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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 June 30, 2015

 

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

For the transition period from                      to                     

Commission file number 001-36895

 

 

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   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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 August 7, 2015, was 10,518,706.

 

 

 


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 (Loss)

     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

     48   

Item 4. Controls and Procedures

     49   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     49   

Item 1A. Risk Factors

     49   

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

     50   

Item 3. Defaults Upon Senior Securities

     50   

Item 4. Mine Safety Disclosures

     50   

Item 5. Other Information

     51   

Item 6. Exhibits

     51   

SIGNATURES

  


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 our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on March 27, 2015 (the “Prospectus”) and those described in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

1


PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2015 and December 31, 2014

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

 

     June 30,
2015
    December 31,
2014
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 43,163      $ 49,347   

Certificates of deposit at other financial institutions

     250        250   

Securities available for sale

     635,184        395,705   

Securities held to maturity (fair value 2015—$46,885 and 2014—$53,741)

     46,815        53,332   

Loans held for sale, at fair value

     16,842        18,462   

Loans

     962,191        787,188   

Allowance for loan losses

     (8,016 )     (6,680 )
  

 

 

   

 

 

 

Net loans

     954,175        780,508   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     7,685        5,349   

Premises and equipment, net

     9,584        9,664   

Accrued interest receivable

     4,886        3,545   

Bank owned life insurance

     21,938        11,664   

Deferred tax asset

     8,430        6,780   

Buildings held for sale

     —          4,080   

Foreclosed assets

     206        715   

Servicing rights, net

     3,298        3,053   

Goodwill

     9,124        9,124   

Core deposit intangible, net

     2,359        2,698   

Other assets

     2,813        1,551   
  

 

 

   

 

 

 

Total assets

   $ 1,766,752      $ 1,355,827   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 167,749      $ 150,337   

Interest bearing

     1,324,237        1,021,896   
  

 

 

   

 

 

 

Total deposits

     1,491,986        1,172,233   

Federal funds purchased and repurchase agreements

     36,567        39,078   

Federal Home Loan Bank advances

     57,000        19,000   

Accrued interest payable

     578        421   

Other liabilities

     3,540        3,296   
  

 

 

   

 

 

 

Total liabilities

     1,589,671        1,234,028   

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 June 30, 2015 and December 31, 2014, respectively

     10,000        10,000   

Common stock, no par value; 20,000,000 shares authorized; 10,502,671 and 7,756,411 shares issued and outstanding at June 30, 2015 and December 31 2014, respectively

     146,017        94,251   

Retained earnings

     21,588        15,372   

Accumulated other comprehensive income (loss)

     (524     2,176   
  

 

 

   

 

 

 

Total shareholders’ equity

     177,081        121,799   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,766,752      $ 1,355,827   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   2015     2014     2015     2014  

Interest income and dividends

        

Loans, including fees

   $ 12,173      $ 6,380      $ 23,327      $ 12,298   

Securities:

        

Taxable

     2,957        2,234        5,622        4,537   

Tax-exempt

     169        20        189        40   

Dividends on restricted equity securities

     83        51        150        91   

Federal funds sold and other

     31        14        51        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     15,413        8,699        29,339        16,998   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     1,913        1,214        3,546        2,362   

Federal funds purchased and repurchase agreements

     92        57        163        84   

Federal Home Loan Bank advances

     81        80        146        109   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,086        1,351        3,855        2,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     13,327        7,348        25,484        14,443   

Provision for loan losses

     805        440        1,430        825   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,522        6,908        24,054        13,618   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     18        12        34        24   

Other service charges and fees

     690        313        1,308        549   

Net gains on sale of loans

     1,463        1,567        3,110        2,351   

Loan servicing fees, net of amortization of servicing assets

     60        88        103        100   

Gain on sales and calls of securities

     109        63        524        71   

Net gain (loss) on foreclosed assets

     21        (2     27        31   

Investment services

     301        35        587        77   

Other

     189        354        373        648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,851        2,430        6,066        3,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     6,071        3,805        11,752        7,350   

Occupancy and equipment

     1,699        1,009        3,278        1,795   

FDIC assessment expense

     216        120        430        239   

Marketing

     198        135        418        246   

Professional fees

     507        279        866        633   

Amortization of core deposit intangible

     167        —          339        —     

Indirect expenses related to public offering

     309        —          326        —     

Other

     1,405        730        2,784        1,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     10,572        6,078        20,193        11,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     4,801        3,260        9,927        5,899   

Income tax expense

     1,667        1,225        3,661        2,335   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,134        2,035        6,266        3,564   

Dividends paid on Series A preferred stock

     (25     (25     (50     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 3,109      $ 2,010      $ 6,216      $ 3,514   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.30      $ 0.41      $ 0.67      $ 0.72   

Diluted

     0.28        0.40        0.64        0.70   

See accompanying notes to condensed consolidated financial statements.

 

3


FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Net income

   $ 3,134      $ 2,035      $ 6,266      $ 3,564   

Other comprehensive income (loss), net of tax:

        

Unrealized gains/losses on securities:

        

Unrealized holding gain (loss) arising during the period

     (6,900     4,892        (3,865     8,068   

Reclassification adjustment for gains included in net income

     (109     (63     (524     (71
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     (7,009     4,829        (4,389     7,997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tax effect

     2,754        (1,849     1,689        (3,062
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (4,255     2,980        (2,700     4,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,121   $ 5,015      $ 3,566      $ 8,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2015 and 2014

(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
 
        Shares      Amount         

Balance at December 31, 2013

   $ 10,000         4,862,875       $ 52,638       $ 7,058      $ (4,533 )   $ 65,163   

Exercise of common stock options

     —           119         1         —          —          1   

Dividends paid on Series A preferred stock

     —           —           —           (50 )     —          (50 )

Issuance of restricted stock, net of forfeitures

        32,568             

Stock based compensation expense, net of forfeitures

     —           —           311         —          —          311   

Stock issued in conjunction with 401(k) employer match

     —           20,345         275         —          —          275   

Net income

     —           —           —           3,564       —          3,564   

Other comprehensive income

     —           —           —           —          4,935        4,935   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 10,000         4,915,907       $ 53,225       $ 10,572      $ 402      $ 74,199   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 10,000         7,756,411       $ 94,251       $ 15,372      $ 2,176      $ 121,799   

Exercise of common stock options

     —           71,965         780         —          —          780   

Exercise of common stock warrants

     —           3,600         43         —          —          43   

Dividends paid on Series A preferred stock

     —           —           —           (50 )     —          (50 )

Issuance of restricted stock, net of forfeitures

        30,695         —           —          —          —     

Stock based compensation expense, net of forfeitures

     —           —           371         —          —          371   

Stock issued related to initial public offering, net of stock issuance costs of $5,015

     —           2,640,000         50,425         —          —          50,425   

Excess tax benefit from exercise of stock options

     —           —           147         —          —          147   

Net income

     —           —           —           6,266        —          6,266   

Other comprehensive income (loss)

     —           —           —           —          (2,700     (2,700 )
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 10,000         10,502,671       $ 146,017       $ 21,588      $ (524   $ 177,081   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

 

     Six Months Ended
June 30,
 
     2015     2014  

Cash flows from operating activities

    

Net income

   $ 6,266      $ 3,564   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     659        335   

Accretion of purchase accounting adjustments

     (1,245 )     —     

Net amortization of securities

     1,837        1,127   

Amortization of loan servicing right asset

     441        363   

Amortization of core deposit intangible

     339        —     

Provision for loan losses

     1,430        825   

Excess tax benefit related to the exercise of stock options

     (147 )     —     

Origination of loans held for sale

     (161,442 )     (109,942 )

Proceeds from sale of loans held for sale

     165,486        106,443   

Net gain on sale of loans

     (3,110 )     (2,351 )

Gain on sale of available for sale securities

     (375 )     (71 )

Gain on call of held to maturity securities

     (149 )     —     

Income from bank owned life insurance

     (274 )     (120 )

(Gain) loss on sale of foreclosed assets

     (22 )     (31 )

Stock-based compensation

     371        311   

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

     240        159   

Recognition of deferred gain on sale of loans

     (18 )     (21 )

Recognition of deferred gain on sale of foreclosed assets

     (5 )     —     

Net change in:

    

Accrued interest receivable and other assets

     (2,565 )     (1,061 )

Accrued interest payable and other liabilities

     331        (716 )
  

 

 

   

 

 

 

Net cash from operating activities

     8,048        (1,186

Cash flows from investing activities

    

Available for sale securities:

    

Sales

     32,288        24,373   

Purchases

     (446,795 )     (69,210 )

Maturities, prepayments and calls

     169,306        56,491   

Held to maturity securities:

    

Purchases

     —          (8,601 )

