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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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  ☒    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  ☒    No  ☐

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

 

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

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

The number of shares outstanding of the registrant’s common stock, no par value per share, as of October 31, 2016, was 10,758,458.

 

 

 


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 (Loss)

     4   

Consolidated Statements 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

     27   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     50   

Item 4. Controls and Procedures

     51   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     51   

Item 1A. Risk Factors

     51   

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

     52   

Item 3. Defaults Upon Senior Securities

     53   

Item 4. Mine Safety Disclosures

     53   

Item 5. Other Information

     53   

Item 6. Exhibits

     54   

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)

 

     September 30,
2016
    December 31,
2015
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 55,749      $ 52,394   

Certificates of deposit at other financial institutions

     1,055        250   

Securities available for sale

     670,756        575,838   

Securities held to maturity (fair value 2016—$243,946 and 2015—$161,969)

     235,050        158,200   

Loans held for sale, at fair value

     26,819        14,079   

Loans

     1,654,058        1,303,826   

Allowance for loan losses

     (15,590     (11,587
  

 

 

   

 

 

 

Net loans

     1,638,468        1,292,239   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     11,829        7,998   

Premises and equipment, net

     8,796        7,640   

Accrued interest receivable

     7,871        7,299   

Bank owned life insurance

     23,105        22,619   

Deferred tax asset

     5,590        9,430   

Assets held for sale

     —         1,640   

Foreclosed assets

     —         200   

Servicing rights, net

     3,566        3,455   

Goodwill

     9,124        9,124   

Core deposit intangible, net

     1,612        2,043   

Other assets

     3,805        3,344   
  

 

 

   

 

 

 

Total assets

   $ 2,703,195      $ 2,167,792   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 232,118      $ 176,742   

Interest bearing

     1,985,836        1,637,297   
  

 

 

   

 

 

 

Total deposits

     2,217,954        1,814,039   

Federal funds purchased and repurchase agreements

     45,843        101,086   

Federal Home Loan Bank advances

     162,000        57,000   

Subordinated notes, net of issuance costs

     58,292        —    

Accrued interest payable

     1,399        644   

Other liabilities

     8,063        6,207   
  

 

 

   

 

 

 

Total liabilities

     2,493,551        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 September 30, 2016 and 10,000 shares issued and outstanding at December 31, 2015

     —         10,000   

Common stock, no par value; 20,000,000 shares authorized; 10,757,483 and 10,571,377 shares issued and outstanding at September 30, 2016 and December 31 2015, respectively

     150,852        147,784   

Retained earnings

     51,591        31,352   

Accumulated other comprehensive income (loss)

     7,201        (320
  

 

 

   

 

 

 

Total shareholders’ equity

     209,644        188,816   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 2,703,195      $ 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

September 30,

   

Nine Months Ended

September 30,

 
     2016     2015     2016     2015  

Interest income and dividends

        

Loans, including fees

   $ 20,192      $ 14,744      $ 56,864      $ 38,071   

Securities:

        

Taxable

     3,889        3,462        11,402        9,084   

Tax-exempt

     1,457        966        3,776        1,155   

Dividends on restricted equity securities

     133        100        354        250   

Federal funds sold and other

     53        29        175        80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     25,724        19,301        72,571        48,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     3,683        2,417        10,118        5,963   

Federal funds purchased and repurchase agreements

     69        69        237        232   

Federal Home Loan Bank advances

     215        79        511        225   

Subordinated notes and other borrowings

     1,082        —         1,820        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     5,049        2,565        12,686        6,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     20,675        16,736        59,885        42,220   

Provision for loan losses

     1,392        1,724        4,095        3,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     19,283        15,012        55,790        39,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     44        44        139        78   

Other service charges and fees

     845        679        2,245        1,987   

Net gains on sale of loans

     2,942        2,463        6,859        5,573   

Wealth management

     446        327        1,343        914   

Loan servicing fees, net

     (40     84        (2     187   

Gain on sale or call of securities

     430        5        1,535        529   

Net gain on sale of foreclosed assets

     30        3        36        30   

Other

     179        193        432        566   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     4,876        3,798        12,587        9,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     7,979        6,208        22,099        17,960   

Occupancy and equipment

     2,001        1,683        5,563        4,961   

FDIC assessment expense

     570        362        1,388        792   

Marketing

     206        277        611        695   

Professional fees

     935        516        3,006        1,382   

Amortization of core deposit intangible

     138        160        431        499   

Indirect expenses related to public offering

     —         —         —         314   

Other

     1,879        1,647        5,354        4,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     13,708        10,853        38,452        31,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     10,451        7,957        29,925        17,884   

Income tax expense

     3,421        2,807        9,663        6,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     7,030        5,150        20,262        11,416   

Dividends paid on Series A preferred stock

     —         (25     (23     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 7,030      $ 5,125      $ 20,239      $ 11,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.66      $ 0.49      $ 1.90      $ 1.17   

