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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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 November 9, 2015, was 10,525,680.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Cautionary Note Regarding Forward-Looking Statements

     1   

Item 1. Condensed Consolidated Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets

     2   

Condensed Consolidated Statements of Income

     3   

Condensed Consolidated Statements of Comprehensive Income

     4   

Condensed Consolidated Statements 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

     27   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     47   

Item 4. Controls and Procedures

     48   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     48   

Item 1A. Risk Factors

     48   

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

     49   

Item 3. Defaults Upon Senior Securities

     49   

Item 4. Mine Safety Disclosures

     49   

Item 5. Other Information

     50   

Item 6. Exhibits

     50   

SIGNATURES

  


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in 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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015 and Part II of this Quarterly Report on Form 10-Q.

 

1


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2015 and December 31, 2014

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

 

     September 30,
2015
    December 31,
2014
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 47,658      $ 49,347   

Certificates of deposit at other financial institutions

     250        250   

Securities available for sale

     624,420        395,705   

Securities held to maturity (fair value 2015—$134,028 and 2014—$53,741)

     132,134        53,332   

Loans held for sale, at fair value

     14,666        18,462   

Loans

     1,123,826        787,188   

Allowance for loan losses

     (9,744 )     (6,680 )
  

 

 

   

 

 

 

Net loans

     1,114,082        780,508   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     7,691        5,349   

Premises and equipment, net

     9,360        9,664   

Accrued interest receivable

     6,108        3,545   

Bank owned life insurance

     22,452        11,664   

Deferred tax asset

     5,980        6,780   

Buildings held for sale

     —         4,080   

Foreclosed assets

     206        715   

Servicing rights, net

     3,415        3,053   

Goodwill

     9,124        9,124   

Core deposit intangible, net

     2,199        2,698   

Other assets

     2,793        1,551   
  

 

 

   

 

 

 

Total assets

   $ 2,002,538      $ 1,355,827   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 177,452      $ 150,337   

Interest bearing

     1,537,142        1,021,896   
  

 

 

   

 

 

 

Total deposits

     1,714,594        1,172,233   

Federal funds purchased and repurchase agreements

     37,618        39,078   

Federal Home Loan Bank advances

     57,000        19,000   

Accrued interest payable

     587        421   

Other liabilities

     5,129        3,296   
  

 

 

   

 

 

 

Total liabilities

     1,814,928        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 September 30, 2015 and December 31, 2014, respectively

     10,000        10,000   

Common stock, no par value; 20,000,000 shares authorized; 10,524,630 and 7,756,411 shares issued and outstanding at September 30, 2015 and December 31 2014, respectively

     146,645        94,251   

Retained earnings

     26,713        15,372   

Accumulated other comprehensive income

     4,252        2,176   
  

 

 

   

 

 

 

Total shareholders’ equity

     187,610        121,799   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,002,538      $ 1,355,827   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Interest income and dividends

        

Loans, including fees

   $ 14,744      $ 10,168      $ 38,071      $ 22,466   

Securities:

        

Taxable

     3,462        2,395        9,084        6,932   

Tax-exempt

     966        20        1,155        60   

Dividends on restricted equity securities

     100        84        250        175   

Federal funds sold and other

     29        25        80        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     19,301        12,692        48,640        29,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     2,417        1,446        5,963        3,808   

Federal funds purchased and repurchase agreements

     69        39        232        123   

Federal Home Loan Bank advances

     79        80        225        189   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,565        1,565        6,420        4,120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     16,736        11,127        42,220        25,570   

Provision for loan losses

     1,724        664        3,154        1,489   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     15,012        10,463        39,066        24,081   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     44        13        78        37   

Other service charges and fees

     679        600        1,987        1,149   

Net gains on sale of loans

     2,463        1,875        5,573        4,226   

Loan servicing fees, net of amortization of servicing assets

     84        73        187        173   

Gain on sales and calls of securities

     5        22        529        93   

Net gain (loss) on foreclosed assets

     3        (3     30        28   

Wealth management

     327        287        914        364   

Other

     193        407        566        1,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     3,798        3,274        9,864        7,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     6,208        6,144        17,960        13,494   

Occupancy and equipment

     1,683        1,443        4,961        3,238   

FDIC assessment expense

     362        181        792        420   

Marketing

     277        224        695        470   

Professional fees

     516        961        1,382        1,594   

Amortization of core deposit intangible

     160        184        499        184   

Indirect expenses related to public offering

     —          —          314        —     

Other

     1,647        1,252        4,443        2,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     10,853        10,389        31,046        21,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     7,957        3,348        17,884        9,247   

Income tax expense

     2,807        1,333        6,468        3,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,150        2,015        11,416        5,579   

Dividends paid on Series A preferred stock

     (25     (25     (75     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 5,125      $ 1,990      $ 11,341      $ 5,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.49      $ 0.26      $ 1.17      $ 0.94   

Diluted

     0.46        0.25        1.12        0.91   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 5,150      $ 2,015      $ 11,416      $ 5,579   

Other comprehensive income (loss), net of tax:

        

Unrealized gains/losses on securities:

        

Unrealized holding gain (loss) arising during the period

     7,871        (623     4,006        7,445   

Reclassification adjustment for gains included in net income

     (5     (22     (529     (93
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     7,866        (645     3,477        7,352   

Tax effect

     (3,090     247        (1,401     (2,815
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     4,776        (398     2,076        4,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,926      $ 1,617      $ 13,492      $ 10,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

 

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

Balance at December 31, 2013

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

Exercise of common stock options

     —           6,508         56         —          —          56   

Dividends paid on Series A preferred stock

     —           —           —           (75 )     —          (75 )

Issuance of restricted stock, net of forfeitures

     —           83,725         —           —          —          —     

Stock based compensation expense

     —           —           457         —          —          457   

Stock issued in conjunction with 401(k) employer match

     —           20,345         275         —          —          275   

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

        2,766,191         40,462             40,462   

Net income

     —           —           —           5,579        —          5,579   

Other comprehensive income

     —           —           —           —          4,537        4,537   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 10,000         7,739,644       $ 93,888       $ 12,562      $ 4      $ 116,454   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

Exercise of common stock options

     —           80,331         780         —          —          780   

Exercise of common stock warrants

     —           4,970         60         —          —          60   

Dividends paid on Series A preferred stock

     —           —           —           (75 )     —          (75 )

Issuance of restricted stock, net of forfeitures

        28,229         —           —          —          —     

Stock based compensation expense, net of forfeitures

     —           —           619         —          —          619   

Stock issued related to initial public offering, net of stock issuance costs of $5,017

     —           2,640,000         50,423         —          —          50,423   

Stock issued in conjunction with 401(k) employer match, net of distributions

     —           14,689         365         —          —          365   

Excess tax benefit from exercise of stock options

     —           —           147         —          —          147   

Net income

     —           —           —           11,416        —          11,416   

Other comprehensive income

     —           —           —           —          2,076        2,076   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 10,000         10,524,630       $ 146,645       $ 26,713      $ 4,252      $ 187,610   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash flows from operating activities

    

Net income

   $ 11,416      $ 5,579   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     996        616   

Accretion of purchase accounting adjustments

     (1,551     (831 )

