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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 March 31, 2016

 

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

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

The number of shares outstanding of the registrant’s common stock, no par value per share, as of April 30, 2016, was 10,619,674.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Cautionary Note Regarding Forward-Looking Statements

     1   

Item 1. Consolidated Financial Statements (unaudited)

  

Consolidated Balance Sheets

     2   

Consolidated Statements of Income

     3   

Consolidated Statements of Comprehensive Income

     4   

Consolidated Statement of Changes in Shareholders’ Equity

     5   

Consolidated Statements of Cash Flows

     6   

Notes to Consolidated Financial Statements

     7   

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

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4. Controls and Procedures

     44   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     44   

Item 1A. Risk Factors

     44   

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

     45   

Item 3. Defaults Upon Senior Securities

     45   

Item 4. Mine Safety Disclosures

     45   

Item 5. Other Information

     45   

Item 6. Exhibits

     46   

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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and those described in Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

1


Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

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

 

         March 31,    
2016
    December 31,
2015
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 62,054     $ 52,394  

Certificates of deposit at other financial institutions

     1,065       250  

Securities available for sale

     589,274       575,838  

Securities held to maturity (fair value 2016—$163,723 and 2015—$161,969)

     157,507       158,200  

Loans held for sale, at fair value

     11,680       14,079  

Loans

     1,421,943       1,303,826  

Allowance for loan losses

     (12,676 )     (11,587 )
  

 

 

   

 

 

 

Net loans

     1,409,267       1,292,239  
  

 

 

   

 

 

 

Restricted equity securities, at cost

     8,024       7,998  

Premises and equipment, net

     8,076       7,640  

Accrued interest receivable

     7,037       7,299  

Bank owned life insurance

     22,780       22,619  

Deferred tax asset

     5,215       9,430  

Assets held for sale

     —         1,640  

Foreclosed assets

     200       200  

Servicing rights, net

     3,420       3,455  

Goodwill

     9,124       9,124  

Core deposit intangible, net

     1,894       2,043  

Other assets

     3,477       3,344  
  

 

 

   

 

 

 

Total assets

   $ 2,300,094     $ 2,167,792  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 201,161     $ 176,742  

Interest bearing

     1,752,412       1,637,297  
  

 

 

   

 

 

 

Total deposits

     1,953,573       1,814,039  

Federal funds purchased and repurchase agreements

     49,593       101,086  

Federal Home Loan Bank advances

     57,000       57,000  

Subordinated notes, net of issuance costs

     38,843        —    

Accrued interest payable

     936       644  

Other liabilities

     8,239       6,207  
  

 

 

   

 

 

 

Total liabilities

     2,108,184       1,978,976  

Shareholders’ equity

    

Preferred stock, no par value: 1,000,000 shares authorized; Senior non-cumulative preferred stock, Series A, no par value, $1,000 liquidation value per share, 10,000 shares authorized; no shares outstanding at March 31, 2016 and 10,000 shares issued and outstanding at December 31, 2015

     —         10,000  

Common stock, no par value; 20,000,000 shares authorized; 10,586,592 and 10,571,377 shares issued and outstanding at March 31, 2016 and December 31 2015, respectively

     148,135       147,784  

Retained earnings

     37,562       31,352  

Accumulated other comprehensive income (loss)

     6,213       (320 )
  

 

 

   

 

 

 

Total shareholders’ equity

     191,910       188,816  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,300,094     $ 2,167,792  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)

 

    

Three Months Ended

March 31,

 
             2016                     2015          

Interest income and dividends

    

Loans, including fees

   $ 17,742      $ 11,154   

Securities:

    

Taxable

     3,528        2,665   

Tax-Exempt

     1,122        20   

Dividends on restricted equity securities

     103        67   

Federal funds sold and other

     66        20   
  

 

 

   

 

 

 

Total interest income

     22,561        13,926   
  

 

 

   

 

 

 

Interest expense

    

Deposits

     3,077        1,633   

Federal funds purchased and repurchase agreements

     109        71   

Federal Home Loan Bank advances

     86        65   

Subordinated notes and other borrowings

     13        —    
  

 

 

   

 

 

 

Total interest expense

     3,285        1,769   
  

 

 

   

 

 

 

Net interest income

     19,276        12,157   

Provision for loan losses

     1,136        625   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     18,140        11,532   
  

 

 

   

 

 

 

Noninterest income

    

Service charges on deposit accounts

     49        16   

Other service charges and fees

     633        618   

Net gains on sale of loans

     1,608        1,647   

Wealth management

     368        286   

Loan servicing fees, net

     42        43   

Gain on sale or call of securities

     310        415   

Net gain on sale of foreclosed assets

     3        6   

Other

     72        184   
  

 

 

   

 

 

 

Total noninterest income

     3,085        3,215   
  

 

 

   

 

 

 

Noninterest expense

    

Salaries and employee benefits

     6,517        5,681   

Occupancy and equipment

     1,807        1,579   

FDIC assessment expense

     413        214   

Marketing

     217        220   

Professional fees

     1,094        359   

Amortization of core deposit intangible

     149        172   

Other

     1,634        1,396   
  

 

 

   

 

 

 

Total noninterest expense

     11,831        9,621   
  

 

 

   

 

 

 

Income before income tax expense

     9,394        5,126   

Income tax expense

     3,161        1,994   
  

 

 

   

 

 

 

Net income

     6,233        3,132   

Dividends paid on Series A preferred stock

     (23 )     (25 )
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 6,210      $ 3,107   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.59      $ 0.39   

Diluted

     0.56        0.37   

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

    

Three Months Ended

March 31,

 
             2016                     2015          

Net income

   $ 6,233      $ 3,132   

Other comprehensive income, net of tax:

    

Unrealized gains on securities:

    

Unrealized holding gain arising during the period

     11,060        3,036   

Reclassification adjustment for gains included in net income

     (310 )     (415 )
  

 

 

   

 

 

 

Net unrealized gains

     10,750        2,621   

Tax effect

     (4,217 )     (1,065 )
  

 

 

   

 

 

 

Total other comprehensive income

     6,533        1,556   
  

 

 

   

 

 

 

Comprehensive income

   $ 12,766      $ 4,688   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2016 and 2015

(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, 2014

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

Exercise of common stock options

     —          70,521        780        —          —          780   

Exercise of common stock warrants

     —          200        2        —          —          2   

Dividends paid on Series A preferred stock

     —          —          —          (25 )     —          (25 )

Stock based compensation expense, net of restricted share forfeitures

     —          (1,202     146        —          —          146   

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

     —          2,640,000        51,004        —          —          51,004   

Excess tax benefit from exercise of stock options

     —          —          147        —          —          147   

Net income

     —          —          —          3,132        —          3,132   

Other comprehensive income

     —          —          —          —          1,556        1,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ 10,000        10,465,930      $ 146,330      $ 18,479      $ 3,732      $ 178,541   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 10,000        10,571,377      $ 147,784      $ 31,352      $ (320 )   $ 188,816   

Exercise of common stock options, net

     —          13,018        118            118   

Exercise of common stock warrants

     —          3,150        38            38   

Redemption of Series A preferred stock

     (10,000     —          —          —          —          (10,000

Dividends paid on Series A preferred stock

     —          —          —          (23 )     —          (23 )

Stock based compensation expense, net of restricted share forfeitures

     —          2,378        258        —          —          258   

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

     —          (3,331     (63     —          —          (63

Net income

     —          —          —          6,233        —          6,233   

Other comprehensive income

     —          —          —          —          6,533        6,533   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $  —          10,586,592      $ 148,135      $     37,562      $ 6,213      $ 191,910   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)

 

    

Three Months Ended

March 31,

 
             2016                     2015          

Cash flows from operating activities

    

Net income

   $ 6,233      $ 3,132   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     322        319   

Accretion of purchase accounting adjustments

     (360 )     (625 )

Net amortization of securities

     1,504        746   

Amortization of loan servicing right asset

     251        223   

Amortization of core deposit intangible

     149        172   

Provision for loan losses

     1,136        625   

Deferred income tax (benefit) expense

     (2 )     75   

Origination of loans held for sale

     (59,381 )     (74,849 )

Proceeds from sale of loans held for sale

     63,172        72,213   

Net gain on sale of loans

     (1,608 )     (1,647 )

Gain on sale of available for sale securities

     (310 )     (376 )

Gain on call of held to maturity securities

     —          (39 )

Income from bank owned life insurance

     (161 )     (112 )

Gain on sale and write down of foreclosed assets

     (3 )     (3 )

Loss on sale of assets held for sale

     98        —     

Stock-based compensation

     258        146   

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

     135        121   

Deferred gain on sale of loans

     (20 )     (9 )

Deferred gain on sale of foreclosed assets

     —          (3 )

Net change in:

    

Accrued interest receivable and other assets

     129        (668 )

Accrued interest payable and other liabilities

     2,212        1,011   
  

 

 

   

 

 

 

Net cash from operating activities

     13,754        452   

Cash flows from investing activities

    

Available for sale securities:

    

Sales

     48,772        9,289   

Purchases

     (70,169 )     (161,475 )

Maturities, prepayments and calls

     18,020        93,686   

Held to maturity securities:

    