Maturities, prepayments and calls

     6,538        6,370   

Net change in loans

     (173,912 )     (65,554 )

Purchase of bank owned life insurance

     (10,000 )     —     

Proceeds from sale of buildings held for sale

     4,080        —     

Purchase of restricted equity securities

     (2,336 )     (745 )

Proceeds from sale of foreclosed assets

     531        377   

Purchases of premises and equipment, net

     (579 )     (2,014 )
  

 

 

   

 

 

 

Net cash from investing activities

     (420,879 )     (58,513 )

Cash flows from financing activities

    

Increase in deposits

     319,813        66,024   

Decrease in federal funds purchased and repurchase agreements

     (2,511 )     (8,439 )

Proceeds from Federal Home Loan Bank advances

     157,000        10,000   

Repayment of Federal Home Loan Bank advances

     (119,000 )     —     

Proceeds from exercise of common stock warrants

     43        —     

Proceeds from exercise of common stock options, including excess tax benefit

     927        1   

Proceeds from issuance of common stock, net of offering costs

     50,425        —     

Dividends paid on preferred stock

     (50 )     (50 )
  

 

 

   

 

 

 

Net cash from financing activities

     406,647        67,536   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (6,184 )     7,837   

Cash and cash equivalents at beginning of period

     49,347        18,217   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 43,163      $ 26,054   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 3,698      $ 2,403   

Income taxes paid

     5,150        3,470   

Non-cash supplemental information:

    

Transfers from loans to foreclosed assets

   $  —        $ 1,315   

See accompanying notes to condensed consolidated financial statements.

 

6


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 BCG Consulting 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 Annual Report on Form 10-K filed with the SEC on March 11, 2015.

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 $9,124, 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 shares of the Company’s common 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


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
MidSouth shares
outstanding
(in thousands)
     Per share
exchange
ratio
     Number of FFN
shares—as
exchanged
(in thousands)
 

Common Shares

     3,873         0.425926         1,650   

Convertible Voting Preferred Stock, 2009-A

     1,018         0.851852         867   

Convertible Voting Preferred Stock, 2011-A

     242         0.851852         206   

Series 2009-A Stock Warrants (strike price $3.25)

     193         0.185185         36   

Series 2011-A Stock Warrants (strike price $3.68)

     44         0.153333         7   
        

 

 

 
           2,766   

Multiplied by FFN common stock value at acquisition date

         $ 14.50   
        

 

 

 

Fair value of FFN common stock issued (“Stock Consideration”)

         $ 40,110   

Cash consideration paid for fractional shares

           18   

Cash consideration paid for dissenting shares

           100   

Fair value of MidSouth stock options converted to FFN stock options

           866   
        

 

 

 

Total acquisition consideration

         $ 41,094   
        

 

 

 

On July 1, 2014 the Company acquired MidSouth. As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Based on appraisals received subsequent to the acquisition date, the Company adjusted its initial fair value estimate of foreclosed assets that were acquired. The table below summarizes the fair value of the assets purchased, including goodwill, and liabilities assumed as of the July 1, 2014 purchase date.

 

In Thousands

   July 1, 2014
(as initially reported)
     Measurement
Period
Adjustments
     July 1, 2014
(as adjusted)
 

Assets:

        

Cash and due from banks

   $ 1,369       $  —         $ 1,369   

Interest-bearing accounts at other financial institutions

     10,946            10,946   

Securities, available-for-sale

     57,431            57,431   

Loans held for sale

     7,071            7,071   

Loans

     184,345            184,345   

Certificates of deposit at other financial institutions

     250            250   

Restricted equity securities

     1,572            1,572   

Bank premises and equipment, net

     6,650            6,650   

Bank-owned life insurance

     3,144            3,144   

Accrued interest receivable

     728            728   

Foreclosed assets

     800         (260 )      540   

Core deposit intangible

     3,060            3,060   

Deferred tax asset

     6,753         100         6,853   

Goodwill

     8,964         160         9,124   

Other assets

     747            747   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

   $ 293,830       $  —         $ 293,830   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Deposits

   $ 244,415       $  —         $ 244,415   

Short-term borrowings

     6,893            6,893   

Other liabilities

     1,428            1,428   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

   $ 252,736       $  —         $ 252,736   
  

 

 

    

 

 

    

 

 

 

At June 30, 2015, there were no circumstances or significant changes that have occurred since July 1, 2014 related to the acquisition of MidSouth that, in management’s assessment, would necessitate recording impairment of goodwill.

 

8


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   
  

 

 

 

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 six-month periods ending June 30, 2014 listed in the table below present pro-forma information as if the MidSouth acquisition occurred at the beginning of 2014. 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- and six-month periods ending June 30, 2015, there is no pro-forma information for those periods.

 

     Three 
months
ended
Jun 30, 2014
     Six 
months
ended
Jun 30, 2014
 

Net interest income

   $ 10,645       $ 21,048   

Net income available to common shareholders

     2,217         4,098   

Earnings per share—basic

   $ 0.29       $ 0.53   

Earnings per share—diluted

   $ 0.28       $ 0.52   

Supplemental pro forma earnings for the three and six months ended June 30, 2014 were adjusted to exclude acquisition-related costs that were incurred during the three and six months ended June 30, 2014 of $965 and $1,481, respectively. Supplemental pro forma earnings for the three and six months ended June 30, 2014 were adjusted to include discount accretion and premium amortization related to the fair value adjustments to acquisition date assets and liabilities, as appropriate.

 

9


During the three months ending June 30, 2014, the acquisition of MidSouth increased pro-forma net interest income by approximately $3,297 and net income available to common shareholders by approximately $207. During the six months ending June 30, 2014, the acquisition of MidSouth increased pro-forma net interest income by approximately $6,605 and net income available to common shareholders by approximately $584.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at June 30, 2015 and December 31, 2014 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
 

June 30, 2015

          

U.S. government sponsored entities and agencies

   $ 14,236       $ 154       $ (192 )   $ 14,198   

Mortgage-backed securities: residential

     512,479         3,617         (3,986 )     512,110   

Mortgage-backed securities: commercial

     20,303         35         (149 )     20,189   

State and political subdivisions

     89,028         90         (431 )     88,687   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 636,046       $ 3,896       $ (4,758 )   $ 635,184   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

December 31, 2014

          

U.S. government sponsored entities and agencies

   $ 30,070       $ 417       $ (314 )   $ 30,173   

U.S. Treasury securities

     20,000         —           —          20,000   

Mortgage-backed securities: residential

     335,677         4,593         (1,203 )     339,067   

Mortgage-backed securities: commercial

     6,432         33         —          6,465   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 392,179       $ 5,043       $ (1,517 )   $ 395,705   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of the held to maturity securities portfolio at June 30, 2015 and December 31, 2014 and the corresponding amounts of gross unrecognized gains and losses were as follows:

 

     Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

June 30, 2015

          

U.S. government sponsored entities and agencies

   $ 3,374       $ 15       $ (102 )   $ 3,287   

Mortgage backed securities: residential

     34,551         486         (548 )     34,489   

State and political subdivisions

     8,890         248         (29 )     9,109   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 46,815       $ 749       $ (679 )   $ 46,885   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Gross
Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

December 31, 2014

          

U.S. government sponsored entities and agencies

   $ 5,550       $ 162       $ (87 )   $ 5,625   

Mortgage backed securities: residential

     38,587         555         (562 )     38,580   

State and political subdivisions

     9,195         351         (10 )     9,536   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 53,332       $ 1,068       $ (659 )   $ 53,741   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10


Sales and calls of available for sale securities were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Proceeds

   $ 22,999       $ 18,922       $ 34,288       $ 24,373   

Gross gains

     —           201         390         225   

Gross losses

     (1 )      (138 )      (15 )      (154 )

Calls of held to maturity securities were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Proceeds

   $ 1,500       $ —         $ 2,300       $ —     

Gross gains

     110         —           149         —     

Gross losses

     —           —           —           —     

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.

 

     June 30, 2015  
     Amortized
Cost
     Fair
Value
 

Available for sale

     

Three months or less

   $  —         $  —     

Over three months through one year

     —           —     

Over one year through five years

     —           —     

Over five years through ten years

     9,711         9,862   

Over ten years

     93,553         93,023   

Mortgage-backed securities: residential

     512,479         512,110   

Mortgage-backed securities: commercial

     20,303         20,189   
  

 

 

    

 

 

 

Total

   $ 636,046       $ 635,184   
  

 

 

    

 

 

 

Held to maturity

     

Three months or less

   $  —         $  —     

Over three months through one year

     —           —     

Over one year through five years

     1,382         1,439   

Over five years through ten years

     1,106         1,122   

Over ten years

     9,776         9,835   

Mortgage-backed securities: residential

     34,551         34,489   
  

 

 

    

 

 

 

Total

   $ 46,815       $ 46,885   
  

 

 

    

 

 

 

Securities pledged at June 30, 2015 and December 31, 2014 had a carrying amount of $479,240 and $366,764 and were pledged to secure public deposits and repurchase agreements.