Net amortization of securities

     3,426        1,928   

Amortization of loan servicing right asset

     644        547   

Amortization of core deposit intangible

     499        184   

Provision for loan losses

     3,154        1,489   

Excess tax benefit related to the exercise of stock options

     (147     —     

Origination of loans held for sale

     (236,831     (191,142 )

Proceeds from sale of loans held for sale

     245,194        186,618   

Net gain on sale of loans

     (5,573     (4,226 )

Gain on sale of available for sale securities

     (380     (93 )

Gain on call of held to maturity securities

     (149     —     

Income from bank owned life insurance

     (444     (203 )

(Gain) loss on sale of foreclosed assets

     (22     (28 )

Stock-based compensation expense

     619        457   

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

     356        294   

Recognition of deferred gain on sale of loans

     (27     (31 )

Recognition of deferred gain on sale of foreclosed assets

     (8     (2

Net change in:

    

Accrued interest receivable and other assets

     (4,406     101   

Accrued interest payable and other liabilities

     2,190        (705 )
  

 

 

   

 

 

 

Net cash from operating activities

     18,956        552   

Cash flows from investing activities

    

Available for sale securities:

    

Sales

     52,064        34,087   

Purchases

     (467,067     (118,611 )

Maturities, prepayments and calls

     187,222        69,465   

Held to maturity securities:

    

Purchases

     (88,550     (8,601 )

Maturities, prepayments and calls

     9,394        8,655   

Net change in loans

     (335,238     (114,676 )

Purchase of bank owned life insurance

     (10,344     —     

Proceeds from sale of buildings held for sale

     4,080        —     

Purchase of restricted equity securities

     (2,342     (745 )

Proceeds from sale of foreclosed assets

     531        634   

Purchases of premises and equipment, net

     (692     (2,941 )

Net cash received from acquisition

     —          12,197   
  

 

 

   

 

 

 

Net cash from investing activities

     (650,942     (120,536 )

Cash flows from financing activities

    

Increase in deposits

     542,422        125,903   

Increase (decrease) in federal funds purchased and repurchase agreements

     (1,460     9,054   

Proceeds from Federal Home Loan Bank advances

     157,000        15,000   

Repayment of Federal Home Loan Bank advances

     (119,000     (11,000

Proceeds from exercise of common stock warrants

     60        —     

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

     927        56   

Proceeds from issuance of common stock, net of offering costs

     50,423        (514 )

Dividends paid on preferred stock

     (75     (75 )
  

 

 

   

 

 

 

Net cash from financing activities

     630,297        138,424   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (1,689     18,440   

Cash and cash equivalents at beginning of period

     49,347        18,217   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,658      $ 36,657   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 6,254      $ 3,905   

Income taxes paid

     6,339        4,546   

Non-cash supplemental information:

    

Transfers from loans to foreclosed assets

   $ —        $ 1,315   

Fair value of stock and stock options issued related to MidSouth Bank acquisition

   $ —        $ 40,976   

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Franklin Financial Network, Inc. (“FFN”), and its wholly owned subsidiaries, Franklin Synergy Bank and BCG Consulting Group, Inc. (“BCG”), together referred to as “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, which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill was calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date.

At September 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.

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 September 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   
  

 

 

 

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition had 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 is being amortized utilizing an accelerated amortization method over an estimated economic life of 8.2 years. Through September 30, 2015, the Company has recorded amortization of core deposit intangibles totaling $861.

 

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Pro forma information

Pro forma data for the nine-month period ended September 30, 2014 listed in the table below presents 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-month periods ended September 30, 2014 and 2015 and for the nine-month period ended September 30, 2015, there is no pro forma information for those periods.

 

     Nine Months Ended
Sept 30, 2014
 

Net interest income

   $ 31,619   

Net income available to common shareholders

     6,353   

Earnings per share—basic

   $ 0.82   

Earnings per share—diluted

   $ 0.80   

Supplemental pro forma earnings for the nine months ended September 30, 2014 were adjusted to exclude acquisition-related costs that were incurred during the nine months ended September 30, 2014 of $2,112. Supplemental pro forma earnings for the nine months ended September 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.

During the nine months ended September 30, 2014, the acquisition of MidSouth increased pro forma net interest income by approximately $6,049 and net income available to common shareholders by approximately $849.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at September 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
 

September 30, 2015

          

U.S. government sponsored entities and agencies

   $ 14,211       $ 253       $ (46 )   $ 14,418   

Mortgage-backed securities: residential

     508,817         6,868         (1,086 )     514,599   

Mortgage-backed securities: commercial

     20,169         161         —          20,330   

State and political subdivisions

     74,220         896         (43 )     75,073   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 617,417       $ 8,178       $ (1,175 )   $ 624,420   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     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 September 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
 

September 30, 2015

          

U.S. government sponsored entities and agencies

   $ 3,301       $ 13       $ (42 )   $ 3,272   

Mortgage backed securities: residential

     31,691         658         (318 )     32,031   

State and political subdivisions

     97,142         1,605         (22 )     98,725   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 132,134       $ 2,276       $ (382 )   $ 134,028   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

8


Table of Contents
     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   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Proceeds

   $ 19,776       $ 9,767       $ 54,064       $ 34,087   

Gross gains

     95         31         485         256   

Gross losses

     (90 )      (9 )      (105 )      (163 )

Calls of held to maturity securities were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Proceeds

   $ —         $ —         $ 2,300       $ —     

Gross gains

     —           —           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.

 

     September 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

     7,761         8,009   

Over ten years

     80,670         81,482   

Mortgage-backed securities: residential

     508,817         514,599   

Mortgage-backed securities: commercial

     20,169         20,330   
  

 

 

    

 

 

 

Total

   $ 617,417       $ 624,420   
  

 

 

    

 

 

 

Held to maturity

     

Three months or less

   $ —         $ —     

Over three months through one year

     —           —     

Over one year through five years

     1,307         1,366   

Over five years through ten years

     3,024         3,091   

Over ten years

     96,112         97,540   

Mortgage-backed securities: residential

     31,691         32,031   
  

 

 

    

 

 

 

Total

   $ 132,134       $ 134,028   
  

 

 

    

 

 

 

Securities pledged at September 30, 2015 and December 31, 2014 had a carrying amount of $467,080 and $366,764 and were pledged to secure public deposits and repurchase agreements.

At September 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.

 

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Table of Contents

The following table summarizes the securities with unrealized and unrecognized losses at September 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
 

September 30, 2015

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ —         $ —        $ 1,654       $ (46 )   $ 1,654       $ (46 )

Mortgage-backed securities: residential

     77,224         (620 )     26,253         (466 )     103,477         (1,086 )

State and political subdivisions

     2,981         (43 )     —           —          2,981         (43 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 80,205       $ (663 )   $ 27,907       $ (512 )   $ 108,112       $ (1,175 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $ 1,979       $ (21 )   $ 979       $ (21 )   $ 2,958       $ (42 )

Mortgage-backed securities: residential

     1,800         (6 )     5,690         (312 )     7,490         (318 )

State and political subdivisions

     4,671         (22 )     —           —          4,671         (22 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 8,450       $ (49 )   $ 6,669       $ (333 )   $ 15,119       $ (382 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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.