Purchases

     (1,245 )     —     

Maturities, prepayments and calls

     1,435        2,657   

Net change in loans

     (117,804 )     (86,758 )

Purchase of bank owned life insurance

     —          (10,000 )

Proceeds from sale of assets held for sale

     1,542        4,080   

Purchase of restricted equity securities

     (26 )     (382 )

Proceeds from sale of foreclosed assets

     —          265   

Purchases of premises and equipment, net

     (758 )     (386 )

Increase in certificates of deposits at other financial institutions

     (815 )     —     
  

 

 

   

 

 

 

Net cash from investing activities

     (121,048 )     (149,024 )

Cash flows from financing activities

    

Increase in deposits

     139,534        99,404   

Decrease in federal funds purchased and repurchase agreements

     (51,493 )     (3,360 )

Proceeds from Federal Home Loan Bank advances

     40,000        —     

Repayment of Federal Home Loan Bank advances

     (40,000 )     —     

Proceeds from other borrowings

     10,000        —     

Repayment of other borrowings

     (10,000 )     —     

Proceeds from issuance of subordinated notes, net of issuance costs

     38,843        —     

Proceeds from exercise of common stock warrants

     38        2   

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

     118        780   

Proceeds from issuance of common stock, net of offering costs

     —          51,004   

Divestment of common stock issued to 401(k) plan

     (63 )     —     

Redemption of Series A preferred stock

     (10,000 )     —     

Dividends paid on preferred stock

     (23 )     (25 )
  

 

 

   

 

 

 

Net cash from financing activities

     116,954        147,805   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     9,660        (767 )

Cash and cash equivalents at beginning of period

     52,394        49,347   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 62,054      $ 48,580   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 2,993      $ 1,638   

Income taxes paid

     1,125        1,500   

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO 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 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 15, 2016.

These consolidated financial statements include the accounts of Franklin Financial Network, Inc. (“FFN”), and its wholly-owned subsidiaries, Franklin Synergy Bank (the “Bank”) and Franklin Synergy Risk Management, Inc. (collectively, the “Company”). Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of Franklin Synergy Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

On July 1, 2014, the Company acquired MidSouth Bank (“MidSouth”), which was merged into the Bank.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at March 31, 2016 and December 31, 2015 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
 

March 31, 2016

          

U.S. government sponsored entities and agencies

   $ 5,750       $ 135       $ (1 )   $ 5,884   

Mortgage-backed securities: residential

     514,894         8,639         (418 )     523,115   

Mortgage-backed securities: commercial

     19,775         243         —         20,018   

State and political subdivisions

     38,632         1,653         (28 )     40,257   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 579,051       $ 10,670       $ (447 )   $ 589,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

December 31, 2015

          

U.S. government sponsored entities and agencies

   $ 6,792       $ 72       $ (47 )   $ 6,817   

Mortgage-backed securities: residential

     502,916         2,386         (4,347 )     500,955   

Mortgage-backed securities: commercial

     19,993         22         (180     19,835   

State and political subdivisions

     46,664         1,570         (3     48,231   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 576,365       $ 4,050       $ (4,577 )   $ 575,838   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of the held to maturity securities portfolio at March 31, 2016 and December 31, 2015 and the corresponding amounts of gross unrecognized gains and losses were as follows:

 

     Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

March 31, 2016

          

U.S. government sponsored entities and agencies

   $ 3,222       $ 11       $ —       $ 3,233   

Mortgage backed securities: residential

     30,241         777         (136 )     30,882   

State and political subdivisions

     124,044         5,564         —         129,608   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 157,507       $ 6,352       $ (136 )   $ 163,723   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

December 31, 2015

          

U.S. government sponsored entities and agencies

   $ 3,300       $ 11       $ (72 )   $ 3,239   

Mortgage backed securities: residential

     30,398         410         (408 )     30,400   

State and political subdivisions

     124,502         3,841         (13 )     128,330   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 158,200       $ 4,262       $ (493 )   $ 161,969   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

    

Three Months Ended

March 31,

 
             2016                      2015          

Proceeds

   $ 48,772       $ 11,289   

Gross gains

     693         390   

Gross losses

     (383 )      (14 )

Calls of held to maturity securities were as follows:

 

    

Three Months Ended

March 31,

 
             2016                      2015          

Proceeds

   $ —         $ 800   

Gross gains

     —           39   

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.

 

     March 31, 2016  
     Amortized
       Cost       
     Fair
      Value      
 

Available for sale

     

Over one year through five years

   $ 2,033       $ 2,121   

Over five years through ten years

     967         1,014   

Over ten years

     41,382         43,006   

Mortgage-backed securities: residential

     514,894         523,115   

Mortgage-backed securities: commercial

     19,775         20,018   
  

 

 

    

 

 

 

Total

   $ 579,051       $ 589,274   
  

 

 

    

 

 

 

Held to maturity

     

Over one year through five years

   $ 1,226       $ 1,278   

Over five years through ten years

     4,248         5,334   

Over ten years

     121,792         126,229   

Mortgage-backed securities: residential

     30,241         30,882   
  

 

 

    

 

 

 

Total

   $ 157,507       $ 163,723   
  

 

 

    

 

 

 

Securities pledged at March 31, 2016 and December 31, 2015 had a carrying amount of $655,140 and $595,524 and were pledged to secure public deposits and repurchase agreements.

At March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, 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
 

March 31, 2016

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 2,750       $ (1 )   $  —         $  —        $ 2,750       $ (1 )

Mortgage-backed securities: residential

     36,963         (154 )     24,274         (264 )     61,237         (418 )

State and political subdivisions

     4,779         (28 )     —           —          4,779         (28 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 44,492       $ (183 )   $ 24,274       $ (264 )   $ 68,766       $ (447 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

Held to maturity

               

Mortgage-backed securities: residential

   $ 3,615       $ (23 )   $ 5,248       $ (113 )   $ 8,863       $ (136 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 3,615       $ (23 )   $ 5,248       $ (113 )   $ 8,863       $ (136 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

December 31, 2015

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 2,703       $ (47 )   $  —         $  —        $ 2,703       $ (47 )

Mortgage-backed securities: residential

     313,570         (3,691 )     23,319         (656 )     336,889         (4,347 )

Mortgage-backed securities: commercial

     15,980         (180 )     —           —          15,980         (180 )

State and political subdivisions

     716         (3 )     —           —          716         (3 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 332,969       $ (3,921 )   $ 23,319       $ (656 )   $ 356,288       $ (4,577 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $ 1,957       $ (43   $ 971       $ (29 )   $ 2,928       $ (72 )

Mortgage-backed securities: residential

     9,788         (97 )     5,481         (311 )     15,269         (408 )

State and political subdivisions

     3,351         (13 )     —           —          3,351         (13 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 15,096       $ (153 )   $ 6,452       $ (340 )   $ 21,548       $ (493 )
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 3—LOANS

Loans at March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 

Loans that are not PCI loans

     

Construction and land development

   $ 413,279       $ 372,767   

Commercial real estate:

     

Nonfarm, nonresidential

     388,807         353,268   

Other

     19,456         10,955   

Residential real estate:

     

Closed-end 1-4 family

     163,216         162,933   

Other

     120,577         112,001   

Commercial and industrial

     308,622         283,888   

Consumer and other

     6,453         6,577   
  

 

 

    

 

 

 

Loans before net deferred loan fees

     1,420,410         1,302,389   

Deferred loan fees, net

     (1,596 )      (2,476 )
  

 

 

    

 

 

 

Total loans that are not PCI loans

     1,418,814         1,299,913   
  

 

 

    

 

 

 

PCI loans

     

Construction and land development

   $ 79       $ 78   

Commercial real estate:

     

Nonfarm, nonresidential

     587         1,460   

Other

     —           —     

Residential real estate:

     

Closed-end 1-4 family

     567         562   

Other

     1         1   

Commercial and industrial

     1,895         1,812   

Consumer and other

     —           —     
  

 

 

    

 

 

 

Total PCI loans

     3,129         3,913   
  

 

 

    

 

 

 

Allowance for loan losses

     (12,676 )      (11,587 )
  

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 1,409,267       $ 1,292,239   
  

 

 

    

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ending March 31, 2016 and 2015:

 

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

Three Months Ending March 31, 2016

             

Allowance for loan losses:

             

Beginning balance

   $ 3,186      $ 3,146       $ 1,861      $ 3,358      $ 36      $ 11,587   

Provision for loan losses

     192        418         (89 )     582        33        1,136   

Loans charged-off

     —          —           —          (65 )     (11 )     (76 )

Recoveries

     —          —           28        —          1        29   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,378      $ 3,564       $ 1,800      $ 3,875      $ 59      $ 12,676   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ending March 31, 2015

             

Allowance for loan losses:

             

Beginning balance

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

Provision for loan losses

     (141 )     630         (67 )     200        3        625   

Loans charged-off

     —          —           —          —          —          —     

Recoveries

     —          —           3        —          —          3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

As of March 31, 2016 and December 31, 2015, there was $0 and $9, respectively, in allowance for loan losses for PCI loans.

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 March 31, 2016 and December 31, 2015. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.