At June 30, 2015 and December 31, 2014, 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.

 

11


The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2015 and December 31, 2014, 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
 

June 30, 2015

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 1,933       $ (67 )   $ 4,325       $ (125 )   $ 6,258       $ (192 )

Mortgage-backed securities: residential

     259,366         (2,976 )     30,688         (1,010 )     290,054         (3,986 )

Mortgage-backed securities: commercial

     16,148         (149 )     —           —          16,148         (149 )

State and political subdivisions

     60,330         (431 )     —           —          60,330         (431 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 337,777       $ (3,623 )   $ 35,013       $ (1,135 )   $ 372,790       $ (4,758 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $ 1,942       $ (58 )   $ 956       $ (44 )   $ 2,898       $ (102 )

Mortgage-backed securities: residential

     8,909         (102 )     9,338         (446 )     18,247         (548 )

State and political subdivisions

     3,971         (29 )     —           —          3,971         (29 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 14,822       $ (189 )   $ 10,294       $ (490 )   $ 25,116       $ (679 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

December 31, 2014

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 9,999       $ (1 )   $ 8,232       $ (313 )   $ 18,231       $ (314 )

Mortgage-backed securities: residential

     59,078         (323 )     41,939         (880 )     101,017         (1,203 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 69,077       $ (324 )   $ 50,171       $ (1,193 )   $ 119,248       $ (1,517 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $  —         $  —        $ 2,913       $ (87 )   $ 2,913       $ (87 )

Mortgage-backed securities: residential

     5,246         (25 )     13,001         (537 )     18,247         (562 )

State and political subdivisions

     507         (1 )     592         (9 )     1,099         (10 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 5,753       $ (26 )   $ 16,506       $ (633 )   $ 22,259       $ (659 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

12


NOTE 4—LOANS

Loans at June 30, 2015 and December 31, 2014 were as follows:

 

     June 30,
2015
     December 31,
2014
 

Loans that are not PCI loans

     

Construction and land development

   $ 293,629       $ 239,225   

Commercial real estate:

     

Nonfarm, nonresidential

     273,221         240,975   

Other

     6,370         5,377   

Residential real estate:

     

Closed-end 1-4 family

     137,815         130,631   

Other

     96,292         83,129   

Commercial and industrial

     144,735         76,570   

Consumer and other

     7,527         8,025   
  

 

 

    

 

 

 

Loans before net deferred loan fees

     959,589         783,932   

Deferred loan fees, net

     (1,676 )      (1,059 )
  

 

 

    

 

 

 

Total loans that are not PCI loans

     957,913         782,873   
  

 

 

    

 

 

 

PCI loans

     

Construction and land development

   $ 77       $ 77   

Commercial real estate:

     

Nonfarm, nonresidential

     1,752         1,798   

Other

     —           —     

Residential real estate:

     

Closed-end 1-4 family

     703         706   

Other

     107         108   

Commercial and industrial

     1,639         1,624   

Consumer and other

     —           2   
  

 

 

    

 

 

 

Total PCI loans

     4,278         4,315   
  

 

 

    

 

 

 

Allowance for loan losses

     (8,016 )      (6,680 )
  

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 954,175       $ 780,508   
  

 

 

    

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ending June 30, 2015 and 2014:

 

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

Three Months Ending June 30, 2015

               

Allowance for loan losses:

               

Beginning balance

   $ 2,549       $ 2,124       $ 1,727      $ 850       $ 58      $ 7,308   

Provision for loan losses

     18         197         24        474         92        805   

Loans charged-off

     —           —           (17 )     —           (88 )     (105

Recoveries

     —           —           5        —           3        8   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total ending allowance balance

   $ 2,567       $ 2,321       $ 1,739      $ 1,324       $ 65      $ 8,016   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Three Months Ending June 30, 2014

               

Allowance for loan losses:

               

Beginning balance

   $ 1,546       $ 1,695       $ 1,536      $ 464       $ 63      $ 5,304   

Provision for loan losses

     250         159         (3 )     44         (10 )     440   

Loans charged-off

     —           —           —          —           —          —     

Recoveries

     —           —           27        —           —          27   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total ending allowance balance

   $ 1,796       $ 1,854       $ 1,560      $ 508       $ 53      $ 5,771   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

13


There was no allowance for loan losses for PCI loans for the three months ended June 30, 2015 or for the three months ended June 30, 2014.

The following table presents the activity in the allowance for loan losses by portfolio segment for the six-month periods ending June 30, 2015 and 2014:

 

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

Six Months Ending June 30, 2015

              

Allowance for loan losses:

              

Beginning balance

   $ 2,690      $ 1,494       $ 1,791      $ 650       $ 55      $ 6,680   

Provision for loan losses

     (123 )     827         (43 )     674         95        1,430   

Loans charged-off

     —          —           (17 )     —           (88 )     (105 )

Recoveries

     —          —           8        —           3        11   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total ending allowance balance

   $ 2,567      $ 2,321       $ 1,739      $ 1,324       $ 65      $ 8,016   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six Months Ending June 30, 2014

              

Allowance for loan losses:

              

Beginning balance

   $ 1,497      $ 1,566       $ 1,402      $ 337       $ 98      $ 4,900   

Provision for loan losses

     299        288         112        171         (45 )     825   

Loans charged-off

     —          —           —          —           —          —     

Recoveries

     —          —           46        —           —          46   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total ending allowance balance

   $ 1,796      $ 1,854       $ 1,560      $ 508       $ 53      $ 5,771   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

There was no allowance for loan losses for PCI loans for the six months ended June 30, 2015 or for the six months ended June 30, 2014.

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 June 30, 2015 and December 31, 2014. 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  

June 30, 2015

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $  —         $  —         $  —         $ 96       $ 23       $ 119   

Collectively evaluated for impairment

     2,567         2,321         1,739         1,228         42         7,897   

Purchased credit-impaired loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,567       $ 2,321       $ 1,739       $ 1,324       $ 65       $ 8,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $  —         $ 927       $ 807       $ 275       $ 23       $ 2,032   

Collectively evaluated for impairment

     293,629         278,664         233,300         144,460         7,504         957,557   

Purchased credit-impaired loans

     77         1,752         810         1,639         —           4,278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 293,706       $ 281,343       $ 234,917       $ 146,374       $ 7,527       $ 963,867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


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

December 31, 2014

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $  —         $  —         $  —         $ 18       $  —         $ 18   

Collectively evaluated for impairment

     2,690         1,494         1,791         632         55         6,662   

Purchased credit-impaired loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,690       $ 1,494       $ 1,791       $ 650       $ 55       $ 6,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $  —         $ 835       $ 93       $ 18       $  —         $ 946   

Collectively evaluated for impairment

     239,225         245,517         213,667         76,552         8,025         782,986   

Purchased credit-impaired loans

     77         1,798         814         1,624         2         4,315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 239,302       $ 248,150       $ 214,574       $ 78,194       $ 8,027       $ 788,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans collectively evaluated for impairment reported at June 30, 2015 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. At June 30, 2015, acquired non-PCI loans were recorded at $111,284, comprised of contractually unpaid principal totaling $114,159 net of discounts totaling $2,875. Management evaluated these loans for credit deterioration since acquisition and determined that no allowance for loan losses was necessary at June 30, 2015.

The following table presents information related to impaired loans by class of loans as of June 30, 2015 and December 31, 2014:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

June 30, 2015

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,514       $ 927       $  —     

Residential real estate:

        

Closed-end 1-4 family

     97         97         —     

Other

     710         710         —     

Commercial and industrial

     179         179         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,500         1,913         —     

With an allowance recorded:

        

Commercial and industrial

     96         96         96   

Consumer and other

     23         23         23   
  

 

 

    

 

 

    

 

 

 

Subtotal

     119         119         119   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,619       $ 2,032       $ 119   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,422       $ 835       $  —     

Residential real estate:

        

Closed-end 1-4 family

     93         93         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,515         928         —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial and industrial

     18         18         18   
  

 

 

    

 

 

    

 

 

 

Subtotal

     18         18         18   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,533       $ 946       $ 18   
  

 

 

    

 

 

    

 

 

 

 

15


The following table presents the average recorded investment of impaired loans by class of loans for the three and six months ended June 30, 2015 and 2014:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Average Recorded Investment

   2015      2014      2015      2014  

With no allowance recorded:

           

Construction and land development

   $  —         $  —         $  —         $  —     

Commercial real estate:

           

Nonfarm, nonresidential

     865         —           850         603   

Residential real estate:

           

Closed-end 1-4 family

     313         —           265         —     

Other

     238         —           119         —     

Commercial and industrial

     110         —           104         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     1,526         —           1,338         603   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction and land development

   $  —         $  —         $  —         $  —     

Commercial real estate:

           

Nonfarm, nonresidential

     —           1,375         —           1,375   

Residential real estate:

           

1-4 family

     —           229         —           725   

Commercial and industrial

     43         66         30         66   

Consumer and other

     16         —           8         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     59         1,670         38         2,166   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,585       $ 1,670       $ 1,376       $ 2,769   
  

 

 

    

 

 

    

 

 

    

 

 

 

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and six months ended June 30, 2015 and 2014.