 

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Table of Contents

NOTE 4—LOANS

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

 

     September 30,
2015
     December 31,
2014
 

Loans that are not PCI loans

     

Construction and land development

   $ 334,208       $ 239,225   

Commercial real estate:

     

Nonfarm, nonresidential

     303,657         240,975   

Other

     9,478         5,377   

Residential real estate:

     

Closed-end 1-4 family

     144,080         130,631   

Other

     104,371         83,129   

Commercial and industrial

     219,341         76,570   

Consumer and other

     6,893         8,025   
  

 

 

    

 

 

 

Loans before net deferred loan fees

     1,122,028         783,932   

Deferred loan fees, net

     (2,115 )      (1,059 )
  

 

 

    

 

 

 

Total loans that are not PCI loans

     1,119,913         782,873   
  

 

 

    

 

 

 

PCI loans

     

Construction and land development

   $ 77       $ 77   

Commercial real estate:

     

Nonfarm, nonresidential

     1,452         1,798   

Other

     —           —     

Residential real estate:

     

Closed-end 1-4 family

     707         706   

Other

     2         108   

Commercial and industrial

     1,675         1,624   

Consumer and other

     —           2   
  

 

 

    

 

 

 

Total PCI loans

     3,913         4,315   
  

 

 

    

 

 

 

Allowance for loan losses

     (9,744 )      (6,680 )
  

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 1,114,082       $ 780,508   
  

 

 

    

 

 

 

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

 

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

Three Months Ended September 30, 2015

             

Allowance for loan losses:

             

Beginning balance

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

Provision (credit) for loan losses

     461         135        (71     1,253        (54     1,724   

Loans charged-off

     —           —          (15 )     (15     (33 )     (63

Recoveries

     —           —          6        —          61        67   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,028       $ 2,456      $ 1,659      $ 2,562      $ 39      $ 9,744   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2014

             

Allowance for loan losses:

             

Beginning balance

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

Provision (credit) for loan losses

     231         173        192        72        (4 )     664   

Loans charged-off

     —           (540 )     (11 )     (4 )     —          (555 )

Recoveries

     —           —          3        —          —          3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

There was $5 in allowance for loan losses for PCI loans for the three months ended September 30, 2015. There was no allowance for loan losses for the three months ended September 30, 2014.

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2015 and 2014:

 

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

Nine Months Ended September 30, 2015

             

Allowance for loan losses:

             

Beginning balance

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

Provision (credit) for loan losses

     338         962        (114 )     1,927        41        3,154   

Loans charged-off

     —           —          (32 )     (15     (121 )     (168 )

Recoveries

     —           —          14        —          64        78   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,028       $ 2,456      $ 1,659      $ 2,562      $ 39      $ 9,744   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

             

Allowance for loan losses:

             

Beginning balance

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

Provision (credit) for loan losses

     589         402        304        243        (49 )     1,489   

Loans charged-off

     —           (540     (11 )     (4     —          (555 )

Recoveries

     —           —          49        —          —          49   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There was $5 in allowance for loan losses for PCI loans for the nine months ended September 30, 2015. There was no allowance for loan losses for the nine months ended September 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 September 30, 2015 and December 31, 2014. For purposes of this table, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.

 

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

September 30, 2015

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —         $ —         $ —         $ 80       $ —         $ 80   

Collectively evaluated for impairment

     3,028         2,451         1,659         2,482         39         9,659   

Purchased credit-impaired loans

     —           5         —           —           —           5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,028       $ 2,456       $ 1,659       $ 2,562       $ 39       $ 9,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ —         $ 914       $ 709       $ 102       $ 25       $ 1,750   

Collectively evaluated for impairment

     334,208         312,221         247,742         219,239         6,868         1,120,278   

Purchased credit-impaired loans

     77         1,452         709         1,675         —           3,913   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 334,285       $ 314,587       $ 249,160       $ 221,016       $ 6,893       $ 1,125,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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 September 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 September 30, 2015, acquired non-PCI loans were recorded at $104,853, comprised of contractually unpaid principal totaling $107,563 net of discounts totaling $2,710. Management evaluated these loans for credit deterioration since acquisition and determined that no allowance for loan losses was necessary at September 30, 2015.

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

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

September 30, 2015

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,501       $ 914       $ —     

Residential real estate:

        

Other

     709         709         —     

Commercial and industrial

     22         22         —     

Consumer and other

     25         25         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,257         1,670         —     

With an allowance recorded:

        

Commercial and industrial

     80         80         80   
  

 

 

    

 

 

    

 

 

 

Subtotal

     80         80         80   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,337       $ 1,750       $ 80   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

Average Recorded Investment

   2015      2014      2015      2014  

With no allowance recorded:

           

Construction and land development

   $ —         $ —         $ —         $ —     

Commercial real estate:

           

Nonfarm, nonresidential

     918         211         873         71   

Residential real estate:

           

Closed-end 1-4 family

     33         —           188         —     

Other

     712         —           317         —     

Commercial and industrial

     23         —           77         —     

Consumer and other

     25         —           8         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     1,711         211         1,463         71   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction and land development

   $ —         $ —         $ —         $ —     

Commercial real estate:

           

Nonfarm, nonresidential

     —           1,194         —           837   

Residential real estate:

           

1-4 family

     —           —           —           476   

Commercial and industrial

     90         64         50         65   

Consumer and other

     16         —           10         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     106         1,258         60         1,378   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,817       $ 1,469       $ 1,523       $ 1,449   
  

 

 

    

 

 

    

 

 

    

 

 

 

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended September 30, 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 September 30, 2015 and December 31, 2014:

 

     Nonaccrual      Loans Past Due
Over 90 Days
 

September 30, 2015

     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 835       $ —     
  

 

 

    

 

 

 

Total

   $ 835       $ —     
  

 

 

    

 

 

 

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.

 

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Table of Contents

The following table presents the aging of the recorded investment in past due loans as of September 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  

September 30, 2015

                    

Construction and land development

   $ 1,358       $  —         $  —         $ 1,358       $ 332,850       $ 77       $ 334,285   

Commercial real estate:

                    

Nonfarm, nonresidential

     —           —           835         835         302,822         1,452         305,109   

Other

     —           —           —           —           9,478         —           9,478   

Residential real estate:

                    

Closed-end 1-4 family

     839         —           —           839         143,241         707         144,787   

Other

     —           —           —           —           104,371         2         104,373   

Commercial and industrial

     123         —           —           123         219,218         1,675         221,016   

Consumer and other

     1         —           —           1         6,892         —           6,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,321       $ —         $ 835       $ 3,156       $ 1,118,872       $ 3,913       $ 1,125,941   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

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 September 30, 2015 and December 31, 2014:

 

     Pass      Special
Mention
     Substandard      Total  

September 30, 2015

           

Construction and land development

   $ 334,208       $  —         $ 77       $ 334,285   

Commercial real estate:

           

Nonfarm, nonresidential

     302,387         —           2,722         305,109   

Other

     9,478         —           —           9,478   

Residential real estate:

           

Closed-end 1-4 family

     143,564         —           1,223         144,787   

Other

     103,663         —           710         104,373   

Commercial and industrial

     219,522         —           1,494         221,016   

Consumer and other

     6,868         —           25         6,893   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,119,690       $  —         $ 6,251       $ 1,125,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

           

Closed-end 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 September 30, 2015 and December 31, 2014. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     Sept 30, 2015      Dec 31, 2014  

Contractually required principal and interest

   $ 5,872       $ 6,532   

Non-accretable difference

     (307 )      (1,270 )
  

 

 

    

 

 

 

Cash flows expected to be collected

     5,565         5,262   

Accretable yield

     (1,652 )      (947 )
  

 

 

    

 

 

 

Carrying value of acquired loans

     3,913         4,315   

Allowance for loan losses

     (5      —     
  

 

 

    

 

 

 

Carrying value less allowance for loan losses

   $ 3,908       $ 4,315   
  

 

 

    

 

 

 

 

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Table of Contents

Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the nine months ended September 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 nine-month periods ended September 30, 2015.