 

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

March 31, 2016

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $  —         $  —         $  —         $  —         $  —         $  —     

Collectively evaluated for impairment

     3,378         3,564         1,800         3,875         59         12,676   

Purchased credit-impaired loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,378       $ 3,564       $ 1,800       $ 3,875       $ 59       $ 12,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ 412       $ 835       $ 1,185       $ 100       $  —         $ 2,532   

Collectively evaluated for impairment

     412,867         407,428         282,608         308,522         6,453         1,417,878   

Purchased credit-impaired loans

     79         587         568         1,895         —           3,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 413,358       $ 408,850       $ 284,361       $ 310,517       $ 6,453       $ 1,423,539   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $  —         $  —         $  —         $ 113       $  —         $ 113   

Collectively evaluated for impairment

     3,186         3,137         1,861         3,245         36         11,465   

Purchased credit-impaired loans

     —           9         —           —           —           9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,186       $ 3,146       $ 1,861       $ 3,358       $ 36       $ 11,587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ 1,943       $ 908       $ 1,185       $ 134       $  —         $ 4,170   

Collectively evaluated for impairment

     370,824         363,315         273,749         283,754         6,577         1,298,219   

Purchased credit-impaired loans

     78         1,460         563         1,812         —           3,913   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 372,845       $ 365,683       $ 275,497       $ 285,700       $ 6,577       $ 1,306,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans collectively evaluated for impairment reported at March 31, 2016 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 March 31, 2016, these non-PCI loans had a carrying value of $93,064, comprised of contractually unpaid principal totaling $95,471 and discounts totaling $2,407. Management evaluated these loans for credit deterioration since acquisition and determined that $28 in allowance for loan losses was necessary at March 31, 2016.

 

11


Table of Contents

The following table presents information related to impaired loans by class of loans as of March 31, 2016 and December 31, 2015:

 

     Unpaid
Principal
      Balance      
     Recorded
    Investment    
     Allowance for
Loan Losses
Allocated
 

March 31, 2016

        

With no allowance recorded:

        

Construction and land development

   $ 412       $ 412       $  —     

Commercial real estate:

        

Nonfarm, nonresidential

     2,422         835         —     

Residential real estate:

        

Closed-end 1-4 family

     476         476         —     

Other

     709         709         —     

Commercial and industrial

     100         100         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     4,119         2,532         —     

With an allowance recorded:

        

None

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,119       $ 2,532       $  —     
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

With no allowance recorded:

        

Construction and land development

   $ 1,943       $ 1,943       $  —     

Commercial real estate:

        

Nonfarm, nonresidential

     2,495         908         —     

Residential real estate:

        

Closed-end 1-4 family

     476         476         —     

Other

     709         709         —     

Commercial and industrial

     21         21         —     
  

 

 

    

 

 

    

 

 

 

Subtotal

     5,644         4,057         —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial and industrial

     113         113         113   
  

 

 

    

 

 

    

 

 

 

Subtotal

     113         113         113   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,757       $ 4,170       $ 113   
  

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

The following table presents the average recorded investment of impaired loans by class of loans for the three months ended March 31, 2016 and 2015:

 

    

Three Months Ended

March 31,

 

Average Recorded Investment

           2016                      2015          

With no allowance recorded:

     

Construction and land development

   $ 898       $ —     

Commercial real estate:

     

Nonfarm, nonresidential

   $ 1,402       $ 835   

Residential real estate:

     

Closed-end 1-4 family

     736         457   

Other

     712         —     

Commercial and industrial

     21         83   
  

 

 

    

 

 

 

Subtotal

     3,769         1,375   
  

 

 

    

 

 

 

With an allowance recorded:

     

Commercial and industrial

   $ 86       $ 19   
  

 

 

    

 

 

 

Subtotal

     86         19   
  

 

 

    

 

 

 

Total

   $ 3,855       $ 1,394   
  

 

 

    

 

 

 

The impact on net interest income for these loans was not material to the Company’s results of operations for the three months ended March 31, 2016 and 2015.

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 March 31, 2016 and December 31, 2015:

 

         Nonaccrual          Loans Past Due
Over 90 Days
 

March 31, 2016

     

Construction and land development

   $  —         $ 412   

Commercial real estate:

     

Nonfarm, nonresidential

     835         —     

Residential real estate:

     

Closed-end 1-4 family

     41         435   

Commercial and industrial

     —           5   
  

 

 

    

 

 

 

Total

   $ 876       $ 852   
  

 

 

    

 

 

 

December 31, 2015

     

Construction and land development

   $  —         $ 1,943   

Commercial real estate:

     

Nonfarm, nonresidential

   $ 835       $  —     

Residential real estate:

     

Closed-end 1-4 family

     41         435   

Commercial and industrial

     32         —     
  

 

 

    

 

 

 

Total

   $ 908       $ 2,378   
  

 

 

    

 

 

 

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.

 

13


Table of Contents

The following table presents the aging of the recorded investment in past due loans as of March 31, 2016 and December 31, 2015 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  

March 31, 2016

                    

Construction and land development

   $ 417       $  —         $ 412       $ 829       $ 412,450       $ 79       $ 413,358   

Commercial real estate:

                    

Nonfarm, nonresidential

     —           —           835         835         387,972         587         389,394   

Other

     —           —           —           —           19,456         —           19,456   

Residential real estate:

                    

Closed-end 1-4 family

     212         —           476         688         162,528         567         163,783   

Other

     —           —           —           —           120,577         1         120,578   

Commercial and industrial

     216         510         5         731         307,891         1,895         310,517   

Consumer and other

     1         —           —           1         6,452         —           6,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 846       $ 510       $ 1,728       $ 3,084       $ 1,417,326       $ 3,129       $ 1,423,539   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

December 31, 2015

                    

Construction and land development

   $  —         $ 149      $ 1,943       $ 2,092       $ 370,675       $ 78       $ 372,845   

Commercial real estate:

                    

Nonfarm, nonresidential

     258         —           835         1,093         352,175         1,460         354,728   

Other

     —           —           —           —           10,955         —           10,955   

Residential real estate:

                    

Closed-end 1-4 family

     213         —           476         689         162,244         562         163,495   

Other

     30         —           —           30         111,971         1         112,002   

Commercial and industrial

     86         32         —           118         283,770         1,812         285,700   

Consumer and other

     2         —           —           2         6,575         —           6,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 589       $ 181       $ 3,254       $ 4,024       $ 1,298,365       $ 3,913       $ 1,306,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

14


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 March 31, 2016 and December 31, 2015:

 

     Pass      Special
Mention
     Substandard      Total  

March 31, 2016

           

Construction and land development

   $ 412,867       $ —         $ 491       $ 413,358   

Commercial real estate:

           

Nonfarm, nonresidential

     387,633         —           1,761         389,394   

Other

     19,456         —           —           19,456   

Residential real estate:

           

Closed-end 1-4 family

     162,236         —           1,547         163,783   

Other

     119,869         —           709         120,578   

Commercial and industrial

     308,959         —           1,558         310,517   

Consumer and other

     6,453         —           —           6,453   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,417,473       $ —         $ 6,066       $ 1,423,539   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pass      Special
    Mention    
     Substandard      Total  

December 31, 2015

           

Construction and land development

   $ 370,824       $ —         $ 2,021       $ 372,845   

Commercial real estate:

           

Nonfarm, nonresidential

     352,451         —           2,277         354,728   

Other

     10,955         —           —           10,955   

Residential real estate:

           

1-4 family

     162,160         —           1,335         163,495   

Other

     111,292         —           710         112,002   

Commercial and industrial

     284,144         —           1,556         285,700   

Consumer and other

     6,577         —           —           6,577   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,298,403       $ —         $ 7,899       $ 1,306,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 2016 and December 31, 2015.

 

     Mar 31, 2016      Dec 31, 2015  

Contractually required principal and interest

   $ 4,563       $ 5,618   

Non-accretable difference

     (305 )      (352 )
  

 

 

    

 

 

 

Cash flows expected to be collected

     4,258         5,266   

Accretable yield

     (1,129 )      (1,353 )
  

 

 

    

 

 

 

Carrying value of acquired loans

     3,129         3,913   

Allowance for loan losses

     —           (9
  

 

 

    

 

 

 

Carrying value less allowance for loan losses

   $ 3,129       $ 3,904   
  

 

 

    

 

 

 

 

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Table of Contents

Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the current quarter. 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 month periods ending March 31, 2016 and 2015.

