brokered deposits that were added in the acquisition of MidSouth. Time deposits excluding brokered deposits as of September 30, 2014, amounted to $191,867, compared to $257,637 as of December 31, 2013.

 

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The following table shows time deposits in denominations of $100 or more by category based on time remaining until maturity.

Maturity of non-brokered time deposits of $100 or more

 

     September 30, 2014  

Three months or less

   $ 23,204   

Three through six months

     8,606   

Six through twelve months

     53,022   

Over twelve months

     59,497   
  

 

 

 

Total

   $ 144,329   
  

 

 

 

Federal Funds Purchased and Repurchase Agreements

As of September 30, 2014, the Company had federal funds purchased from correspondent banks totaling $10,159 compared to $20,825 outstanding as of December 31, 2013. Securities sold under agreements to repurchase had an outstanding balance of $24,079 as of September 30, 2014, compared to $3,466 as of December 31, 2013. Securities sold under agreements to repurchase are financing arrangements that mature daily. At maturity, the securities underlying the agreements are returned to the Company.

Federal Home Loan Bank Advances

The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages. At September 30, 2014, advances totaled $33,000 compared to $23,000 as of December 31, 2013.

At September 30, 2014, the scheduled maturities of these and advances and interest rates were as follows:

 

Scheduled Maturities

   Amount      Weighted
Average Rates
 

2014

   $ 14,000         0.48

2015

     2,000         0.70

2017

     10,000         1.27

2018

     7,000         1.61
  

 

 

    

 

 

 

Total

   $ 33,000         0.97
  

 

 

    

 

 

 

Liquidity

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the Company’s needs.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered deposits. As of September 30, 2014, $347,000 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another $58,636 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $347,846 of the total $403,293 investment securities portfolio on hand at September 30, 2014, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.

 

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Table of Contents

Effects of Inflation and Changing Prices

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce the Company’s earnings from such activities.

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At September 30, 2014, the Company had unfunded loan commitments outstanding of $32,074, unused lines of credit of $202,978, and outstanding standby letters of credit of $10,964.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for up to five years, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or revised standard. This election is irrevocable.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing interest rates using various rate change (shock) scenarios. The Company’s rate sensitivity position has an important impact on earnings. Senior management monitors the Company’s rate sensitivity position throughout each month, and then the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.

 

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Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100, 200, 300 and 400 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a 12-month time period ending September 30, 2015, net interest income was estimated to increase 1.98% and 3.16% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to decrease 3.58% and 15.92% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of September 30, 2014.

 

                                                                          

Projected Interest Rate
Change

   Net Interest
Income
   Net Interest Income $
Change from Base
   % Change from Base
-400    $25,473    $-16,607    -39.47%
-300      30,006      -12,074    -28.69%
-200      35,380        -6,699    -15.92%
-100      40,574        -1,506      -3.58%
Base      42,080          0.00%
+100      42,914            835       1.98%
+200      43,410         1,330       3.16%
+300      43,799        1,719       4.09%
+400      44,132        2,052       4.88%

The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any management action that might be taken in responding to or anticipating changes in interest rates. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2014, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

 

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ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in our Form S-4 other than the additional disclosure of the risk factors listed below.

Our Limited Operating History as an Integrated Company May Make it Difficult for Investors to Evaluate our Business, Financial Condition and Results of Operations and Also Impairs Our Ability to Accurately Forecast our Future Performance

Our limited operating history as an integrated company following our merger with MidSouth on July 1, 2014 may not provide an adequate basis for investors to evaluate our business, financial condition and results of operations. Our future operating results depend upon a number of factors, including our ability to manage our growth, retain our customer base and successfully identify and respond to emerging trends in our primary product lines and markets. It may also be difficult for us to evaluate trends that may affect our business and to determine whether our expansion may be profitable. Thus, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

We Have Incurred, and Expect to Continue Incurring, Substantial Expenses Related to Our Recent Acquisition

We have incurred and expect to continue incurring, substantial expenses in connection with completing our recent acquisition of MidSouth and integrating the operations of the acquired businesses of MidSouth with our operations. There are a number of factors beyond our control that 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 acquisition of MidSouth 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 of MidSouth following the completion of our recent acquisition.

Our Financial Information Reflects the Application of Purchase Accounting. Any Change in the Assumptions Used in Such Methodology Could Have a Material Adverse Effect on Our Results of Operations.

We have acquired a significant amount of our assets and assumed a significant amount of our liabilities in our acquisition of MidSouth and our combined financial results are heavily influenced by the application of purchase accounting. Purchase accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair value at acquisition. If these assumptions are incorrect or our accountants or the regulatory agencies to whom we report do not concur with our judgments and require that we change or modify our assumptions, such change or modification could have a material adverse effect on our financial condition or results of operations or our previously reported results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

 

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ITEM 6. EXHIBITS

 

Exhibit

No.

   Description
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
32    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101    Interactive Data Files.*

 

* The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under these sections.

 

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SIGNATURES

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

 

  FRANKLIN FINANCIAL NETWORK, INC.
November 14, 2014   By:  

/s/ Sally P. Kimble

    Sally P. Kimble
   

On behalf of the registrant and as Chief Financial Officer

(Principal Financial Officer)


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EXHIBIT INDEX

 

Exhibit

No.

   Description
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
32    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101    Interactive Data Files.*

 

* The documents formatted in XBRL (Extensible Business Reporting Language) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under these sections.