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 June 30, 2015 and December 31, 2014:

 

     Nonaccrual      Loans Past Due
Over 90 Days
 

June 30, 2015

     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 835       $  —     

Residential real estate:

     

Closed-end1-4 family

     96         —     

Commercial and industrial

     16         —     
  

 

 

    

 

 

 

Total

   $ 947       $  —     
  

 

 

    

 

 

 

December 31, 2014

     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 835       $  —     

Residential real estate:

     

Closed-end 1-4 family

     —           316   
  

 

 

    

 

 

 

Total

   $ 835       $ 316   
  

 

 

    

 

 

 

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.

 

16


The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 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
     PCI
Loans
     Total  

June 30, 2015

                    

Construction and land development

   $ 1,328       $ 38       $  —         $ 1,366       $ 292,263       $ 77       $ 293,706   

Commercial real estate:

                    

Nonfarm, nonresidential

     —           —           835         835         272,386         1,752         274,973   

Other

     —           —           —           —           6,370         —           6,370   

Residential real estate:

                    

Closed-end 1-4 family

     630         35         —           665         137,150         703         138,518   

Other

     710         40         —           750         95,542         107         96,399   

Commercial and industrial

     79         —           —           79         144,656         1,639         146,374   

Consumer and other

     23         —           —           23         7,504         —           7,527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,770       $ 113       $ 835       $ 3,718       $ 955,871       $ 4,278       $ 963,867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2014

                    

Construction and land development

   $ 354       $  —         $  —         $ 354       $ 238,871       $ 77       $ 239,302   

Commercial real estate:

                    

Nonfarm, nonresidential

     —           —           835         835         240,140         1,798         242,773   

Other

     —           —           —           —           5,377         —           5,377   

Residential real estate:

                    

Closed-end 1-4 family

     299         165         316         780         129,851         706         131,337   

Other

     52         —           —           52         83,077         108         83,237   

Commercial and industrial

     —           212         —           212         76,358         1,624         78,194   

Consumer and other

     —           —           —           —           8,025         2         8,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 705       $ 377       $ 1,151       $ 2,233       $ 781,699       $ 4,315       $ 788,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

17


Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table includes PCI loans, which are included in the “Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of June 30, 2015 and December 31, 2014:

 

 

     Pass      Special
Mention
     Substandard      Total  

June 30, 2015

           

Construction and land development

   $ 293,629       $  —         $ 77       $ 293,706   

Commercial real estate:

           

Nonfarm, nonresidential

     271,384         —           3,589         274,973   

Other

     6,370         —           —           6,370   

Residential real estate:

           

Closed-end 1-4 family

     136,939         —           1,579         138,518   

Other

     95,582         —           817         96,399   

Commercial and industrial

     144,460         —           1,914         146,374   

Consumer and other

     7,504         —           23         7,527   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 955,868       $ —         $ 7,999       $ 963,867   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pass      Special
Mention
     Substandard      Total  

December 31, 2014

           

Construction and land development

   $ 239,225       $ —         $ 77       $ 239,302   

Commercial real estate:

           

Nonfarm, nonresidential

     239,584         —           3,189         242,773   

Other

     5,377         —           —           5,377   

Residential real estate:

           

1-4 family

     128,869         —           2,468         131,337   

Other

     83,129         —           108         83,237   

Commercial and industrial

     76,552         —           1,642         78,194   

Consumer and other

     8,025         —           2         8,027   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 780,761       $ —         $ 7,486       $ 788,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and December 31, 2014. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     Jun 30, 2015      Dec 31, 2014  

Contractually required principal and interest

   $ 6,000       $ 6,532   

Non-accretable difference

     (973 )      (1,270 )
  

 

 

    

 

 

 

Cash flows expected to be collected

     5,027         5,262   

Accretable yield

     (749 )      (947 )
  

 

 

    

 

 

 

Carrying value of acquired loans

     4,278         4,315   

Allowance for loan losses

     —           —     
  

 

 

    

 

 

 

Carrying value less allowance for loan losses

   $ 4,278       $ 4,315   
  

 

 

    

 

 

 

 

18


Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the six months ended June 30, 2015. These adjustments resulted in a decrease in expected cash flows and accretable yield, and a decrease in the non-accretable difference. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three- and six-month periods ending June 30, 2015.

 

Activity during the

three-month period ending June 30, 2015

   Mar 31, 2015     Effect of
Acquisitions
     Income
Accretion
     All other
Adjustments
    Jun 30, 2015  

Contractually required principal and interest

   $ 6,135      $ —         $ —         $ (135 )   $ 6,000   

Non-accretable difference

     (989 )     —           —           16        (973 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,146        —           —           (119 )     5,027   

Accretable yield

     (840 )     —           133         (42     (749 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 4,306      $ —         $ 133       $ (161 )   $ 4,278   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Activity during the

six-month period ending June 30, 2015

   Dec 31, 2014     Effect of
Acquisitions
     Income
Accretion
     All other
Adjustments
    Jun 30, 2015  

Contractually required principal and interest

   $ 6,532      $ —         $ —         $ (532 )   $ 6,000   

Non-accretable difference

     (1,270 )     —           —           297        (973 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,262        —           —           (235 )     5,027   

Accretable yield

     (947 )     —           190         8        (749 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 4,315      $ —         $ 190       $ (227 )   $ 4,278   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Troubled Debt Restructurings

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

NOTE 5—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at June 30, 2015 and December 31, 2014 are as follows:

 

     June 30,
2015
     December 31,
2014
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 445,816       $ 414,222   

Other

     3,683         3,986   

The components of net loan servicing fees for the three and six months ended June 30, 2015 and 2014 were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015     2014  

Loan servicing fees, net:

          

Loan servicing fees

   $ 278       $ 236       $ 544      $ 463   

Amortization of loan servicing fees

     (218 )      (148 )      (441 )     (363 )

Change in impairment

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 60       $ 88       $ 103      $ 100   
  

 

 

    

 

 

    

 

 

   

 

 

 

The fair value of servicing rights was estimated by management to be approximately $4,679 at June 30, 2015. Fair value for June 30, 2015 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.2%. At December 31, 2014, the fair value of servicing rights was estimated by management to be approximately $4,180. Fair value for December 31, 2014 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.8%.

 

19


The weighted average amortization period is 6.77 years. Estimated amortization expense for each of the next three years is:

 

2015

   $ 668   

2016

     456   

2017

     456   

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 3,600 warrants exercised during the six months ended June 30, 2015, for which the Company received cash proceeds of $43. The exercised warrants had an aggregate intrinsic value of $31 at the date of exercise. No warrants were exercised during the six months ended June 30, 2014. At June 30, 2015, there were 28,277 outstanding warrants associated with the 2010 offering.

Since the common stock of the Company has been registered under the Securities Act and has been 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 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 stock 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. Shareholders approved amendments to the Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”) to increase the number of authorized shares to 2,000,000 in June 2014 and to 4,000,000 in February 2015. At June 30, 2015, there were 2,375,717 authorized shares available for issuance.

Employee, organizer and director awards are 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 2014, the Company granted 181,680 options, had 23,809 options exercised, and had 31,135 options that were either forfeited, cancelled or expired. In addition, on July 1, 2014, 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. No compensation expense was required related to the converted options.

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.

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

 

     June 30,
2015
    June 30,
2014
 

Risk-free interest rate

     1.81 %     2.24 %

Expected term

     7.5 years        7.5 years   

Expected stock price volatility

     25.00 %     11.04 %

Dividend yield

     0.22 %     0.44 %

The weighted average fair value of options granted for the six months ended June 30, 2015 and 2014 were $6.35 and $2.44, respectively.

 

20


A summary of the activity in the stock option plans for the six months ended June 30, 2015 follows:

 

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

Outstanding at beginning of year

     1,210,660       $ 11.32         6.53       $ 7,244   

Granted

     210,782         20.62         

Exercised

     (77,600 )      11.52         

Forfeited, expired, or cancelled

     (2,108 )      18.56         
  

 

 

          

Outstanding at period end

     1,341,734       $ 12.75         6.58       $ 13,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,274,647       $ 12.75         6.58       $ 12,423   

Exercisable at period end

     811,299       $ 10.73         5.23       $ 9,550   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company received cash proceeds of $780 for the options exercised during the six months ended June 30, 2015. The exercised options had an aggregate intrinsic value of $639 at the date of exercise.