 

Activity during the three-month period ended September 30, 2015

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

Contractually required principal and interest

   $ 6,000      $ —        $ —        $ (128   $ 5,872   

Non-accretable difference

     (973 )     —          839         (173     (307 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,027        —          839         (301     5,565   

Accretable yield

     (749 )     —          447         (1,350     (1,652 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

   $ 4,278      $ —        $ 1,286       $ (1,651 )   $ 3,913   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Activity during the nine-month period ended September 30, 2015

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

Contractually required principal and interest

   $ 6,532      $ —        $ —        $ (660 )   $ 5,872   

Non-accretable difference

     (1,270 )     —          839         124        (307 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,262        —          839         (536     5,565   

Accretable yield

     (947 )     —          637         (1,342 )     (1,652 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

   $ 4,315      $ —        $ 1,476       $ (1,878 )   $ 3,913   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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 September 30, 2015 and December 31, 2014 are as follows:

 

     September 30,
2015
     December 31,
2014
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 461,121       $ 414,222   

Other

     3,613         3,986   

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Loan servicing fees, net:

           

Loan servicing fees

   $ 287       $ 253       $ 831       $ 720   

Amortization of loan servicing fees

     (203 )      (180 )      (644 )      (547 )

Change in impairment

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 84       $ 73       $ 187       $ 173   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of servicing rights was estimated by management to be approximately $4,264 at September 30, 2015. Fair value for September 30, 2015 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 11.5%. 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%.

 

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Table of Contents

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

 

2015

   $ 782   

2016

     552   

2017

     552   

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 4,970 warrants exercised during the nine months ended September 30, 2015, for which the Company received cash proceeds of $60. The exercised warrants had an aggregate intrinsic value of $46 at the date of exercise. No warrants were exercised during the nine months ended September 30, 2014. At September 30, 2015, there were 26,907 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 September 30, 2015, there were 2,364,492 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.

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.

 

18


Table of Contents

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

 

     September 30,
2015
    September 30,
2014
 

Risk-free interest rate

     1.84 %     1.81 %

Expected term

     7.5 years        5.9 years   

Expected stock price volatility

     25.00 %     10.85 %

Dividend yield

     0.22 %     0.23 %

The weighted average fair value of options granted for the nine months ended September 30, 2015 and 2014 were $6.41 and $4.12, respectively.

A summary of the activity in the stock option plans for the nine months ended September 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

     226,782         20.78         

Exercised

     (93,754 )      11.53         

Forfeited, expired, or cancelled

     (4,417 )      19.02         
  

 

 

          

Outstanding at period end

     1,339,271       $ 12.88         6.39       $ 12,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,272,307       $ 12.88         6.39       $ 12,051   

Exercisable at period end

     829,072       $ 10.76         5.06       $ 9,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company received cash proceeds of $780 for the options exercised during the nine months ended September 30, 2015. The exercised options had an aggregate intrinsic value of $839 at the date of exercise.

As of September 30, 2015, there was $1,733 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.7 years.

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

A summary of activity for non-vested restricted share awards for the nine months ended September 30, 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

     (25,075      14.08   

Forfeited

     (3,709 )      15.99   
  

 

 

    

Non-vested at period end

     105,864       $ 15.89   
  

 

 

    

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of September 30, 2015, there was $1,524 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 3.5 years.

 

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Table of Contents

NOTE 7—REGULATORY CAPITAL MATTERS

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amended 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 Wall Street Reform and Consumer Protection Act.

Under these rules, the leverage and risk-based capital ratios of financial 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 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 September 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     Required
For Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2015

               

Company common equity Tier 1 capital to risk-weighted assets

   $ 161,721         11.03   $ 65,479         4.50   $ 87,937         6.00

Company Total Capital to risk weighted assets

   $ 178,516         12.18   $ 116,407         8.00   $ 146,562         10.00

Company Tier 1 (Core) Capital to risk weighted assets

   $ 168,771         11.52   $ 58,204         6.00   $ 117,249         8.00

Company Tier 1 (Core) Capital to average assets

   $ 168,771         8.90   $ 75,824         4.00   $ 94,781         5.00

Bank common equity Tier 1 capital to risk-weighted assets

   $ 166,116         11.34   $ 65,947         4.50   $ 87,930         6.00

Bank Total Capital to risk weighted assets

   $ 175,860         12.00   $ 117,239         8.00   $ 146,549         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 166,116         11.34   $ 87,930         6.00   $ 117,239         8.00

Bank Tier 1 (Core) Capital to average assets

   $ 166,116         8.76   $ 75,824         4.00   $ 94,781         5.00

December 31, 2014

               

Company Total Capital to risk weighted assets

   $ 114,475         12.30   $ 74,464         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

   $ 107,795         11.58   $ 37,232         4.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

   $ 107,795         8.57   $ 50,291         4.00     N/A         N/A   

Bank Total Capital to risk weighted assets

   $ 113,830         12.23   $ 74,447         8.00   $ 93,059         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 107,150         11.51   $ 37,223         4.00   $ 55,835         6.00

Bank Tier 1 (Core) Capital to average assets

   $ 107,150         8.52   $ 50,279         4.00   $ 62,849         5.00

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2015, the Bank could declare, without prior approval, dividends of approximately $13,836 plus any 2015 net profits retained to the date of declaration.

 

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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).

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.

 

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

 

     Fair Value Measurements at
September 30, 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

   $ —        $ 14,418       $ —    

Mortgage-backed securities-residential

     —          514,599         —    

Mortgage-backed securities-commercial

     —          20,330         —    

State and political subdivisions

     —          75,073         —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —        $ 624,420       $ —    
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $  —        $ 14,666       $ —    
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 559       $ —    
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —        $ 131       $ —    
  

 

 

    

 

 

    

 

 

 
     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 September 30, 2015, the unpaid principal balance of loans held for sale was $14,124 resulting in an unrealized gain of $542 included in gains on sale of loans. For the three months ended September 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 $248 and $217, respectively. For the nine months ended September 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 ($22) and $755, respectively. None of these loans are 90 days or more past due or on nonaccrual as of September 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 September 30, 2015 or December 31, 2014. For the three months ended September 30, 2015 and 2014, $0 and ($7), respectively, in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the nine months ended September 30, 2015 and 2014, $0 and $39, respectively, in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

 

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Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $206 and $715 as of September 30, 2015 and December 31, 2014, respectively. There were no properties at September 30, 2015 or 2014 that had required write-downs to fair value resulting in no write downs for the three or nine months ended September 30, 2015 and 2014.