 

Activity during the three month period ending March 31, 2016

   Dec 31, 2015     Effect of
Acquisitions
     Income
Accretion
     All other
Adjustments
    Mar 31, 2016  

Contractually required principal and interest

   $ 5,618      $ —         $ —         $ (1,055 )   $ 4,563   

Non-accretable difference

     (352 )     —           —           47        (305 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,266        —          
 
—  
  
  
 
     (1,008 )     4,258   

Accretable yield

     (1,353 )     —           194         30        (1,129 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 3,913      $ —         $ 194       $ (978 )   $ 3,129   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

Activity during the three month period ending March 31, 2015

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

Contractually required principal and interest

   $ 6,532      $ —         $ —         $ (397 )   $ 6,135   

Non-accretable difference

     (1,270 )     —           —           281        (989 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,262        —           —           (116 )     5,146   

Accretable yield

     (947 )     —           57         50        (840 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 4,315      $ —         $ 57       $ (66 )   $ 4,306   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Troubled Debt Restructurings

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

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at March 31, 2016 and December 31, 2015 are as follows:

 

         March 31,    
2016
     December 31,
2015
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 467,789       $ 463,952   

Other

     3,379         4,037   

The components of net loan servicing fees for the three months ended March 31, 2016 and 2015 were as follows:

 

     Three Months Ended
March 31,
 
             2016                      2015          

Loan servicing fees, net:

     

Loan servicing fees

   $ 293       $ 266   

Amortization of loan servicing fees

     (251 )      (223 )

Change in impairment

     —           —     
  

 

 

    

 

 

 

Total

   $ 42       $ 43   
  

 

 

    

 

 

 

The fair value of servicing rights was estimated by management to be approximately $3,993 at March 31, 2016. Fair value for March 31, 2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 13.6%. At December 31, 2015, the fair value of servicing rights was estimated by management to be approximately $4,635. Fair value for December 31, 2015 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%.

 

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Table of Contents

NOTE 5—SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

Our subsidiary bank enters into borrowing arrangements with our retail business customers and correspondent banks 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 short-term borrowing arrangements. At maturity the securities underlying the agreements are returned to the Company. At March 31, 2016 and December 31, 2015, these short-term borrowings totaled $36,093 and $61,261, respectively, and were secured by securities with carrying amounts of $40,032 and $73,478, respectively. At March 31, 2016, all of the Company’s repurchase agreements had one-day maturities.

The following table provides additional details as of March 31, 2016:

 

As of March 31, 2016

   U.S.
Government
Sponsored
Entities and
Agencies
Securities
    Mortgage-
Backed
Securities:
Residential
    State and
Political
Subdivisions
    Total  

Market value of securities pledged

   $ 1,233      $ 66      $ 40,577      $ 41,876   

Borrowings related to pledged amounts

   $ 833      $ —        $ 35,260      $ 36,093   

Market value pledged as a % of borrowings

     148     —       115     116

NOTE 6—SHARE-BASED PAYMENTS

In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant allows the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will be exercisable in whole or in part up to seven years following the date of issuance. The warrants are detachable from the common stock. There were 3,150 and 200 warrants exercised during the three months ended March 31, 2016 and 2015, respectively. A summary of the stock warrant activity for the three months ended March 31, 2016 and 2015 follows:

 

             2016                      2015          

Stock warrants exercised:

     

Intrinsic value of warrants exercised

   $ 61       $ 2   

Cash received from warrants exercised

     38         2   

At March 31, 2016, there 22,157 outstanding warrants associated with the 2010 offering.

Since the common stock of the Company is 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 holders of such 2010 warrants, 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.

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $258 and $146 for the three months ended March 31, 2016 and 2015, respectively. The total income tax benefit was $147 for the three months ended March 31, 2015. There was no excess tax benefit from the exercise of stock options for the three months ended March 31, 2016.

Stock Option Plan: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved, permitted the grant of share options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan, and to increase the number of authorized shares to 1,500,000. The Company believes that such awards better align the interests of its employees with those of its shareholders. Shareholders approved amendments to 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 March 31, 2016, there were 2,315,029 authorized shares available for issuance.

 

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Table of Contents

Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those option awards have a vesting period of three to five years and have a ten-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.

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

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

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

 

         March 31,    
2016
        March 31,    
2015
 

Risk-free interest rate

     1.99 %     1.93 %

Expected term

     7.5 years        7.5 years   

Expected stock price volatility

     29.14 %     25.00 %

Dividend yield

     0.24 %     0.22 %

The weighted average fair value of options granted for the three months ended March 31, 2016 and 2015 were $10.45 and $6.76, respectively.

A summary of the activity in the stock option plans for the three months ended March 31, 2016 follows:

 

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

Outstanding at beginning of year

     1,312,791       $ 13.04         6.23       $ 24,070   

Granted

     29,500         29.83         

Exercised

     (14,389 )      10.87         

Forfeited, expired, or cancelled

     (1,082 )      20.69         
  

 

 

          

Outstanding at period end

     1,326,820       $ 13.44         6.10       $ 17,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,260,479       $ 13.44         6.10       $ 17,098   

Exercisable at period end

     773,236       $ 10.73         4.61       $ 12,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the three months
ended March 31,
 
             2016                      2015          

Stock options exercised:

     

Intrinsic value of options exercised

   $ 242       $ 609   

Cash received from options exercised

     118         780   

Tax benefit realized from option exercises

     —          147   

As of March 31, 2016, there was $1,871 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 1.6 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. 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.

 

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Table of Contents

A summary of activity for non-vested restricted share awards for the three months ended March 31, 2016 is as follows:

 

Non-vested Shares

       Shares          Weighted-Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2015

     105,864       $ 15.89   

Granted

     4,000         31.38   

Vested

     —          —    

Forfeited

     (1,622 )      15.58   
  

 

 

    

Non-vested at March 31, 2016

     108,242       $ 16.46   
  

 

 

    

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 March 31, 2016, there was $1,398 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 2.3 years. There were no shares that vested during the three months ended March 31, 2016 or 2015.

NOTE 7—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

The Basel III rules additionally provide for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This new capital conversation buffer requirement was phased in beginning January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented at 2.5% in January 2019.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes, as of March 31, 2016, that the Company and Bank met all capital adequacy requirements to which they are subject. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

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Table of Contents

Actual and required capital amounts and ratios are presented below as of March 31, 2016 and December 31, 2015 for the Company and Bank:

 

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

March 31, 2016

              

Company common equity Tier 1 capital to risk-weighted assets

  $ 171,136         9.60   $ 80,231         4.50     N/A         N/A   

Company Total Capital to risk weighted assets

  $ 222,655         12.49   $ 142,633         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

  $ 171,136         9.60   $ 106,975         6.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

  $ 171,136         7.69   $ 89,059         4.00     N/A         N/A   

Bank common equity Tier 1 capital to risk-weighted assets

  $ 208,413         11.69   $ 80,232         4.50   $ 115,891         6.50

Bank Total Capital to risk weighted assets

  $ 221,089         12.40   $ 142,635         8.00   $ 178,293         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

  $ 208,413         11.69   $ 106,976         6.00   $ 142,635         8.00

Bank Tier 1 (Core) Capital to average assets

  $ 208,413         9.37   $ 89,001         4.00   $ 111,252         5.00

December 31, 2015

              

Company common equity Tier 1 capital to risk-weighted assets

  $ 167,562         10.08   $ 74,768         4.50     N/A         N/A   

Company Total Capital to risk weighted assets

  $ 186,243         11.21   $ 132,922         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

  $ 174,656         10.51   $ 99,691         6.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

  $ 174,656         8.48   $ 82,362         4.00     N/A         N/A   

Bank common equity Tier 1 capital to risk-weighted assets

  $ 172,205         10.36   $ 74,772         4.50   $ 108,004         6.50

Bank Total Capital to risk weighted assets

  $ 183,792         11.06   $ 132,928         8.00   $ 166,160         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

  $ 172,205         10.36   $ 99,696         6.00   $ 132,928         8.00

Bank Tier 1 (Core) Capital to average assets

  $ 172,205         8.36   $ 82,357         4.00   $ 102,649         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 2016 the Bank can declare, without prior approval, dividends of approximately $25,887 plus any 2016 net profits retained to the date of declaration.

NOTE 8—FAIR VALUE

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

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

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

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

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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). 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).

 

20


Table of Contents

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.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been review and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Loans Held For Sale: The Company has 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 (Level 2).

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
March 31, 2016 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

   $ —         $ 5,884       $  —     

Mortgage-backed securities-residential

     —           523,115         —     

Mortgage-backed securities-commercial

     —           20,018         —     

State and political subdivisions

     —           40,257         —     
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —         $ 589,274       $  —     
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $  —         $ 11,680       $  —     
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —         $ 706       $  —     
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —         $ 194       $  —     
  

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     Fair Value Measurements at
December 31, 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

   $  —         $ 6,817       $  —     

Mortgage-backed securities-residential

     —           500,955         —     

Mortgage-backed securities-commercial

     —           19,835         —     

State and political subdivisions

     —           48,231         —     
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —         $ 575,838       $  —     
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $  —         $ 14,079       $  —     
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $  —         $ 411       $  —     
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $  —         $ 29       $  —     
  

 

 

    

 

 

    

 

 

 

As of March 31, 2016, the unpaid principal balance of loans held for sale was $11,317 resulting in an unrealized gain of $363 included in gains on sale of loans. As of December 31, 2015, the unpaid principal balance of loans held for sale was $13,754, resulting in an unrealized gain of $325 included in gains on sale of loans. For the three months ended March 31, 2016 and 2015, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $38 and $23, respectively. None of these loans were 90 days or more past due or on nonaccrual as of March 31, 2016 and December 31, 2015.

There were no transfers between level 1 and 2 during 2016 and 2015.

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 March 31, 2016 or December 31, 2015. For the three months ended March 31, 2016 and 2015, no additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $200 as of both March 31, 2016 and December 31, 2015. There were no properties at March 31, 2016 or 2015 that had required write-downs to fair value resulting in no write downs for the three months ending March 31, 2016 and 2015, respectively.