As of June 30, 2015, there was $1,756 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 1.8 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 six months ended June 30, 2015 is as follows:

 

Non-vested Shares

   Shares      Weighted-Average
Grant-Date
Fair Value
 

Non-vested at beginning of year

     102,710       $ 13.93   

Granted

     31,938         20.69   

Vested

     (11,705      13.61   

Forfeited

     (1,243 )      16.29   
  

 

 

    

Non-vested at period end

     121,700       $ 15.73   
  

 

 

    

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 June 30, 2015, there was $1,677 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 3.7 years.

NOTE 7—REGULATORY CAPITAL MATTERS

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Framework for More Resilient Banks and Banking Systems” (“Basel III”) and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective to the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes capital for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.

In addition to the new minimum capital level requirements, the rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer is to be phased in beginning in

 

21


January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has opted out of this requirement.

Management believes, as of June 30, 2015, that the Company and Bank met all capital adequacy requirements to which they are subject and met the requirements to be considered well-capitalized. The Company’s and Bank’s actual capital amounts and ratios are presented in the following table (in thousands):

 

     Actual     Minimum Capital
Requirement
    Excess
Amount
 
     Amount      Ratio     Amount      Ratio    

June 30, 2015

            

Company common equity Tier 1 capital to risk-weighted assets

   $ 152,941         12.29 %   $ 56,006         4.50 %   $ 96,935   

Company total capital to risk-weighted assets

   $ 168,019         13.50 %   $ 99,566         8.00 %   $ 68,453   

Company Tier 1 capital to risk-weighted assets

   $ 160,003         12.86 %   $ 74,674         6.00 %   $ 85,329   

Company Tier 1 capital to average assets

   $ 160,003         10.19 %   $ 62,790         4.00 %   $ 97,213   

Bank common equity Tier 1 capital to risk-weighted assets

   $ 150,511         12.10 %   $ 55,980         4.50 %   $ 94,531   

Bank total capital to risk-weighted assets

   $ 158,527         12.74 %   $ 99,519         8.00 %   $ 59,008   

Bank Tier 1 capital to risk-weighted assets

   $ 150,511         12.10 %   $ 74,639         6.00 %   $ 75,872   

Bank Tier 1 capital to average assets

   $ 150,511         9.59 %   $ 62,785         4.00 %   $ 87,726   

December 31, 2014

            

Company total capital to risk-weighted assets

   $ 114,475         12.30 %   $ 74,464         8.00 %   $ 40,011   

Company Tier 1 capital to risk-weighted assets

   $ 107,795         11.58 %   $ 37,232         4.00 %   $ 70,563   

Company Tier 1 capital to average assets

   $ 107,795         8.57 %   $ 50,291         4.00 %   $ 57,504   

Bank total capital to risk-weighted assets

   $ 113,830         12.23 %   $ 74,447         8.00 %   $ 39,383   

Bank Tier 1 capital to risk-weighted assets

   $ 107,150         11.51 %   $ 37,223         4.00 %   $ 69,927   

Tier 1 capital to average assets

   $ 107,150         8.52 %   $ 50,279         4.00 %   $ 56,871   

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 2015 the Bank could declare, without prior approval, dividends of approximately $13,836 plus any 2015 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.

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).

 

22


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
June 30, 2015 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

   $  —         $ 14,198       $ —     

Mortgage-backed securities-residential

     —           512,110         —     

Mortgage-backed securities-commercial

     —           20,189         —     

State and political subdivisions

     —           88,687         —     
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $  —         $ 635,184       $ —     
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ —         $ 16,842       $ —     
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $  —         $ 242       $ —     
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $  —         $ 16       $ —     
  

 

 

    

 

 

    

 

 

 

 

23


     Fair Value Measurements at
December 31, 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

   $  —         $ 30,173       $ —     

U.S. Treasury Bills

     20,000         —           —     

Mortgage-backed securities-residential

     —           339,067         —     

Mortgage-backed securities-commercial

     —           6,465         —     

State and political subdivisions

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 20,000       $ 375,705       $ —     
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $  —         $ 18,462       $ —     
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $  —         $ 285       $ —     
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $  —         $ 132       $ —     
  

 

 

    

 

 

    

 

 

 

As of June 30, 2015, the unpaid principal balance of loans held for sale was $16,548 resulting in an unrealized gain of $294 included in gains on sale of loans. For the three months ended June 30, 2015 and 2014, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ($293) and $329, respectively. For the six months ended June 30, 2015 and 2014, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ($270) and $538, respectively. None of these loans are 90 days or more past due or on nonaccrual as of June 30, 2015.

There were no transfers between level 1 and 2 during 2015 and 2014.

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

There were no collateral dependent impaired loans carried at fair value as of June 30, 2015 or December 31, 2014. For the three months ended June 30, 2015 and 2014, $0 and ($20) in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the six months ended June 30, 2015 and 2014, $0 and $46 in 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 $206 and $715 as of June 30, 2015 and December 31, 2014, respectively. There were no properties at June 30, 2015 or 2014 that had required write-downs to fair value resulting in no write downs for the three or six months ending June 30, 2015 and 2014, respectively.

 

24


The carrying amounts and estimated fair values of financial instruments, at June 30, 2015 and December 31, 2014 are as follows:

 

     Carrying
Amount
     Fair Value Measurements at
June 30, 2015 Using:
 
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 43,163       $ 43,163       $  —         $  —         $ 43,163   

Securities available for sale

     635,184         —           635,184         —           635,184   

Certificates of deposit held at other financial institutions

     250         —           250         —           250   

Securities held to maturity

     46,815         —           46,885         —           46,885   

Loans held for sale

     16,842         —           16,842         —           16,842   

Net loans

     954,175         —           —           953,829         953,829   

Restricted equity securities

     7,685         n/a         n/a         n/a         n/a   

Servicing rights, net

     3,298         —           4,679         —           4,679   

Accrued interest receivable

     4,886         6         2,257         2,623         4,886   

Financial liabilities

              

Deposits

   $ 1,491,986       $ 940,917       $ 557,906       $  —         $ 1,498,823   

Federal funds purchased and repurchase agreements

     36,567         —           36,567         —           36,567   

Federal Home Loan Bank advances

     57,000         —           57,152         —           57,152   

Accrued interest payable

     578         47         531         —           578   
     Carrying
Amount
     Fair Value Measurements at
December 31, 2014 Using:
 
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 49,347       $ 49,347       $  —         $  —         $ 49,347   

Securities available for sale

     395,705         20,000         375,705         —           395,705   

Certificates of deposit held at other financial institutions

     250         —           250         —           250   

Securities held to maturity

     53,332         —           53,741         —           53,741   

Loans held for sale

     18,462         —           18,462         —           18,462   

Net loans

     780,508         —           —           782,745         782,745   

Restricted equity securities

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

Servicing rights, net

     3,053         —           4,180         —           4,180   

Accrued interest receivable

     3,545         —           1,368         2,177         3,545   

Financial liabilities

              

Deposits

   $ 1,172,233       $ 848,158       $ 326,644       $  —         $ 1,174,802   

Federal funds purchased and repurchase agreements

     39,078         —           39,078         —           39,078   

Federal Home Loan Bank advances

     19,000         —           19,146         —           19,146   

Accrued interest payable

     421         33         388         —           421   

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.

 

25


(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.