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

follows:

 

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

Financial assets

              

Cash and cash equivalents

   $ 47,658       $ 47,658       $ —        $ —        $ 47,658   

Securities available for sale

     624,420         —          624,420         —          624,420   

Certificates of deposit held at other financial institutions

     250         —          250         —          250   

Securities held to maturity

     132,134         —          134,028         —          134,028   

Loans held for sale

     14,666         —          14,666         —          14,666   

Net loans

     1,114,082         —          —          1,112,007         1,112,007   

Restricted equity securities

     7,691         n/a         n/a         n/a         n/a   

Servicing rights, net

     3,415         —          4,264         —          4,264   

Accrued interest receivable

     6,108         7         3,032         3,069         6,108   

Financial liabilities

              

Deposits

   $ 1,714,594       $ 956,892       $ 764,467       $ —        $ 1,721,359   

Federal funds purchased and repurchase agreements

     37,618         —          37,618         —          37,618   

Federal Home Loan Bank advances

     57,000         —          57,123         —          57,123   

Accrued interest payable

     587         79         508         —          587   
     Carrying      Fair Value Measurements at
December 31, 2014 Using:
 
     Amount      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.

 

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

(e) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, 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.

NOTE 9—SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

Our subsidiary bank enters into borrowing arrangements with our retail business customers through agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its control as collateral against these one-day borrowing arrangements. At September 30, 2015 and December 31, 2014, these short-term borrowings totaled $37,618 and $22,253, respectively.

The following table provides additional details as of September 30, 2015:

 

As of September 30, 2015

   U.S.
Government
Sponsored
Entities and
Agencies
Securities
    Mortgage-
Backed
Securities:
Residential
    Mortgage-
Backed
Securities:
Commercial
    Total  

Market value of securities pledged

   $ 6,039      $ 33,542      $ 3,471      $ 43,052   

Borrowings related to pledged amounts

   $ 4,734      $ 29,623      $ 3,261      $ 37,618   

Market value pledged as a % of borrowings

     128     113     106     114

Any risks related to these arrangements, primarily from market value changes, are minimized due to the overnight (one day) maturity and the additional collateral pledged over the borrowed amounts.

 

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Table of Contents

NOTE 10—EARNINGS PER SHARE

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

 

     Three Months Ended
September 30,
 
     2015      2014  

Basic

     

Net income available to common shareholders

   $ 5,125       $ 1,990   

Less: earnings allocated to participating securities

     (52 )      (27 )
  

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 5,073       $ 1,963   
  

 

 

    

 

 

 

Weighted average common shares outstanding including participating securities

     10,516,290         7,737,710   

Less: Participating securities

     (107,502 )      (105,129 )
  

 

 

    

 

 

 

Average shares

     10,408,788         7,632,581   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 0.49       $ 0.26   
  

 

 

    

 

 

 

Diluted

     

Net income allocated to common shareholders

   $ 5,073       $ 1,963   

Weighted average common shares outstanding for basic earnings per common share

     10,408,788         7,632,581   

Add: Dilutive effects of assumed exercises of stock options

     534,148         272,634   

Add: Dilutive effects of assumed exercises of stock warrants

     13,265         7,559   
  

 

 

    

 

 

 

Average shares and dilutive potential common shares

     10,956,201         7,912,774   
  

 

 

    

 

 

 

Dilutive earnings per common share

   $ 0.46       $ 0.25   
  

 

 

    

 

 

 
     Nine Months Ended
September 30,
 
     2015      2014  

Basic

     

Net income available to common shareholders

   $ 11,341       $ 5,504   

Less: earnings allocated to participating securities

     (127 )      (57 )
  

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 11,214       $ 5,447   
  

 

 

    

 

 

 

Weighted average common shares outstanding including participating securities

     9,668,497         5,840,620   

Less: Participating securities

     (108,617 )      (60,840 )
  

 

 

    

 

 

 

Average shares

     9,559,880         5,779,780   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 1.17       $ 0.94   
  

 

 

    

 

 

 

Diluted

     

Net income allocated to common shareholders

   $ 11,214       $ 5,447   

Weighted average common shares outstanding for basic earnings per common share

     9,559,880         5,779,780   

Add: Dilutive effects of assumed exercises of stock options

     466,955         170,470   

Add: Dilutive effects of assumed exercises of stock warrants

     13,257         5,033   
  

 

 

    

 

 

 

Average shares and dilutive potential common shares

     10,040,092         5,955,283   
  

 

 

    

 

 

 

Dilutive earnings per common share

   $ 1.12       $ 0.91   
  

 

 

    

 

 

 

For the three months ended September 30, 2015, stock options for 226,040 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 228,691 and 274,132 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2015 and 2014 because they were antidilutive.

 

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Table of Contents

NOTE 11—CAPITAL OFFERING

The Company commenced its initial public 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

     (5,017 )
  

 

 

 

Net proceeds from issuance of common stock

   $ 50,423   
  

 

 

 

 

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

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the financial statements and accompanying notes included in the Company’s Prospectus filed with the SEC 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 nine months ended September 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.

Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

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Table of Contents

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

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

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

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

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

Mortgage Servicing Rights

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

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

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

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.

 

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Table of Contents

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

SEPTEMBER 30, 2015 AND 2014

Overview

The Company reported net income of $5,150 and $11,416 for the three and nine months ended September 30, 2015, respectively, compared to $2,015 and $5,579 for the three and nine months ended September 30, 2014, respectively. After the payment of preferred dividends on the senior preferred stock issued to the Treasury pursuant to Small Business Lending Fund (“SBLF”), the Company’s net earnings available to common shareholders for the three and nine months ended September 30, 2015 was $5,125 and $11,341, respectively, compared to $1,990 and $5,504, respectively, for the three and nine months ended September 30, 2014. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 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 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 the capital leverage program that was 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. Through the execution of the leverage program, the Company purchased $394,142 in securities during the second and third quarters of 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 nine months ended September 30, 2015, totaled $16,736 and $42,220, respectively, compared to $11,127 and $25,570, respectively, for the same periods in 2014, an increase of $5,609 and $16,650, or 50.4% and 65.1%, between the respective periods. For the three and nine months ended September 30, 2015, interest income increased $6,609 and $18,950, or 52.1% and 63.8%, respectively, due to growth in both the loan and investment securities portfolios. In addition, the Company received a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship that resulted in an increase in loan interest income for $1,155 for the three and nine months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the three and nine months ended September 30, 2015, interest expense increased $1,000 and $2,300, or 63.9% and 55.8%, respectively, primarily as a result of increases in volumes of both interest-bearing deposits and borrowings.