 

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The carrying amounts and estimated fair values of financial instruments, at March 31, 2016 and December 31, 2015 are as follows:

 

     Carrying      Fair Value Measurements at
March 31, 2016 Using:
 
     Amount      Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 62,054       $ 62,054       $ —         $ —         $ 62,054   

Certificates of deposit held at other financial institutions

     1,065         —           1,065         —           1,065   

Securities available for sale

     589,274         —           589,274         —           589,274   

Securities held to maturity

     157,507         —           163,723         —           163,723   

Loans held for sale

     11,680         —           11,680         —           11,680   

Net loans

     1,409,267         —           —           1,408,603         1,408,603   

Restricted equity securities

     8,024         n/a         n/a         n/a         n/a   

Servicing rights, net

     3,420         —           3,993         —           3,993   

Accrued interest receivable

     7,037         —           3,291         3,746         7,037   

Financial liabilities

              

Deposits

   $ 1,953,573       $ 1,153,029       $ 752,683       $ —         $ 1,905,712   

Federal funds purchased and repurchase agreements

     49,593         —           49,593         —           49,593   

Federal Home Loan Bank advances

     57,000         —           57,102         —           57,102   

Subordinated notes, net

     38,843         —           —           38,843         38,843   

Accrued interest payable

     936         110         818         8         936   
     Carrying      Fair Value Measurements at
December 31, 2015 Using:
 
     Amount      Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 52,394       $ 52,394       $ —         $ —         $ 52,394   

Certificates of deposit held at other financial institutions

     250         —           250         —           250   

Securities available for sale

     575,838         —           575,838         —           575,838   

Securities held to maturity

     158,200         —           161,969         —           161,969   

Loans held for sale

     14,079         —           14,079         —           14,079   

Net loans

     1,292,239         —           —           1,279,849         1,279,849   

Restricted equity securities

     7,998         n/a         n/a         n/a         n/a   

Servicing rights, net

     3,455         —           4,635         —           4,635   

Accrued interest receivable

     7,299         3         3,780         3,516         7,299   

Financial liabilities

              

Deposits

   $ 1,814,039       $ 1,062,587       $ 748,961       $ —         $ 1,811,548   

Federal funds purchased and repurchase agreements

     101,086         —           101,086         —           101,086   

Federal Home Loan Bank advances

     57,000         —           56,931         —           56,931   

Accrued interest payable

     644         100         544         —           644   

The methods and assumptions not previously described used to estimate fair values 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.

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

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

 

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

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

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

(h) Subordinated Notes: The fair values of the Company’s subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(i) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

(j) 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—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

March 31,

 
     2016      2015  

Basic

     

Net income available to common shareholders

   $ 6,210       $ 3,107   

Less: earnings allocated to participating securities

     (64 )      (40 )
  

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 6,146       $ 3,067   
  

 

 

    

 

 

 

Weighted average common shares outstanding including participating securities

     10,580,304         7,970,250   

Less: Participating securities

     (109,064 )      (102,187 )
  

 

 

    

 

 

 

Average shares

     10,471,240         7,868,063   
  

 

 

    

 

 

 

Basic earnings per common share

   $ 0.59       $ 0.39   
  

 

 

    

 

 

 

 

    

Three Months Ended

March 31,

 
     2016      2015  

Diluted

     

Net income allocated to common shareholders

   $ 6,146       $ 3,067   

Weighted average common shares outstanding for basic earnings per common share

     10,471,240         7,868,063   

Add: Dilutive effects of assumed exercises of stock options

     559,017         432,808   

Add: Dilutive effects of assumed exercises of stock warrants

     12,426         12,951   
  

 

 

    

 

 

 

Average shares and dilutive potential common shares

     11,042,683         8,313,822   
  

 

 

    

 

 

 

Dilutive earnings per common share

   $ 0.56       $ 0.37   
  

 

 

    

 

 

 

 

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Stock options for 62,167 and 3,000 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2016 and 2015 because they were antidilutive.

NOTE 10—CAPITAL OFFERING

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

 

Gross proceeds

   $   55,440   

Less: stock offering costs

     (4,436 )
  

 

 

 

Net proceeds from issuance of common stock

   $ 51,004   
  

 

 

 

NOTE 11—SUBORDINATED DEBT ISSUANCE

On March 31, 2016, the Company issued $40,000 in aggregate principal amount of fixed-to-floating rate Subordinated Notes due 2026 (the “Notes”) in a public offering to accredited institutional investors. The Notes will mature on March 30, 2026 unless redeemed prior to that date. The Company may redeem the Notes in whole or in part on or after March 30, 2021, and in whole, but not in part, at any time within 90 days following a “Regulatory Capital Treatment Event”, as defined in the First Supplemental Indenture, dated as of March 31, 2016, between the Company and U.S. Bank National Association, as trustee (the “Supplemental Indenture”) governing the Notes. The redemption price for any redemption will be 100% of the principal amount of the Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the Notes.

The Notes initially bear interest at 6.875% per year, payable semi-annually in arrears on March 30 and September 30 of each year, beginning on September 30, 2016, and going through March 29, 2021. Thereafter, the notes will bear interest at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus a spread of 5.636%, with interest payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on June 30, 2021.

The Notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The Notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of Franklin Synergy Bank (the “Bank”), its depositors, and any preferred equity holders of our subsidiaries. The holders of the Notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

The sale of the Notes yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing that had been used to redeem the shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued to the United States Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Small Business Lending Fund and to fund future growth of the Bank.

The estimated issuance costs related to the Notes amounted to $1,157 and will be amortized as interest expense over the ten-year term of the Notes.

For regulatory capital purposes, the Notes are treated as Tier 2 capital and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.

 

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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 audited financial statements and accompanying notes included in the Company’s Form 10-K filed with the SEC on March 15, 2016, 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 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.

Company Overview

We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly-owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 12 branches in the demographically attractive and growing Williamson and Rutherford Counties within the Nashville metropolitan area. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our company,” “the company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy), any reference to “FFN” refers to Franklin Financial Network, Inc. only and any reference to “Franklin Synergy” or the “Bank” refers to our banking subsidiary, Franklin Synergy Bank.

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 in Form 10-K that was filed on March 15, 2016. 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 Franklin Synergy Risk Management, Inc., together referred to as “the Company.” Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of Franklin Synergy Bank and are included in these consolidated financial statements. 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 the Company for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.

 

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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.

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

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

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

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

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

Mortgage Servicing Rights

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

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

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

 

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Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, rather than as an asset. The amendments in this ASU are effective for public business entities for the first annual period beginning after December 15, 2015, and must be applied retrospectively to all prior periods presented in the financial statements. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the potential impact of ASU 2016-02 on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU 2016-09 will be effective on January 1, 2017, and early adoption is allowed; however, the Company does not plan to adopt this ASU early. ASU 2016-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

MARCH 31, 2016 AND 2015

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $6,233 and $3,132 for the three months ended March 31, 2016 and 2015, respectively. After the payment of preferred dividends on the Series A 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 months ended March 31, 2016 and 2015 was $6,210 and $3,107, respectively. The primary reasons for the increase in net earnings available to common shareholders for the three months ended March 31, 2016 was increased interest income on loans and investment securities due to significant organic growth in each of these portfolios over the same period in 2015.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets, less interest expense. Net interest income for the three months ended March 31, 2016 and 2015, totaled $19,276 and $12,157, respectively, an increase of $7,119, or 58.6%, between the respective periods. For the three months ended March 31, 2016 and 2015, interest income was $22,561 and $13,926, respectively, an increase of 62.0%, due to growth in both the loan and investment securities portfolios. For the three months ended March 31, 2016 and 2015, interest expense was $3,285 and $1,769, respectively, an increase of 85.7%, which is a result of increases in both interest-bearing deposits and borrowings.

Interest-earning assets averaged $2,177,905 and $1,351,351 during the three months ended March 31, 2016 and 2015, respectively, an increase of $826,554, or 61.2%. This increase was due to organic growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 61.4%, and investment securities increased 62.1%, when comparing the three months ended March 31, 2016 with the same period in 2015. When comparing the three months ended March 31, 2016 and 2015, the yield on average interest earning assets, adjusted for tax equivalent yield increased 12 basis points to 4.30% compared to 4.18% for the same period during 2015. For the three months ended March 31, 2016, the tax equivalent yield on available for sale securities was 2.56%, and for the three months ended March 31, 2015, the yield on available for sale securities was 2.31%. The primary driver for the increase was the increase in coupon rates on securities purchased during the past 12 months. During the three months ended March 31, 2016, coupon interest on available for sale securities was $4,568 which, when compared with coupon interest on available for sale securities for the three months ended March 31, 2015 of $2,955, represented a yield increase of 111 basis points.