 

26


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
June 30,
 
     2015     2014  

Basic

    

Net income available to common shareholders

   $ 3,109      $ 2,010   

Less: earnings allocated to participating securities

     (34 )     (20 )
  

 

 

   

 

 

 

Net income allocated to common shareholders

   $ 3,075      $ 1,990   
  

 

 

   

 

 

 

Weighted average common shares outstanding including participating securities

     10,490,972        4,889,873   

Less: Participating securities

     (116,103 )     (49,356 )
  

 

 

   

 

 

 

Average shares

     10,374,869        4,840,517   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.30      $ 0.41   
  

 

 

   

 

 

 

Diluted

    

Net income allocated to common shareholders

   $ 3,075      $ 1,990   

Weighted average common shares outstanding for basic earnings per common share

     10,374,869        4,840,517   

Add: Dilutive effects of assumed exercises of stock options

     457,613        127,848   

Add: Dilutive effects of assumed exercises of stock warrants

     12,785        3,542   
  

 

 

   

 

 

 

Average shares and dilutive potential common shares

     10,845,267        4,971,907   
  

 

 

   

 

 

 

Dilutive earnings per common share

   $ 0.28      $ 0.40   
  

 

 

   

 

 

 
     Six Months Ended
June 30,
 
     2015     2014  

Basic

    

Net income available to common shareholders

   $ 6,216      $ 3,514   

Less: earnings allocated to participating securities

     (73 )     (28 )
  

 

 

   

 

 

 

Net income allocated to common shareholders

   $ 6,143      $ 3,486   
  

 

 

   

 

 

 

Weighted average common shares outstanding including participating securities

     9,237,574        4,876,347   

Less: Participating securities

     (109,183 )     (38,325 )
  

 

 

   

 

 

 

Average shares

     9,128,391        4,838,022   
  

 

 

   

 

 

 

Basic earnings per common share

   $ 0.67      $ 0.72   
  

 

 

   

 

 

 

Diluted

    

Net income allocated to common shareholders

   $ 6,143      $ 3,486   

Weighted average common shares outstanding for basic earnings per common share

     9,128,391        4,838,022   

Add: Dilutive effects of assumed exercises of stock options

     445,611        124,728   

Add: Dilutive effects of assumed exercises of stock warrants

     12,882        3,542   
  

 

 

   

 

 

 

Average shares and dilutive potential common shares

     9,586,884        4,966,292   
  

 

 

   

 

 

 

Dilutive earnings per common share

   $ 0.64      $ 0.70   
  

 

 

   

 

 

 

For the three months ended June 30, 2015 and 2014, stock options for 147,782 and 245,432 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 210,782 and 249,968 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2015 and 2014 because they were antidilutive.

 

27


NOTE 10—CAPITAL OFFERING

The Company commenced its initial public stock offering on March 26, 2015. The Company issued 2,640,000 shares of common stock at a price of $21.00 per share and began trading on the New York Stock Exchange on March 26, 2015, under the ticker symbol “FSB”. Net proceeds were as follows:

 

Gross proceeds

   $ 55,440   

Less: stock offering costs

     (5,015 )
  

 

 

 

Net proceeds from issuance of common stock

   $ 50,425   
  

 

 

 

 

28


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 on March 27, 2015, 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. Historical results and trends that might appear in the condensed consolidated financial statements should not be interpreted as being indicative of future operations. 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 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 BCG Consulting Group, Inc. (“BCG”), together referred to as “the Company.” The Company sold the assets of BCG in December 2014; therefore, only the consolidated statements of income for the three and six months ending June 30, 2014 contain income and expenses that include BCG. 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.

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.

 

29


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.

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.

Recent Accounting Pronouncements

There are currently no new accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption that were not disclosed in the Company’s most recent Annual Report on Form 10-K.

 

30


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

JUNE 30, 2015 AND 2014

Overview

The Company reported net income of $3,134 and $6,266 for the three and six months ended June 30, 2015, respectively, compared to $2,035 and $3,564 for the three and six months ended June 30, 2014. 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 six months ended June 30, 2015 was $3,109 and $6,216, respectively, compared to $2,010 and $3,514 for the three and six months ended June 30, 2014. The primary reason for the increase in net earnings available to common shareholders for the three and six months ended June 30, 2015 was increased interest income on loans and investment securities compared with the same periods in 2014. The increase in loans was due to both significant organic growth and due to the acquisition of MidSouth which, after considering the effect of purchase accounting entries, added $191,416 in loans when the transaction was completed on July 1, 2014. The growth in the securities portfolio is primarily attributable to both organic growth and capital leverage programs implemented during the second quarter of 2015 to utilize proceeds received from the issuance of common stock in conjunction with the Company’s initial public stock offering on March 26, 2015. The acquisition of MidSouth also added $57,431 in securities available-for-sale, after the effect of purchase accounting entries, when the transaction was completed on July 1, 2014.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and six months ended June 30, 2015, totaled $13,327 and $25,484, respectively, compared to $7,348 and $14,443 for the same periods in 2014, an increase of $5,979 and $11,041, or 81.4% and 76.4%, between the respective periods. For the three and six months ended June 30, 2015, interest income increased $6,714 and $12,341, or 77.2% and 72.6%, respectively, due to growth in both the loan and investment securities portfolios. For the three and six months ended June 30, 2015, interest expense increased $735 and $1,300, or 54.4% and 50.9%, respectively, as a result of increases in both interest-bearing deposits and borrowings.

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 six months ended June 30, 2015 and 2014:

Average Balances (7)—Yields & Rates

(Dollars are in thousands)

 

     Three Months Ended June 30,  
     2015     2014  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans (1)(6)

   $ 909,705      $ 12,173         5.37   $ 478,133      $ 6,380         5.35 %

Securities available for sale (6)

     512,152        2,790         2.19     285,086        1,859         2.62 %

Securities held to maturity (6)

     48,676        336         2.77     59,619        395         2.66 %

Certificates of deposit at other financial institutions

     250        2         3.21     —          —           0.00 %

Federal funds sold and other (2)

     53,299        112         0.84     23,898        65         1.09 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 1,524,082      $ 15,413         4.06   $ 846,736      $ 8,699         4.12 %

Allowance for loan losses

     (7,483 )          (5,467 )     

All other assets

     73,183             29,258        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 1,589,782           $ 870,527        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 265,844      $ 261         0.39   $ 173,628      $ 131         0.30 %

Money market

     443,085        630         0.57     247,893        454         0.73 %

Savings

     33,471        38         0.46     20,639        26         0.51 %

Time deposits

     402,335        984         0.98     232,024        603         1.04 %

Federal Home Loan Bank advances

     48,165        81         0.67     33,000        80         0.97 %

Federal funds purchased and other (3)

     53,832        92         0.69     25,149        57         0.91 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 1,246,732      $ 2,086         0.67   $ 732,333      $ 1,351         0.74 %

Demand deposits

     157,511             64,923        

Other liabilities

     5,937             2,113        

Total shareholders’ equity

     179,602             71,158        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,589,782           $ 870,527        

NET INTEREST SPREAD (4)

          3.39          3.38 %

NET INTEREST INCOME

     $ 13,327           $ 7,348      

NET INTEREST MARGIN (5)

          3.51          3.48 %

 

31


     Six Months Ended June 30,  
     2015     2014  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans (1)(6)

   $ 877,749      $ 23,327         5.36 %   $ 461,948      $ 12,298         5.37 %

Securities available for sale (6)

     460,458        5,111         2.24 %     280,876        3,787         2.72 %

Securities held to maturity (6)

     50,584        700         2.79 %     58,985        790         2.70 %

Certificates of deposit at other financial institutions

     250        3         2.42 %     —          —           0.00 %

Federal funds sold and other (2)

     49,154        198         0.81 %     27,077        123         0.92 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 1,438,195      $ 29,339         4.11 %   $ 828,886      $ 16,998         4.14 %

Allowance for loan losses

     (7,262 )          (5,265 )     

All other assets

     71,276             29,337        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 1,502,209           $ 852,958        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 283,398      $ 435         0.31 %   $ 191,733      $ 297         0.31 %

Money market

     418,719        1,215         0.59 %     242,942        896         0.74 %

Savings

     32,051        73         0.46 %     20,193        51         0.51 %

Time deposits

     371,593        1,823         0.99 %     218,050        1,118         1.03 %

Federal Home Loan Bank advances

     35,718        146         0.82 %     26,619        109         0.83 %

Federal funds purchased and other (3)

     48,381        163         0.68 %     19,193        84         0.88 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 1,189,860      $ 3,855         0.65 %   $ 718,730      $ 2,555         0.72 %

Demand deposits

     153,827             62,352        

Other liabilities

     5,919             2,322        

Total shareholders’ equity

     152,603             69,554        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,502,209           $ 852,958        

NET INTEREST SPREAD (4)

          3.46 %          3.42 %

NET INTEREST INCOME

     $ 25,484           $ 14,443      

NET INTEREST MARGIN (5)

          3.57 %          3.51 %

 

(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) Average balances are average daily balances.

Interest-earning assets averaged $1,524,082 and $1,438,195 during the three and six months ended June 30, 2015 compared to $846,736 and $828,886 for the same periods in 2014, an increase of $677,346 and $609,309, or 80.0% and 73.5%, respectively. This increase was primarily due to organic growth in both the loan and securities portfolios over the past year, increases to the securities

 

32


portfolio as a result of a capital leverage program that was implemented during the second quarter of 2015, and due to the acquisition of MidSouth. Average loans increased 90.3% and 90.0% and average investment securities increased 62.7% and 50.4% when comparing the three and six months ended June 30, 2015 with the same periods in 2014. When comparing the three and six months ended June 30, 2015 and 2014, the yield on average interest earning assets decreased six and three basis points to 4.06% and 4.11%, compared to 4.12% and 4.14%, for the same periods during 2014. The yield on available-for-sale securities was 2.19% and 2.24% during the three and six months ended June 30, 2015 compared to 2.62% and 2.72% for the same periods in 2014. The primary driver for the decrease in yield was due to decreases in coupon rates on securities purchased during the past 12 months. For the three and six months ended June 30, 2015, the weighted average coupon rate for available-for-sale securities was 2.99% compared to 3.29% and 3.41% for the same periods in 2014, a decrease of 30 and 42 basis points, respectively. During the six months ending June 30, 2015, the Company purchased securities with total purchased par of $305,160, weighted average yield of 2.45% and weighted average life of 7.1 years.