 

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The tables below summarize average balances, yields, cost of funds, and the analysis of changes in interest income and interest expense for the three and nine months ended September 30, 2015 and 2014:

Average Balances(7)—Yields & Rates

(Dollars are in thousands)

 

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

ASSETS:

              

Loans(1)(6)

   $ 1,044,520      $ 14,763         5.61   $ 719,155      $ 10,168         5.61 %

Securities available for sale(6)

     674,991        4,422         2.60     324,574        2,007         2.45 %

Securities held to maturity(6)

     74,332        632         3.37     57,611        407         2.80 %

Certificates of deposit at other financial institutions

     250        2         3.17     250        1         1.59 %

Federal funds sold and other(2)

     52,279        127         0.96     41,811        109         1.03 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 1,846,372      $ 19,946         4.29   $ 1,143,401      $ 12,692         4.40 %

Allowance for loan losses

     (8,576 )          (5,862 )     

All other assets

     74,570             60,508        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 1,912,366           $ 1,198,047        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 246,584      $ 170         0.27 %   $ 190,294      $ 111         0.23 %

Money market

     514,669        703         0.54 %     355,488        567         0.63 %

Savings

     37,888        44         0.46 %     27,253        32         0.47 %

Time deposits

     648,605        1,500         0.92 %     322,329        736         0.91 %

Federal Home Loan Bank advances

     57,000        79         0.55 %     33,065        80         0.96 %

Federal funds purchased and other(3)

     45,261        69         0.60 %     24,442        39         0.63 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 1,550,007      $ 2,565         0.66 %   $ 952,871      $ 1,565         0.65 %

Demand deposits

     169,451             128,982        

Other liabilities

     11,368             2,290        

Total shareholders’ equity

     181,540             113,904        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,912,366           $ 1,198,047        

NET INTEREST SPREAD(4)(6)

          3.63 %          3.75 %

NET INTEREST INCOME(6)

     $ 17,381           $ 11,127      

NET INTEREST MARGIN(5)(6)

          3.73 %          3.86 %

 

(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 and the Federal Home Loan 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 for 2015 include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates for 2014 exclude the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.
(7)  Averages balances are average daily balances.

 

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Table of Contents
     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans(1)(6)

   $ 933,950      $ 38,127         5.46   $ 552,157      $ 22,466         5.44

Securities available for sale(6)

     532,754        9,628         2.42     295,602        5,793         2.62

Securities held to maturity(6)

     58,587        1,358         3.10     58,522        1,199         2.74

Certificates of deposit at other financial institutions

     250        5         2.67     84        2         3.18

Federal funds sold and other(2)

     50,207        325         0.87     32,041        230         0.96
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 1,575,748      $ 49,443         4.20   $ 938,406      $ 29,690         4.23

Allowance for loan losses

     (7,705 )          (5,466 )     

All other assets

     72,387             39,574        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 1,640,430           $ 972,514        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 270,992      $ 605         0.30   $ 191,248      $ 408         0.29

Money market

     451,054        1,918         0.57     280,870        1,465         0.70

Savings

     34,018        117         0.46     22,572        83         0.49

Time deposits

     464,945        3,323         0.96     253,191        1,852         0.98

Federal Home Loan Bank advances

     42,890        225         0.70     28,791        189         0.88

Federal funds purchased and other(3)

     47,330        232         0.66     20,962        123         0.78
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 1,311,229      $ 6,420         0.65   $ 797,635      $ 4,120         0.69

Demand deposits

     159,093             84,908        

Other liabilities

     7,753             4,905        

Total shareholders’ equity

     162,355             85,066        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,640,430           $ 972,514        

NET INTEREST SPREAD(4)(6)

          3.55          3.54

NET INTEREST INCOME(6)

     $ 43,023           $ 25,570      

NET INTEREST MARGIN(5)(6)

          3.65          3.64

 

(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 and the Federal Home Loan 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 for 2015 include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates for 2014 exclude the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.
(7)  Averages balances are average daily balances.

Interest-earning assets averaged $1,846,372 and $1,575,748, respectively, during the three and nine months ended September 30, 2015 compared to $1,143,401 and $938,406, respectively, for the same periods in 2014, an increase of $702,971 and $637,342, or 61.5% and 67.9%, respectively. This increase was primarily due to organic growth in both the loan and securities portfolios over the past year, increases to the securities 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 45.2% and 69.1% and average investment securities increased 96.1% and 67.0%, respectively, when comparing the three and nine months ended September 30, 2015 with the same periods in 2014. When comparing the three and nine months ended September 30, 2015 and 2014, the yield on average interest earning assets decreased 11 basis points and three basis points to 4.29% and 4.20%, respectively, compared to 4.40% and 4.23%, for the same periods during 2014.

The tax-equivalent yield on available-for-sale securities was 2.60% and 2.42%, respectively, during the three and nine months ended September 30, 2015 compared to 2.45% and 2.62%, respectively, for the same periods in 2014. The primary driver for the increase in yield during the three months ended September 30, 2015 compared with the same period in 2014 was due to the volume of tax-exempt securities purchased during the second and third quarters of 2015, which increased the yields by 28 basis points when considering tax equivalent adjustments. The primary driver for the decrease in yield during the nine months ended September 30, 2015 compared with the same period in 2014 was due to decreases in the weighted coupon rate, which decreased by 24 basis points between the two periods.

 

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Interest-bearing liabilities averaged $1,550,007 and $1,311,229, respectively, during the three- and nine-month periods ended September 30, 2015 compared to $952,871 and $797,635, respectively, for the same periods in 2014, an increase of $597,136 and $513,594, or 62.7% and 64.4%, respectively. Total average interest-bearing deposits grew $552,382 and $473,127, including increases in average brokered deposits of $461,131 and $229,202 and average interest-bearing public funds deposits of $23,313 and $61,552 for the three- and nine-month periods ended September 30, 2015, respectively, as compared to the same periods during 2014. The increases in brokered deposits were directly attributable to the Company’s leverage program that began in the second quarter of 2015 and the rapid growth in the loan and portfolio. That growth also resulted in increases in average Federal Home Loan Bank advances of $23,935 and $14,099, respectively, and average other borrowed funds of $20,819 and $26,368, respectively, for the three- and nine-month periods ended September 30, 2015 as compared to the same periods during 2014. The cost of interest-bearing liabilities for the three months ended September 30, 2015 increased by one basis point when comparing the cost of interest-bearing liabilities with the same period of 2014. The cost of interest-bearing liabilities for the nine months ended September 30, 2015 decreased by four basis points when comparing the cost of interest-bearing liabilities with the same period of 2014, with the largest declines in interest costs being reported in money market deposits, in Federal Home Loan Bank advances and in other borrowed funds.

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

Analysis of Changes in Interest Income and Expenses

 

     Net change three months ended
September 30, 2015 versus
September 30, 2014
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 4,595       $ —        $ 4,595   

Securities available for sale

     2,165         250         2,415   

Securities held to maturity

     119         106         225   

Certificates of deposit at other financial institutions

     —          1         1   

Federal funds sold and other

     28         (10      18   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 6,907       $ 347       $ 7,254   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 35       $ 24       $ 59   

Money market accounts

     256         (120 )      136   

Savings

     13         (1 )      12   

Time deposits

     741         23         764   

Federal Home Loan Bank advances

     58         (59      (1 )

Other borrowed funds

     34         (4 )      30   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 1,137       $ (137 )    $ 1,000   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 5,770       $ 484       $ 6,254   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Net change nine months ended
September 30, 2015 versus
September 30, 2014
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 15,521       $ 140       $ 15,661   

Securities available for sale

     4,633         (798 )      3,835   

Securities held to maturity

     1         158         159   

Certificates of deposit at other financial institutions

     —          3         3   

Federal funds sold and other

     129         (34      95   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 20,284       $ (531 )    $ 19,753   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 167       $ 30       $ 197   

Money market accounts

     883         (430 )      453   

Savings

     42         (8 )      34   

Time deposits

     1,533         (62 )      1,471   

Federal Home Loan Bank advances

     93         (57 )      36   

Other borrowed funds

     153         (44 )      109   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 2,871       $ (571 )    $ 2,300   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 17,413       $ 40       $ 17,453   
  

 

 

    

 

 

    

 

 

 

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 $1,724 and $664 for the three months ended September 30, 2015 and 2014, respectively, and $3,154 and $1,489 for the nine months ended September 30, 2015 and 2014, respectively. The higher provision for the nine months ended September 30, 2015 compared to the same period in 2014 is due primarily to the Company’s loan growth during the three and nine months ended September 30, 2015, compared to the same periods in 2014. The Company’s provision related to commercial and industrial loans increased from $243 for the nine months ended September 30, 2014 to $1,927 for the nine months ended September 30, 2015 due to the growth in commercial and industrial loans, which includes growth produced by the Company’s healthcare lending team over the past two quarters. Nonperforming loans at September 30, 2015 totaled $835 compared to $1,151 at December 31, 2014, representing 0.05% and 0.14% of total loans, respectively.