Interest-bearing liabilities averaged $1,865,564 during the three months ending March 31, 2016, compared to $1,132,357 for the same period in 2015, an increase of $733,207, or 64.8%. Total average interest-bearing deposits grew $687,325, including increases in average brokered deposits of $386,257 and average interest-bearing public funds deposits of $10,942 for the three-month period ending March 31, 2016, as compared to the same period during 2015. Rapid growth in the loan portfolio also resulted in increases in average Federal Home Loan Bank advances of $33,867, average other borrowed funds of $10,916 and subordinated notes and other borrowings of $1,099, when comparing the first three months of 2016 with the same period in 2015. Within other borrowed funds, average securities sold under agreement to repurchase increased $14,828 for the three months ended March 31, 2016 in comparison with the same period in 2015. The large increase in this funding source is due to the addition of some larger commercial relationships during the past year and the addition of one repurchase agreement with one of the Company’s correspondent banks.

For the three month periods ending March 31, 2016 and 2015, the cost of average interest-bearing liabilities increased eight basis points to 0.71% from 0.63%. The increase was primarily due to increases in the cost of funds for interest checking deposits and subordinated notes and other borrowings. These increases were partially offset by decreases in the rates on other types of interest-bearing deposits, Federal Home Loan Bank advances and other borrowed funds, which all decreased from the first quarter of 2015 to first quarter of 2016

 

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The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three-months ended March 31, 2016 and 2015:

Average Balances—Yields & Rates(7)

(Dollars are in thousands)

 

     Three Months Ended March 31,  
     2016     2015  
     Average
Balance
    Interest
  Inc / Exp  
     Average
Yield / Rate
    Average
Balance
    Interest
  Inc / Exp  
     Average
Yield / Rate
 

ASSETS:

              

Loans (1)(6)

   $ 1,364,467      $ 17,759         5.23 %   $ 845,437      $ 11,154         5.35 %

Securities available for sale (6)

     588,885        3,745         2.56 %     408,189        2,321         2.31 %

Securities held to maturity

     157,839        1,628         4.15 %     52,513        364         2.81 %

Certificates of deposit at other financial institutions

     1,044        3         1.16 %     250        1         1.62 %

Federal funds sold and other (2)

     65,670        166         1.02 %     44,962        86         0.78 %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 2,177,905      $ 23,301         4.30 %   $ 1,351,351      $ 13,926         4.18 %

Allowance for loan losses

     (11,967 )          (7,043 )     

All other assets

     80,544             69,350        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 2,246,482           $ 1,413,658        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 334,065      $ 326         0.39 %   $ 301,147      $ 174         0.23 %

Money market

     569,084        869         0.61 %     394,082        585         0.60 %

Savings

     45,810        42         0.37 %     30,615        35         0.46 %

Time deposits

     804,719        1,840         0.92 %     340,509        839         1.00 %

Federal Home Loan Bank advances

     57,000        86         0.77 %     23,133        65         1.14 %

Federal funds purchased and other (3)

     53,787        109         0.82 %     42,871        71         0.67 %

Subordinated notes and other borrowings

     1,099        13         4.76 %     —         —          —   %
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 1,865,564      $ 3,285         0.71 %   $ 1,132,357      $ 1,769         0.63 %

Demand deposits

     177,449             150,108        

Other liabilities

     9,086             5,895        

Total shareholders’ equity

     194,383             125,298        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 2,246,482           $ 1,413,658        

NET INTEREST SPREAD (4)

          3.59 %          3.55 %

NET INTEREST INCOME

     $ 20,016           $ 12,157      

NET INTEREST MARGIN (5)

          3.70 %          3.65 %

 

(1) Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.
(2) Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank.
(3) Includes repurchase agreements.
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income (annualized) divided by total average earning assets.
(6) Interest income and rates for 2015 exclude the effects of a tax-equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.
(7) Averages balances are average daily balances. Yields and rates are annualized.

 

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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
March 31, 2016 versus March 31, 2015
 
       Volume            Rate          Net Change  

INTEREST INCOME

        

Loans

   $ 7,012       $ (407 )    $ 6,605   

Securities available for sale

     1,053         371         1,424   

Securities held to maturity

     737         527         1,264   

Certificates of deposit at other financial institutions

     3         (1 )      2   

Federal funds sold and other

     40         40         80   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 8,845       $ 530       $ 9,375   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 19       $ 133       $ 152   

Money market accounts

     270         14         284   

Savings

     17         (10 )      7   

Time deposits

     1,161         (160 )      1,001   

Federal Home Loan Bank advances

     96         (52 )      44   

Other borrowed funds

     19         (4 )      15   

Subordinated notes and other borrowings

     13         —          13   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 1,595       $ (79 )    $ 1,516   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 7,250       $ 609       $ 7,859   
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses

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

The provision for loan losses was $1,136 and $625 for the three months ended March 31, 2016 and 2015, respectively. The increase in loan loss provision is due primarily to the Company’s loan growth. Nonperforming loans at March 31, 2016 totaled $1,728 compared to $3,286 at December 31, 2015, representing 0.1% and 0.3% of total loans, respectively.

Non-Interest Income

Non-interest income for the three months ended March 31, 2016 and 2015 was $3,085 and $3,215, respectively. The following is a summary of the components of non-interest income (in thousands):

 

    

Three Months Ended

March 31,

     $
Increase
(Decrease)
    %
Increase
(Decrease)
 
           2016                  2015             

Service charges on deposit accounts

   $ 49       $ 16       $ 33        206.3

Other service charges and fees

     633         618         15        2.4

Net gains on sale of loans

     1,608         1,647         (39 )     (2.4 %)

Wealth management

     368         286         82        28.7

Loan servicing fees, net

     42         43         (1 )     (2.3 %)

Gain on sale of investment securities, net

     310         415         (105 )     (25.3 %)

Net gain on sale of foreclosed assets

     3         6         (3 )     (50.0 %)

Other

     72         184         (112 )     (60.9 %)
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 3,085       $ 3,215       $ (130 )     (4.0 %)
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Service charges on deposit accounts for the three months ending March 31, 2016 increased $33, or 206.3%, from the same period in 2015 due to changes made to the Company’s schedule of service charges and due to the reduction of the amount of service charges waived during the first quarter of 2016.

Wealth management income for the three months ending March 31, 2016 increased $82, or 28.7%, in comparison with the same period in 2015. The increase was primarily due to the growth in the client base and the assets under management in the wealth management division.

Net gain on sale of investment securities decreased $105, or 25.3%, when comparing the three months ending March 31, 2016 to same period in 2015. The decrease was primarily due to the gains on securities that were called during the first quarter of 2015, which added $182 to net gains on sale of investment securities.

Other non-interest income decreased by $112, or 60.9%, when comparing first quarter 2016 with first quarter 2015. The decrease is primarily attributed to the loss of $98 recorded on the sale of the Company’s real estate in downtown Murfreesboro, Tennessee during first quarter 2016. That compares with a gain of the sale of three of the Company’s branch locations in Rutherford County, Tennessee in 2015, which resulted in a gain of $15 being recorded in first quarter 2015.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2016 and 2015 was $11,831 and $9,621, respectively, an increase of $2,210, or 23.0%. This increase was the result of the following components listed in the table below (in thousands):

 

    

Three Months Ended

March 31,

     $
Increase
(Decrease)
    %
Increase
(Decrease)
 
           2016                  2015             

Salaries and employee benefits

   $ 6,517       $ 5,681       $ 836        14.7

Occupancy and equipment

     1,807         1,579         228        14.4

FDIC assessment expense

     413         214         199        93.0

Marketing

     217         220         (3 )     (1.4 %) 

Professional fees

     1,094         359         735        204.7

Amortization of core deposit intangible

     149         172         (23 )     (13.4 %) 

Other

     1,634         1,396         238        17.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 11,831       $ 9,621       $ 2,210        23.0
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in non-interest expense noted in the table above is indicative of the Company’s overall growth. The Company’s biggest variances for the three months ending March 31, 2016, in comparison with the same period of 2015, were in salaries, occupancy, FDIC assessment expense, professional fees and other non-interest expense.

Salaries and employee benefits increased $836, or 14.7%, when comparing the three months ended March 31, 2016 with the same period in 2015. The increase is primarily due to the Company’s staffing growth from 210 full-time equivalent employees as of March 31, 2015, to 236 as of March 31, 2016. The Company added several lending professionals, including a healthcare lending team that joined the Company in the second quarter of 2015, as well as additional credit administration and operational staff needed to handle the Company’s growth. The Company also experienced growth in incentive expenses related to the Company’s financial performance.

Occupancy and equipment expense increased $228, or 14.4%, when comparing the three months ended March 31, 2016 with the same period in 2015. This variance is attributable to increases in building rent expense ($129), software maintenance fees ($68), and leasehold improvement depreciation ($24). During the first quarter of 2016, the Company opened two new leased facilities – a new branch location in Nolensville, Tennessee and an expansion of its headquarters in downtown Franklin, Tennessee, the latter of which is leased from a related party of the Company.

The Company’s FDIC assessment expense increased $199, or 93.0%, when comparing the three months ended March 31, 2016 with the same period in 2015. The increase is primarily due to the year-over-year growth of the Company, on which FDIC assessments are calculated.

The $735, or 204.7%, increase in professional fees is primarily attributable to increases in other professional fees ($261), merger-related expenses ($151), legal fees ($121) and accounting/audit fees ($116). The increase in other professional fees is related to the design and implementation of subsidiaries (Franklin Synergy Risk Management, Inc., Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc.) and a consulting engagement related to the Company’s core systems and related processes.