Interest-bearing liabilities averaged $1,246,732 and $1,189,860 during the three- and six-month periods ending June 30, 2015 compared to $732,333 and $718,730 for the same periods in 2014, an increase of $514,399 and $471,130, or 70.2% and 65.6%, respectively. Total average interest-bearing deposits grew $470,551 and $432,843, including increases in average brokered CDs of $154,452 and $111,316 and average interest-bearing public funds deposits of $86,610 and 80,988 for the three- and six-month periods ending June 30, 2015 as compared to the same periods during 2014. Rapid growth in the loan and investment portfolios also resulted in an increase in average Federal Home Loan Bank advances of $15,165 and $9,099 and average federal funds purchased of $28,683 and $29,188 for the three- and six-month periods ending June 30, 2015 as compared to the same periods during 2014. The cost of interest-bearing liabilities for the three and six months ending June 30, 2015 decreased by seven basis points each when comparing the cost of interest-bearing liabilities with the same periods of 2014, with the largest declines in interest costs being reported in money market deposits and in Federal funds purchased and other.

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
June 30, 2015 versus June 30, 2014
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 5,759       $ 34       $ 5,793   

Securities available for sale

     1,481         (550 )      931   

Securities held to maturity

     (73 )      14         (59 )

Certificates of deposit at other financial institutions

     2         —           2   

Federal funds sold and other

     79         (32      47   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 7,248       $ (534 )    $ 6,714   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 70       $ 60       $ 130   

Money market accounts

     357         (181 )      176   

Savings

     16         (4 )      12   

Time deposits

     443         (62 )      381   

Federal Home Loan Bank advances

     37         (36      1   

Other borrowed funds

     65         (30 )      35   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 988       $ (253 )    $ 735   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 6,260       $ (281 )    $ 5,979   
  

 

 

    

 

 

    

 

 

 

 

33


     Net change six months ended
June 30, 2015 versus June 30, 2014
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 11,071       $ (42 )    $ 11,029   

Securities available for sale

     2,421         (1,097 )      1,324   

Securities held to maturity

     (113 )      23         (90 )

Certificates of deposit at other financial institutions

     3         —           3   

Federal funds sold and other

     100         (25      75   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 13,482       $ (1,141 )    $ 12,341   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 142       $ (4 )    $ 138   

Money market accounts

     648         (329 )      319   

Savings

     30         (8 )      22   

Time deposits

     787         (82 )      705   

Federal Home Loan Bank advances

     37         —           37   

Other borrowed funds

     128         (49 )      79   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 1,772       $ (472 )    $ 1,300   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 11,710       $ (669 )    $ 11,041   
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in our 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 $805 and $440 for the three months ended June 30, 2015 and 2014, respectively, and $1,430 and $825 for the six months ended June 30, 2015 and 2014, respectively. The higher provision for the six months ended June 30, 2015 compared to the same period in 2014 is due primarily to the Company’s loan growth during the three and six months ended June 30, 2015, compared to the same periods in 2014. Nonperforming loans at June 30, 2015 totaled $947 compared to $1,151 at December 31, 2014, representing 0.1% of total loans at both dates.

Non-Interest Income

Non-interest income for the three and six months ended June 30, 2015 was $2,851 and $6,066 compared to $2,430 and $3,851 for the same periods in 2014. The following is a summary of the components of non-interest income (in thousands):

 

     Three Months Ended
June 30,
     $
Increase
(Decrease)
    %
Increase
(Decrease)
 
     2015      2014       

Service charges on deposit accounts

   $ 18       $ 12       $ 6        50.0

Other service charges and fees

     690         313         377        120.4

Net gains on sale of loans

     1,463         1,567         (104 )     (6.6 %)

Investment services

     301         35         266        760.0

Loan servicing fees, net

     60         88         (28 )     (31.8 %)

Gain on sales and calls of investment securities, net

     109         63         46        73.0

Net gain (loss) on foreclosed assets

     21         (2      23        1,150.0

Other

     189         354         (165 )     (46.6 %)
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 2,851       $ 2,430       $ 421        17.3
  

 

 

    

 

 

    

 

 

   

 

 

 

 

34


     Six Months Ended
June 30,
     $
Increase
(Decrease)
    %
Increase
(Decrease)
 
     2015      2014       

Service charges on deposit accounts

   $ 34       $ 24       $ 10        41.7

Other service charges and fees

     1,308         549         759        138.3

Net gains on sale of loans

     3,110         2,351         759        32.3

Investment services

     587         77         510        662.3

Loan servicing fees, net

     103         100         3        3.0

Gain on sales and calls of investment securities, net

     524         71         453        638.0

Net gain (loss) on foreclosed assets

     27         31         (4 )     (12.9 %)

Other

     373         648         (275 )     (42.4 %)
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 6,066       $ 3,851       $ 2,215        57.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Other service charges and fees for the three and six months ending June 30, 2015 increased $377 and $759, or 120.4% and 138.3%, respectively, from the same periods in 2014. The increases for both periods were due to: (1) the MidSouth acquisition, which contributed to an increase in electronic banking fee income; (2) mortgage origination fee income, which increased due to the volume of loans originated during the periods; and (3) nonsufficient funds and overdraft fees, which have increased due to the number of accounts that were added in the MidSouth acquisition.

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 three months ending June 30, 2015 were $1,463, a decrease of $104, or 6.6%, from the same period during 2014. The decrease was primarily due to less favorable differences between the selling price and the carrying value of the sold loans and due to a decrease in the fair value of mortgage banking derivatives. Net gains for the six months ending June 30, 2015 were $3,110, an increase of $759, or 32.3%, from the same period in 2014. The increase was primarily due to more favorable differences between the selling price and the carrying value of the sold loans and due to an increase in the fair value of mortgage banking derivatives when comparing the six months ending June 30, 2015 with the same period in 2014.

Investment services income for the three and six months ending June 30, 2015 increased $266 and $510, or 760.0% and 662.3%, respectively, in comparison with the same periods in 2014. The increases in both comparative periods were primarily due to the acquisition of MidSouth, which brought an established wealth management division and its existing client base into the Company when the acquisition was completed on July 1, 2014.

Loan servicing fees are fees earned for servicing residential mortgages and SBA loans offset by the amortization of the respective servicing rights. These 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 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 six months ending June 30, 2015, net loan servicing fees were $60 and $103 compared to $88 and $100 for the three and six months ending June 30, 2014. The decrease in loan servicing fees when comparing the three months ending June 30, 2015 with the same period in 2014 was primarily related to an increase in amortization of mortgage servicing rights.

Net gain on sale of investment securities increased during the three and six months ending June 30, 2015 increased 73.0% and 638.0%, respectively when compared with the same periods in 2014. The significant increase for the six months ending June 30, 2015 is attributable to the sales and calls of securities during 2015, $291 of which was related to securities called during the first quarter of 2015.

Other non-interest income decreased by $165, or 46.6%, when comparing second quarter 2015 with second quarter 2014; however, it decreased by $275, or 42.4%, when comparing the six months ended June 30, 2015 with the same period in 2014. The decrease is attributed to the compliance consulting fees that were recorded in 2014 by the Company’s subsidiary, BCG, the assets of which the Company sold at the end of 2014. The Company has had no compliance consulting fee income in 2015 due to the sale of BCG.