 

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Table of Contents

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2015 was $3,798 and $9,864, respectively, compared to $3,274 and $7,125, respectively, for the same periods in 2014. The following is a summary of the components of non-interest income (in thousands):

 

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

Service charges on deposit accounts

   $ 44       $ 13       $ 31         238.5

Other service charges and fees

     679         600         79         13.2

Net gains on sale of loans

     2,463         1,875         588         31.4

Loan servicing fees, net of amortization of servicing assets

     84         73         11         15.1

Gain on sales and calls of investment securities, net

     5         22         (17      (77.3 %) 

Net gain (loss) on foreclosed assets

     3         (3      6         200.0

Wealth management

     327         287         40         13.9

Other

     193         407         (214 )      (52.6 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 3,798       $ 3,274       $ 524         16.0
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2015      2014        

Service charges on deposit accounts

   $ 78       $ 37       $ 41         110.8

Other service charges and fees

     1,987         1,149         838         72.9

Net gains on sale of loans

     5,573         4,226         1,347         31.9

Loan servicing fees, net of amortization of servicing assets

     187         173         14         8.1

Gain on sales and calls of investment securities, net

     529         93         436         468.8

Net gain (loss) on foreclosed assets

     30         28         2         7.1

Wealth management

     914         364         550         151.1

Other

     566         1,055         (489 )      (46.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 9,864       $ 7,125       $ 2,739         38.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Other service charges and fees for the three and nine months ended September 30, 2015 increased $79 and $838, or 13.2% and 72.9%, 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 ended September 30, 2015 were $2,463, an increase of $588, or 31.4%, from the same period during 2014. The increase was primarily due to 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. Net gains for the nine months ended September 30, 2015 were $5,573, an increase of $1,347, or 31.9%, from the same period in 2014. The increase was due to increased mortgage loan origination volume and 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 nine months ended September 30, 2015 with the same period in 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 nine months ended September 30, 2015, net loan servicing fees were $84 and $187, respectively, compared to $73 and $173, respectively, for the three and nine months ended September 30, 2014. The increase in loan servicing fees when comparing the three and nine months ended September 30, 2015 with the same period in 2014 was primarily related to an increase in the volume of mortgage loans and originated and servicing premiums retained.

 

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Table of Contents

Net gain on sale of investment securities decreased $17, or 77.3%, during the three months ended September 30, 2015 when compared with the same period in 2014. For the nine months ended September 30, 2015 net gain on sale of investment securities increased 468.8% when compared with the same period in 2014. The significant increase for the nine months ended September 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.

Wealth management income for the three and nine months ended September 30, 2015 increased $40 and $550, or 13.9% and 151.1%, respectively, in comparison with the same periods in 2014. The increase in the three-month comparative periods was due to the increase in accounts under management. The increase in the nine-month comparative periods was 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. There have been a full nine months of earnings recorded in 2015 that included the MidSouth wealth management team’s client versus only three months of earnings in 2014.

Other non-interest income decreased by $214, or 52.6%, when comparing third quarter 2015 with third quarter 2014, and it decreased by $489, or 46.4%, when comparing the nine months ended September 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 had no compliance consulting fee income in 2015 due to the sale of BCG.

Non-interest Expense

Non-interest expense for the three and nine months ended September 30, 2015 was $10,853 and $31,046, respectively, compared to $10,389 and $21,959 compared to the same periods in 2014. These increases were the result of the following components listed in the table below:

 

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

Salaries and employee benefits

   $ 6,208       $ 6,144       $ 64         1.0

Occupancy and equipment

     1,683         1,443         240         16.6

FDIC assessment expense

     362         181         181         100.0

Marketing

     277         224         53         23.7

Professional fees

     516         961         (445      (46.3 %)

Amortization of core deposit intangible

     160         184         (24      (13.0 %) 

Indirect expenses related to public offering

     —          —          —          NM   

Other

     1,647         1,252         395         31.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 10,853       $ 10,389       $ 464         4.5
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2015      2014        

Salaries and employee benefits

   $ 17,960       $ 13,494       $ 4,466         33.1 %

Occupancy and equipment

     4,961         3,238         1,723         53.2 %

FDIC assessment expense

     792         420         372         88.6 %

Marketing

     695         470         225         47.9 %

Professional fees

     1,382         1,594         (212      (13.3 %) 

Amortization of core deposit intangible

     499         184         315         171.2

Indirect expenses related to public offering

     314         —          314         NM   

Other

     4,443         2,559         1,884         73.6 %
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 31,046       $ 21,959       $ 9,087         41.4 %
  

 

 

    

 

 

    

 

 

    

 

 

 

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 nine months ended September 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, while the number of full-time equivalent employees has been stable when comparing September 30, 2015 and

 

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2014, the composition of the Bank’s personnel has changed with the addition of several experienced lenders during 2015. When comparing the nine months ended September 30, 2015 and 2014, there were nine months of expenses in 2015 related to the MidSouth acquisition compared to only three months of expenses in 2014 related to the acquisition.

The decrease in professional fees for the three- and nine-month periods ended September 30, 2015 is attributable to the expenses that were incurred in 2014 relative to the Company’s acquisition of MidSouth.

The increase in amortization expense for the core deposit intangible for the nine months ended September 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. Only three months of amortization was recognized during the nine months ended September 30, 2014, as compared with amortization expense that was recognized for a full nine months during 2015.

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

For the three and nine months ended September 30, 2015, other non-interest expenses increased $395 and $1,884, or 31.5% and 73.6%, respectively from the same periods in 2014. Of the increases for the three and nine months ended September 30, 2015, $192 and $351, respectively, is attributed to the increase in lending-related expenses associated with the Company’s growing lending portfolio. Customers’ increased usage of technology-based services, such as ATM/debit card transactions, internet banking transactions, and other types of automated transactions accounted for $325 of the increase for the nine months ended September 30, 2015 when compared with the same period of 2014. Much of the electronic banking expense increase was attributable to the MidSouth acquisition, which added more consumers to the Company’s customer base. The remaining increases of $203 and $1,208, respectively, 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.

Income Tax Expense

The Company recognized income tax expense for the three and nine months ended September 30, 2015, of $2,807 and $6,468, respectively, compared to $1,333 and $3,668, respectively, for the three and nine months ended September 30, 2014. The Company’s year-to-date income tax expense for the period ended September 30, 2015 reflects an effective income tax rate of 36.2% compared to 39.7% for the same period in 2014. The decrease in the effective tax rate resulted from several factors, as follows: increased tax-exempt investment income during the nine months ended September 30, 2015, unfavorable permanent differences incurred during the nine months ended September 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 SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

Overview

The Company’s total assets increased by $646,711, or 47.7%, from December 31, 2014 to September 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 September 30, 2015 and December 31, 2014 were $1,123,826 and $787,188, respectively, an increase of $336,638, or 42.8%. 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 has been focused on commercial and industrial lending, with emphasis on lending within the health care industry, thereby helping to diversify the Company’s loan mix. During the third quarter, this team added over $64 million in loans with a number of approved loans in their pipeline to be closed during the fourth quarter of 2015.