 

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For the three months ended March 31, 2016, other non-interest expenses increased $238, or 17.0%, from the same period during 2015. The rise in other non-interest expense is attributed to increases in the following expense types: insurance expense ($90); loan-related expenses ($58); director-related expenses ($46); and franchise taxes ($41).

Income Tax Expense

The Company recognized an income tax expense for the three months ended March 31, 2016 and 2015, of $3,161 and $1,994, respectively. The Company’s year-to-date income tax expense for the period ended March 31, 2016 reflects an effective income tax rate of 33.6%, compared to 38.9% for the same period in 2015. The decrease in the effective tax rate for the three months ended March 31, 2016, primarily resulted from the Company’s investments in tax-exempt municipal securities and from the establishment and funding of a real estate investment trust subsidiary of Franklin Synergy Bank in the first quarter of 2016.

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2016 AND DECEMBER 31, 2015

Overview

The Company’s total assets increased by $132,302, or 6.1%, from December 31, 2015 to March 31, 2016. 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. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.

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 March 31, 2016 and December 31, 2015 were $1,421,943 and $1,303,826, respectively, an increase of $118,117, or 9.1%. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy.

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

 

     March 31, 2016     December 31, 2015  
Types of Loans    Amount      % of Total
Loans
    Amount     % of Total
Loans
 

Total loans, excluding PCI loans

         

Real estate:

         

Construction and land development

   $ 413,279         29.0 %   $ 372,767        28.5 %

Commercial

     408,263         28.7 %     364,223        27.9 %

Residential

     283,793         19.9 %     274,934        21.1 %

Commercial and industrial

     308,622         21.7 %     283,888        21.7 %

Consumer and other

     6,453         0.5 %     6,577        0.5 %
  

 

 

    

 

 

   

 

 

   

 

 

 

Total loans—gross, excluding PCI loans

     1,420,410         99.8 %     1,302,389        99.7 %
  

 

 

    

 

 

   

 

 

   

 

 

 

Total PCI loans

     3,129         0.2     3,913        0.3
  

 

 

    

 

 

   

 

 

   

 

 

 

Total gross loans

     1,423,539         100.0 %     1,306,302        100.0 %
     

 

 

     

 

 

 

Less: deferred loan fees, net

     (1,596 )        (2,476 )  

Allowance for loan losses

     (12,676 )        (11,587 )  
  

 

 

      

 

 

   

Total loans, net allowance for loan losses

   $ 1,409,267         $ 1,292,239     
  

 

 

      

 

 

   

As presented in the above table, gross loans increased 9.0% during the first three months of 2016, primarily due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of 9.2% with the majority of the growth occurring in the construction and land development (10.9%) and commercial real estate (12.1%) segments. The Company also experienced growth of 8.7% in the commercial and industrial segment during the first three months of 2016.

Real estate loans comprised 77.6% of the loan portfolio at March 31, 2016. The largest portion of the real estate segments as of March 31, 2016, was construction and land development loans, which totaled 37.4% of real estate loans. Construction and land development loans totaled $413,279 at March 31, 2016, and comprised 29.0% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.

 

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Commercial real estate loans totaled $408,263 at March 31, 2016, and comprised 36.9% of real estate loans and 28.7% 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, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled $283,793 comprised 25.7% of real estate loans and 19.9% of total loans at March 31, 2016.

Commercial and industrial loans totaled $308,622 at March 31, 2016 and grew 8.7% during the first three months of 2016. Loans in this classification comprised 21.7% of total loans at March 31, 2016. The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and healthcare loans.

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 March 31, 2016, excluding unearned net fees and costs.

Loan Maturity Schedule

 

     March 31, 2016  
     One year
or less
     Over one
year to five
years
     Over five
years
     Total  

Real estate:

           

Construction and land development

   $ 234,244       $ 114,275       $ 64,224       $ 412,743   

Commercial

     22,962         135,759         250,745         409,466   

Residential

     24,339         96,950         163,072         284,361   

Commercial and industrial

     51,664         191,813         67,039         310,516   

Consumer and other

     2,097         3,485         871         6,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 335,306       $ 542,282       $ 545,951       $ 1,423,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed interest rate

   $ 205,948       $ 292,250       $ 212,533       $ 710,731   

Variable interest rate

     129,358         250,032         333,418         712,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 335,306       $ 542,282       $ 545,951       $ 1,423,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Allowance for Loan Losses

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

 

    past loan experience;

 

    the nature and volume of the portfolio;

 

    risks known about specific borrowers;

 

    underlying estimated values of collateral securing loans;

 

    current and anticipated economic conditions; and

 

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

 

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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 data 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 March 31, 2016 and December 31, 2015.

 

     March 31, 2016     December 31, 2015     Increase (Decrease)  
     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
     ALLL
Balance
     %     Loan
Balance
    ALLL
Balance
       

Non impaired loans

   $ 1,324,810       $ 12,648         0.95 %   $ 1,198,891       $ 11,465         0.96 %   $ 125,919      $ 1,183        -1 bps   

Non-PCI acquired loans (Note 1)

     93,068         28         0.03 %     99,328         —           —   %     (6,260 )     28        3 bps   

Impaired loans

     2,532         —           —   %     4,170         113         2.71 %     (1,638     (113     -271 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Non-PCI loans

     1,420,410         12,676         0.89 %     1,302,389         11,578         0.89 %     118,021        1,098        —     

PCI loans

     3,129         —           —   %     3,913         9         0.23 %     (784 )     (9     -23 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 1,423,539       $ 12,676         0.89 %   $ 1,306,302       $ 11,587         0.89 %   $ 117,237      $ 1,089        —     

 

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. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of March 31, 2016, $28 in allowance for loan loss was recorded at March 31, 2016 related to the loans acquired from MidSouth.

At March 31, 2016, the allowance for loan losses was $12,676, compared to $11,587 at December 31, 2015. The allowance for loan losses as a percentage of total loans was 0.89% at March 31, 2016 and December 31, 2015, respectively. Loan growth during the first quarter of 2016 is the primary reason for the increase in the allowance amount.

 

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Table of Contents

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

 

     Three Months Ended
March 31, 2016
    Three Months Ended
March 31, 2015
 

Beginning balance

   $ 11,587      $ 6,680   

Loans charged-off:

    

Construction & land development

     —          —     

Commercial real estate

     —          —     

Residential real estate

     —          —     

Commercial & industrial

     65        —     

Consumer & other

     11        —     
  

 

 

   

 

 

 

Total loans charged-off

     76        —     

Recoveries on loans previously charged-off:

    

Construction & land development

     —          —     

Commercial real estate

     —          —     

Residential real estate

     28        3   

Commercial & industrial

     —          —     

Consumer & other

     1        —     
  

 

 

   

 

 

 

Total loan recoveries

     29        3   

Net recoveries (charge-offs)

     (47     3   

Provision for loan losses charged to expense

     1,136        625   
  

 

 

   

 

 

 

Total allowance at end of period

   $ 12,676      $ 7,308   
  

 

 

   

 

 

 

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

   $ 1,423,539      $ 875,936   
  

 

 

   

 

 

 

Average gross loans (1)

   $ 1,355,965      $ 829,149   
  

 

 

   

 

 

 

Allowance to total loans

     0.89 %     0.83 %
  

 

 

   

 

 

 

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

     0.01 %     0.00 %
  

 

 

   

 

 

 

 

(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.

 

     March 31, 2016     December 31, 2015  
     Amount      % of
Allowance
to Total
    Amount      % of
Allowance
to Total
 

Real estate loans:

          

Construction and land development

   $ 3,378         26.6 %   $ 3,186         27.5 %

Commercial

     3,564         28.1 %     3,146         27.1 %

Residential

     1,800         14.2 %     1,861         16.1 %
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate

     8,742         68.9 %     8,193         70.7 %
  

 

 

    

 

 

   

 

 

    

 

 

 

Commercial and industrial

     3,875         30.6 %     3,358         29.0 %

Consumer and other

     59         0.5 %     36         0.3 %
  

 

 

    

 

 

   

 

 

    

 

 

 
     12,676         100.0     11,587         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Nonperforming Assets

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

 

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The primary component of non-performing loans is non-accrual loans, which as of March 31, 2016 totaled $876. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection. There were outstanding loans totaling $852 that were past due 90 days or more and still accruing interest at March 31, 2016.

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

 

         March 31,    
2016
    December 31,
2015
 

Non-accrual loans

   $ 876      $ 908   

Past due loans 90 days or more and still accruing interest

     852        2,378   
  

 

 

   

 

 

 

Total non-performing loans

     1,728        3,286   

Foreclosed real estate (“OREO”)

     200        200   
  

 

 

   

 

 

 

Total non-performing assets

     1,928        3,486   

Total non-performing loans as a percentage of total loans

     0.1 %     0.3 %

Total non-performing assets as a percentage of total assets

     0.1 %     0.2 %

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

     734 %     353 %

As of March 31, 2016, there were two loans on non-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

 

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

Construction & land development

   $ —           —   %     —     

Commercial real estate

     835         95.3 %     1   

Residential real estate

     41         4.7 %     1   

Commercial & industrial

     —           —   %     —     

Consumer

     —           —   %     —     
  

 

 

    

 

 

   

 

 

 

Total non-accrual loans

   $ 876         100.0 %     2   
  

 

 

    

 

 

   

 

 

 

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were $589,274 at March 31, 2016, compared to $575,838 at December 31, 2015, an increase of $13,436 or 2.3%. The increase in available-for-sale securities was primarily attributed to the securities purchased during the first quarter of 2016.