 

35


Non-interest Expense

Non-interest expense for the three and six months ended June 30, 2015 was $10,572 and $20,193, compared to $6,078 and $11,570 compared to the same periods in 2014. These increases were the result of the following components listed in the table below:

 

     Three Months Ended
June 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2015      2014        

Salaries and employee benefits

   $ 6,071       $ 3,805       $ 2,266         59.6 %

Occupancy and equipment

     1,699         1,009         690         68.4 %

FDIC assessment expense

     216         120         96         80.0 %

Marketing

     198         135         63         46.7 %

Professional fees

     507         279         228         81.7 %

Amortization of core deposit intangible

     167         —           167         NM   

Indirect expenses related to public offering

     309         —           309         NM   

Other

     1,405         730         675         92.5 %
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 10,572       $ 6,078       $ 4,494         73.9 %
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended
June 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2015      2014        

Salaries and employee benefits

   $ 11,752       $ 7,350       $ 4,402         59.9 %

Occupancy and equipment

     3,278         1,795         1,483         82.6 %

FDIC assessment expense

     430         239         191         79.9 %

Marketing

     418         246         172         69.9 %

Professional fees

     866         633         233         36.8 %

Amortization of core deposit intangible

     339         —           339         NM   

Indirect expenses related to public offering

     326         —           326         NM   

Other

     2,784         1,307         1,477         113.0 %
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 20,193       $ 11,570       $ 8,623         74.5 %
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in non-interest expense noted in the table above is indicative of the Company’s overall growth over the past 12 months. Two primary increases for the three and six months ending June 30, 2015, were in salaries and occupancy expenses, which were primarily attributed to: 1) the acquisition of MidSouth, which added the MidSouth employee base and five branch locations to the Bank’s branch network; and 2) the expansion of the Company’s headquarters in downtown Franklin, Tennessee. Also, staffing increased from 136 full-time equivalent employees as of June 30, 2014, to 221 as of June 30, 2015. The increased staffing is due to the retention of the majority of the MidSouth employees to continue to support the branches as well as the addition of key lenders and operational staff needed to facilitate the Company’s growth.

The increase in amortization expense for the core deposit intangible for the three and six months ending June 30, 2015 is directly attributable to the acquisition of MidSouth, which brought a core deposit intangible asset that is being amortized over a period of eight years and two months.

The increase in indirect expenses related to public offering for the three and six months ending June 30, 2015 is attributable to expenses incurred from management’s nationwide “roadshow” marketing campaign related to the Company’s initial public offering (“IPO”).

For the three and six months ended June 30, 2015, other non-interest expenses increased $675 and $1,477, or 92.5% and 113.0%, respectively from the same periods in 2014. Of the increases for the three and six months ending June 30, 2015, $151 and $325 is attributed to the increase in electronic banking expenses associated with the Company’s customers’ increased usage of technology-based services, such as ATM/debit card transactions, internet banking transactions, and other types of automated transactions. Much of the electronic banking expense increase was attributable to the MidSouth acquisition, which added more consumers to the Company’s customer base. Expenses related to the Company’s lending activities, including mortgage lending, accounted for $194 and $273 of the increase for the three and six months ending June 30, 2015, when compared with the same periods in 2014. The remaining increases of $330 and $879 were due to a variety of expense items that include, but are not limited to, deposit account expense, insurance expense, postage and freight, franchise taxes, meals and entertainment, travel, communications expenses, etc.

 

36


Income Tax Expense

The Company recognized income tax expense for the three and six months ended June 30, 2015, of $1,667 and $3,661, respectively, compared to $1,225 and $2,335, respectively, for the three and six months ended June 30, 2014. The Company’s year-to-date income tax expense for the period ended June 30, 2015 reflects an effective income tax rate of 36.9% compared to 39.6% for the same period in 2014. The decrease in the effective tax rate resulted from unfavorable permanent differences incurred during the six months ended June 30, 2014, from expenses associated with the acquisition of MidSouth 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 JUNE 30, 2015 AND DECEMBER 31, 2014

Overview

The Company’s total assets increased by $410,925, or 30.3%, from December 31, 2014 to June 30, 2015. The increase in total assets has primarily been the result of organic growth in the loan and investment securities portfolios.

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 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 June 30, 2015 and December 31, 2014 were $962,191 and $787,188, respectively, an increase of $175,003, or 22.2%. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. In addition, the Company added a new health care lending team in the second quarter of 2015 that will be focused on commercial and industrial lending, with emphasis on lending within the health care industry, thereby adding more diversification to the Company’s loans. During the second quarter, this team closed nearly $25 million in loans with a number of approved loans in their pipeline to be closed during the third quarter of 2015.

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

 

Types of Loans    June 30, 2015     December 31, 2014  
     Amount      % of Total
Loans
    Amount     % of Total
Loans
 

Total loans, excluding PCI loans

         

Real estate:

         

Residential

   $ 234,107         24.3 %   $ 213,760        27.1 %

Construction and land development

     293,629         30.5 %     239,225        30.4 %

Commercial

     279,591         29.0 %     246,352        31.3 %

Commercial and industrial

     144,735         15.0 %     76,570        9.7 %

Consumer and other

     7,527         0.8 %     8,025        1.0 %
  

 

 

    

 

 

   

 

 

   

 

 

 

Total loans—gross, excluding PCI loans

     959,589         99.6 %     783,932        99.5 %
  

 

 

    

 

 

   

 

 

   

 

 

 

Total PCI loans (note 1)

         

Real estate:

         

Residential

   $ 810         NM      $ 814        0.1 %

Construction and land development

     77         NM        77        NM   

Commercial

     1,752         0.2 %     1,798        0.2 %

Commercial and industrial

     1,639         0.2 %     1,624        0.2 %

Consumer and other

     —           —    %     2        NM   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total loans—gross PCI loans

     4,278         0.4 %     4,315        0.5 %
  

 

 

    

 

 

   

 

 

   

 

 

 

Total gross loans

     963,867         100.0 %     788,247        100.0 %
     

 

 

     

 

 

 

Less: deferred loan fees, net

     (1,676 )        (1,059 )  

Allowance for loan losses

     (8,016 )        (6,680 )  
  

 

 

      

 

 

   

Total loans, net allowance for loan losses

   $ 954,175           780,508     
  

 

 

      

 

 

   

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

 

37


As presented in the above table, gross loans increased 22.3% during the first six months of 2015, primarily due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of 15.4% with the majority of the growth occurring in the construction and land development (22.7%) segment. The Company also experienced strong growth of 87.2% in the commercial and industrial segment during the first six months of 2015 due to the second quarter addition of a group of lenders that is focused on commercial and health care lending.

Real estate loans comprised 84.0% of the loan portfolio at June 30, 2015. The following chart displays the Company’s real estate loan portfolio as of June 30, 2015, broken down into the various segments or types of real estate loans that the Company produces and stated as a percentage of total real estate loans:

 

LOGO

The largest portion of the real estate loan segments as of June 30, 2015, was construction and land development loans, which totaled 36.3% of real estate loans and was broken down into three sub-segments: residential construction (27.5% of real estate loans), commercial construction (5.2% of real estate loans), and acquisition and development (3.6% of real estate loans). Construction and land development loans totaled $293,706 and made up 30.5% of the total loan portfolio at June 30, 2015. 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 real estate loans totaled $281,343 at June 30, 2015, and comprised 34.7% of real estate loans and 29.2% 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 totaled $234,917 and increased 9.5% during the first six months of 2015 and comprised 29.0% of real estate loans and 24.4% of total loans at June 30, 2015.

Commercial and industrial loans totaled $146,374 at June 30, 2015 and grew 87.2% during the first six months of 2015. Loans in this classification comprised 15.2% of total loans at June 30, 2015, as compared to 9.9% as of December 31, 2014. The commercial and industrial classification primarily consists of commercial loans to small-to-medium sized businesses, but with the addition of the health care lending team during the second quarter of 2015, the composition of that portfolio segment will likely change to reflect the addition of health care and other types of commercial loans.

 

38


The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at June 30, 2015, excluding unearned net fees and costs.

Loan Maturity Schedule

 

     June 30, 2015  
     One year
or less
     Over one
year to five
years
     Over five
years
     Total  

Real estate:

           

Residential

   $ 21,336       $ 95,414       $ 118,167       $ 234,917   

Construction and land development

     154,346         111,043         28,317         293,706   

Commercial

     19,506         108,524         153,313         281,343   

Commercial and industrial

     40,820         73,668         31,886         146,374   

Consumer and other

     2,496         4,500         531         7,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 238,504       $ 393,149       $ 332,214         963,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed interest rate

   $ 134,612       $ 292,362       $ 152,833       $ 579,807   

Variable interest rate

     103,892         100,787         179,381         384,060   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 238,504       $ 393,149       $ 332,214         963,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

39


In the table below, the components, as discussed above, of the allowance for loan losses are shown at June 30, 2015 and December 31, 2014.

 

     June 30, 2015     December 31, 2014     Increase (Decrease)  
     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
    ALLL
Balance
     Change  

Non impaired loans

   $ 846,273       $ 7,897         0.93 %   $ 626,180       $ 6,662         1.06 %   $ 220,093      $ 1,235         -13 bps   

MidSouth loans (Note 1)

     111,284         —           —    %     156,806         —           —    %     (45,522 )     —           —     

Impaired loans

     2,032         119         5.86 %     946         18         1.90 %     1,086        101         396 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-PCI loans

     959,589         8,016         0.84 %     783,932         6,680         0.85 %     175,657        1,336         -1 bps   

PCI loans

     4,278         —           —    %     4,315         —           —    %     (37 )     —           —