 

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

 

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

Total loans, excluding PCI loans

          

Real estate:

          

Construction and land development

   $ 334,208         29.7 %   $ 239,225         30.4

Commercial

     313,135         27.8 %     246,352         31.3

Residential

     248,451         22.1 %     213,760         27.1

Commercial and industrial

     219,341         19.5 %     76,570         9.7

Consumer and other

     6,893         0.6 %     8,025         1.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans—gross, excluding PCI loans

     1,122,028         99.7 %     783,932         99.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total PCI loans (note 1)

          

Real estate:

          

Construction and land development

   $ 77         NM      $ 77         NM   

Commercial

     1,452         0.1 %     1,798         0.2

Residential

     709         0.1 %     814         0.1

Commercial and industrial

     1,675         0.1 %     1,624         0.2

Consumer and other

     —          —   %     2         NM   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans—gross PCI loans

     3,913         0.3 %     4,315         0.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total gross loans

     1,125,941         100.0 %     788,247         100.0
     

 

 

      

 

 

 

Less: deferred loan fees, net

     (2,115 )        (1,059 )   

Allowance for loan losses

     (9,744 )        (6,680 )   
  

 

 

      

 

 

    

Total loans, net allowance for loan losses

   $ 1,114,082           780,508      
  

 

 

      

 

 

    

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

As presented in the previous table, gross loans increased 42.8% during the first nine months of 2015, primarily due to organic growth as a result of continued market penetration and the strength of the local economies the Company serves. During this period, the Company experienced growth in real estate loans of 27.9% with the majority of the growth occurring in the construction and land development category, which increased 39.7% during the first nine months of 2015. The Company also experienced strong growth of 182.7% in the commercial and industrial segment during the first nine 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 79.8% of the loan portfolio at September 30, 2015. The following chart displays the composition of the Company’s loan portfolio as of September 30, 2015 and December 31, 2014, broken down into the three major segments or types of loans that the Company produces and stated as a percentage of total loans:

 

 

LOGO

 

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The largest portion of the real estate loan segments as of September 30, 2015, was construction and land development loans, which totaled 37.2% of real estate loans and was broken down into three sub-segments: residential construction (27.6% of real estate loans), commercial construction (5.6% of real estate loans), and acquisition and development (4.0% of real estate loans). Construction and land development loans totaled $334,285 and made up 29.7% of the total loan portfolio at September 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 $314,587 at September 30, 2015, and comprised 35.0% of real estate loans and 28.0% 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 $249,160 and comprised 27.7% of real estate loans and 22.1% of total loans at September 30, 2015.

Commercial and industrial loans totaled $221,016 at September 30, 2015 and grew 182.7% during the first nine months of 2015. As indicated in the chart above, loans in this classification comprised 19.6% of total loans at September 30, 2015, as compared to 9.9% as of December 31, 2014. This change reflects the Company’s specific actions that were taken to diversify the loan portfolio. The commercial and industrial classification primarily consists of commercial loans to healthcare companies and small-to-medium sized businesses. With the addition of the healthcare lending team during the second quarter of 2015, the composition of that portfolio segment has changed and will likely continue to change to reflect the addition of healthcare and other types of commercial loans. Since becoming part of the Company, the healthcare lending team has produced $89,000 in loan volume.

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 September 30, 2015, excluding unearned net fees and costs.

Loan Maturity Schedule

 

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

Real estate:

           

Construction and land development

   $ 173,194       $ 122,132       $ 38,959       $ 334,285   

Commercial

     19,328         129,130         166,129         314,587   

Residential

     18,824         94,105         136,231         249,160   

Commercial and industrial

     48,441         132,889         39,686         221,016   

Consumer and other

     2,159         3,782         952         6,893   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 261,946       $ 482,038       $ 381,957         1,125,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed interest rate

   $ 155,680       $ 310,399       $ 170,868       $ 636,947   

Variable interest rate

     106,266         171,639         211,089         488,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 261,946       $ 482,038       $ 381,957         1,125,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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.

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

 

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

Non impaired loans

   $ 1,015,425       $ 9,659         0.95 %   $ 626,180       $ 6,662         1.06 %   $ 389,245      $ 2,997         -11 bps   

MidSouth loans (Note 1)

     104,853         —          —   %     156,806         —          —   %     (51,953 )     —          —    

Impaired loans

     1,750         80         4.57 %     946         18         1.90 %     804        62         267 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-PCI loans

     1,122,028         9,739         0.87 %     783,932         6,680         0.85 %     338,096        3,059         2 bps   

PCI loans

     3,913         5         0.13 %     4,315         —          —   %     (402 )     5         13bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

   $ 1,125,941       $ 9,744         0.87 %   $ 788,247       $ 6,680         0.85 %   $ 337,694      $ 3,064         2 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

Note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstanding non-PCI loan balances acquired, and the remaining fair value adjustment at September 30, 2015 was $2,710 of the outstanding non-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on July 1, 2014, no allowance for loan loss was recorded at September 30, 2015 related to the acquired loans.

At September 30, 2015, the allowance for loan losses was $9,744, compared to $6,680 at December 31, 2014. The allowance for loan losses as a percentage of total loans was 0.87% and 0.85% at September 30, 2015 and December 31, 2014, respectively. Loan growth during this period is the primary reason for the increase in the allowance amount.

 

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

 

     Nine Months Ended
September 30, 2015
    Nine Months Ended
September 30, 2014
 

Beginning balance

   $ 6,680      $ 4,900   

Loans charged-off:

    

Residential real estate

     32        11   

Construction & land development

     —         —    

Commercial real estate

     —         540   

Commercial & industrial

     15        4   

Consumer and other

     121        —    
  

 

 

   

 

 

 

Total loans charged-off

     168        555   

Recoveries on loans previously charged-off:

    

Residential real estate

     14        49   

Construction & land development

     —         —    

Commercial real estate

     —         —    

Commercial & industrial

     —         —    

Consumer and other

     64        —    
  

 

 

   

 

 

 

Total loan recoveries

     78        49   

Net (charge-offs) recoveries

     (90 )     (506 )

Provision for loan losses charged to expense

     3,154        1,489   
  

 

 

   

 

 

 

Total allowance at end of period

   $ 9,744      $ 5,883   
  

 

 

   

 

 

 

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

   $ 1,125,941      $ 720,148   
  

 

 

   

 

 

 

Average gross loans (1)

   $ 919,865      $ 541,105   
  

 

 

   

 

 

 

Allowance to total loans

     0.87 %     0.82 %
  

 

 

   

 

 

 

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

     0.01 %     0.13 %
  

 

 

   

 

 

 

 

(1) Loan balances exclude loans held for sale

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

 

     September 30, 2015     December 31, 2014  
     Amount      % of
Allowance
to Total
    % of Loan
Type to
Total
Loans
    Amount