The held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $157,507 at March 31, 2016, compared to $158,200 at December 31, 2015, a decrease of $693, or 0.4%. The decrease is attributable to securities that matured during the first quarter of 2016.

The combined portfolios represented 32.5% and 33.9% of total assets at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, the Company had no securities that were classified as having Other Than Temporary Impairment.

The Company also had other investments of $8,024 and $7,998 at March 31, 2016 and December 31, 2015, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

 

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Bank Premises and Equipment

Bank premises and equipment totaled $8,076 at March 31, 2016 compared to $7,640 at December 31, 2015, an increase of $436, or 5.7%. This increase was the result of adding leasehold improvements and furniture and equipment as needed in the normal course of business and related to the opening of the new Nolensville branch.

Assets Held for Sale

At March 31, 2016, the balance in assets held for sale was zero, compared with the balance of $1,640 at December 31, 2015. The Company’s College Street branch real estate in Murfreesboro, Tennessee was reclassified at December 31, 2015 as held for sale, since the property had been identified to be sold, and the sale of the property was probable at that time. The sale of the property settled on March 29, 2016, and a loss of $97 was realized as a result of the sale and was recorded in other noninterest income.

Deposits

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

At March 31, 2016, total deposits were $1,953,573, an increase of $139,534, or 7.7%, compared to $1,814,039 at December 31, 2015. The growth in deposits is attributable to growth in public funds deposits, money market deposits, noninterest-bearing deposits, and interest checking deposits.

Included in the Company’s funding strategy are brokered deposits. Total brokered deposits increased from $478,257 at December 31, 2015 to $573,510 at March 31, 2016, primarily due to fluctuation in certain brokered deposits that are interest-bearing checking accounts that fluctuate daily.

Public funds deposits in the form of county deposits are a part of the Company’s funding strategy and are cyclical in nature, with the highest period of growth being during the first quarter of each calendar year. Public funds grew $50,191, or 15.3%, from $327,766 at December 31, 2015 to $377,957 at March 31, 2016.

Time deposits excluding brokered deposits as of March 31, 2016, amounted to $472,752, compared to $470,284 as of December 31, 2015, an increase of $2,468, or 0.5%. Noninterest-bearing checking deposits grew $24,419, or 13.8%, and non-public funds interest checking accounts grew $1,471, or 1.3%, respectively when comparing deposit balances from March 31, 2016 with balances at December 31, 2015.

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

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

 

     March 31, 2016  

Three months or less

   $ 198,397   

Three through six months

     50,976   

Six through twelve months

     87,558   

Over twelve months

     148,640   
  

 

 

 

Total

   $ 485,571   
  

 

 

 

Federal Funds Purchased and Repurchase Agreements

As of March 31, 2016, the Company had $13,500 federal funds purchased from correspondent banks compared to $39,825 outstanding as of December 31, 2015. Securities sold under agreements to repurchase had an outstanding balance of $36,093 as of March 31, 2016, compared to $61,261 as of December 31, 2015. Securities sold under agreements to repurchase are financing arrangements that mature daily or within a short period of time. At maturity, the securities underlying the agreements are returned to the Company.

 

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Federal Home Loan Bank Advances

The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages. At March 31, 2016 and at December 31, 2015, advances totaled $57,000.

At March 31, 2016, the scheduled maturities of these and advances and interest rates were as follows:

 

Scheduled Maturities

       Amount          Weighted
Average Rates
 

2016

     40,000         0.46 %

2017

     10,000         1.27 %

2018

     7,000         1.61 %
  

 

 

    

 

 

 

Total

   $ 57,000         0.74 %
  

 

 

    

 

 

 

Subordinated Notes

On March 31, 2016, the Company issued $40,000 in aggregate principal amount of fixed-to-floating rate Subordinated Notes due 2026 (the “Notes”) in a public offering to accredited institutional investors. The Notes will mature on March 30, 2026 unless redeemed prior to that date. The Company may redeem the Notes in whole or in part on or after March 30, 2021, and in whole, but not in part, at any time within 90 days following a “Regulatory Capital Treatment Event”, as defined in the Supplemental Indenture governing the Notes. The redemption price for any redemption will be 100% of the principal amount of the Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the Notes.

The Notes initially bear interest at 6.875% per year, payable semi-annually in arrears on March 30 and September 30 of each year, beginning on September 30, 2016, and going through March 29, 2021. Thereafter, the notes will bear interest at an annual floating rate equal to three-month LIBOR as determined for the applicable quarterly period, plus a spread of 5.636%, with interest payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, beginning on June 30, 2021.

The sale of the Notes yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing, which had been used to redeem the shares of Series A Preferred Stock issued to Treasury in connection with the Company’s participation in the Small Business Lending Fund, and to fund future growth of the Bank.

The estimated issuance costs related to the Notes amounted to $1,157 and will be amortized as interest expense over the ten-year term of the Notes.

Liquidity

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

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

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered deposits. As of March 31, 2016, $589,274 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another $157,507 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $655,140 of the total $746,781 investment securities portfolio on hand at March 31, 2016, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.

Shareholders’ Equity

As of March 31, 2016, the Company’s shareholders’ equity was $191,910, as compared with $188,816 as of December 31, 2015. The increase in shareholders’ equity was due to the Company’s earnings of $6,233 in the first quarter of 2016 and the increase in accumulated other comprehensive income of $6,533 during the first quarter, offset by a $10,000 reduction in preferred stock due to the Company’s redemption of the Series A Preferred Stock related to the Small Business Lending Fund on March 25, 2016.

 

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

 

Gross proceeds

   $   55,440   

Less: stock offering costs

     (4,436 )
  

 

 

 

Net proceeds from issuance of common stock

   $ 51,004   
  

 

 

 

The details of the offering are available in the Prospectus that the Company filed with the SEC on March 27, 2015.

Effects of Inflation and Changing Prices

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

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At March 31, 2016, the Company had unfunded loan commitments outstanding of $55,552 unused lines of credit of $378,585, and outstanding standby letters of credit of $16,666.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial data included in our selected historical consolidated financial information are not measures of financial performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance:

 

    “Common shareholders’ equity” is defined as total shareholders’ equity at end of period less the liquidation preference value of the preferred stock;

 

    “Tangible common shareholders’ equity” is common shareholders’ equity less goodwill and other intangible assets;

 

    “Total tangible assets” is defined as total assets less goodwill and other intangible assets;

 

    “Other intangible assets” is defined as the sum of core deposit intangible and SBA servicing rights;

 

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

 

    “Tangible common shareholders’ equity ratio” is defined as the ratio of tangible common shareholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets;

 

    “Return on Average Tangible Common Equity” is defined as net income available to common shareholders divided by average tangible common shareholders’ equity;

 

    “Efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income;

 

    “Adjusted yield on loans” is our yield on loans after excluding loan accretion from our acquired loan portfolio. Our management uses this metric to better assess the impact of purchase accounting on our yield on loans, as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet;

 

    “Net interest margin” is defined as annualized net interest income divided by average interest-earning assets for the period;

 

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    “Adjusted net interest margin” is net interest margin after excluding loan accretion from the acquired loan portfolio and premiums for acquired time deposits. Our management uses this metric to better assess the impact of purchase accounting on net interest margin, as the effect of loan discount accretion and accretion of net discounts and premiums related to deposits is expected to decrease as the acquired loans and deposits mature or roll off of our balance sheet.

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

 

     As of or for the Three Months Ended  
(Amounts in thousands, except share/per share data and percentages)    Mar 31,
2016
    Dec 31,
2015
    Sept 30,
2015
    Jun 30,
2015
    Mar 31,
2015
 

Total shareholders’ equity

   $ 191,910      $ 188,816      $ 187,610      $ 177,081      $ 178,541   

Less: Preferred stock

     —          10,000        10,000        10,000        10,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total common shareholders’ equity

     191,910        178,816        177,610        167,081        168,541   

Less: Goodwill and other intangibles

     11,070        11,231        11,373        11,538        11,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common shareholders’ equity

   $ 180,840      $ 167,585      $ 166,237      $ 155,543      $ 156,832   

Common shares outstanding

     10,586,592        10,571,377        10,524,630        10,502,671        10,465,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible book value per share

   $ 17.08      $ 15.85      $ 15.80      $ 14.81      $ 14.99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 6,210      $ 4,639      $ 5,125      $ 3,109      $ 3,107   

Average tangible common equity

     173,987        167,151        160,071        157,959        103,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible common equity

     14.36     11.01     12.70     7.89     12.18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio:

          

Net interest income

   $ 19,276      $ 17,195      $ 16,736      $ 13,327      $ 12,157   

Noninterest income

     3,085        2,992        3,798        2,851        3,215