Diluted

     0.62        0.46        1.80        1.12   

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Nine Months Ended September 30, 2016 and 2015

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

(Unaudited)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2016     2015     2016     2015  

Net income

   $ 7,030      $ 5,150      $ 20,262      $ 11,416   

Other comprehensive income, net of tax:

        

Unrealized gains (losses) on securities:

        

Unrealized holding gain (loss) arising during the period

     (3,664     7,871        13,910        4,006   

Reclassification adjustment for gains included in net income

     (430     (5     (1,535     (529
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     (4,094     7,866        12,375        3,477   

Tax effect

     1,606        (3,090     (4,854     (1,401
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (2,488     4,776        7,521        2,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,542      $ 9,926      $ 27,783      $ 13,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2016 and 2015

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

(Unaudited)

 

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

Balance at December 31, 2014

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

Exercise of common stock options

     —         80,331        780        —         —         780   

Exercise of common stock warrants

     —         4,970        60        —         —         60   

Dividends paid on Series A preferred stock

     —         —         —         (75     —         (75

Issuance of restricted stock, net of forfeitures

     —         28,229        —         —         —         —    

Stock based compensation expense, net of restricted share forfeitures

     —         —         619        —         —         619   

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

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

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

     —         14,689        365        —         —         365   

Excess tax benefit from exercise of stock options

     —         —         147        —         —         147   

Net income

     —         —         —         11,416        —         11,416   

Other comprehensive income

     —         —         —         —       $ 2,076        2,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

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

Exercise of common stock options, net

     —         152,003        1,357            1,357   

Exercise of common stock warrants

     —         6,575        79            79   

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

     —         34,480        1,201        —         —         1,201   

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

     —         (6,952     (185     —         —         (185

Excess tax benefit from restricted stock vesting

     —         —         94        —         —         94   

Excess tax benefit from exercise of stock options

     —         —         522        —         —         522   

Net income

     —         —         —         20,262        —         20,262   

Other comprehensive income

     —         —         —         —         7,521        7,521   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ —         10,757,483      $ 150,852      $ 51,591      $ 7,201      $ 209,644   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

    

Nine Months Ended

September 30,

 
     2016     2015  

Cash flows from operating activities

    

Net income

   $ 20,262      $ 11,416   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     986        996   

Accretion of purchase accounting adjustments

     (488     (1,551

Net amortization of securities

     5,428        3,426   

Amortization of loan servicing right asset

     905        644   

Amortization of core deposit intangible

     431        499   

Amortization of debt issuance costs

     79        —    

Provision for loan losses

     4,095        3,154   

Deferred income tax benefit

     (1,015     (567

Origination of loans held for sale

     (260,598     (236,831

Proceeds from sale of loans held for sale

     253,701        245,194   

Net gain on sale of loans

     (6,859     (5,573

Gain on sale of available for sale securities

     (1,535     (380

Gain on call of held to maturity securities

     —         (149

Income from bank owned life insurance

     (486     (444

Net gain on foreclosed assets

     (36     (30

Loss on sale of assets held for sale

     98        —    

Stock-based compensation

     1,201        619   

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

     404        356   

Deferred gain on sale of loans

     (46     (27

Net change in:

    

Accrued interest receivable and other assets

     (1,033     (3,986

Accrued interest payable and other liabilities

     2,261        2,190   
  

 

 

   

 

 

 

Net cash from operating activities

     17,755        18,956   

Cash flows from investing activities

    

Securities available for sale :

    

Sales

     74,203        52,064   

Purchases

     (223,432     (467,067

Maturities, prepayments and calls

     64,502        187,222   

Securities held to maturity :

    

Purchases

     (92,646     (88,550

Maturities, prepayments and calls

     14,088        9,394   

Net change in loans

     (349,944     (335,238

Purchase of bank owned life insurance

     —         (10,344

Proceeds from sale of assets held for sale

     1,542        4,080   

Purchase of restricted equity securities

     (3,831     (2,342

Proceeds from sale of foreclosed assets

     336        531   

Purchases of premises and equipment, net

     (2,142     (692

Increase in certificates of deposits at other financial institutions

     (805     —    
  

 

 

   

 

 

 

Net cash from investing activities

     (518,129     (650,942

Cash flows from financing activities

    

Increase in deposits

     403,915        542,422   

Decrease in federal funds purchased and repurchase agreements

     (55,243     (1,460

Proceeds from Federal Home Loan Bank advances

     305,000        157,000   

Repayment of Federal Home Loan Bank advances

     (200,000     (119,000

Proceeds from other borrowings

     10,000        —    

Repayment of other borrowings

     (10,000     —    

Proceeds from issuance of subordinated notes, net of issuance costs

     58,213        —    

Proceeds from exercise of common stock warrants

     79        60   

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

     1,879        927   

Excess tax benefit from restricted stock vesting

     94        —    

Proceeds from issuance of common stock, net of offering costs

     —         50,423   

Divestment of common stock issued to 401(k) plan

     (185     —    

Redemption of Series A preferred stock

     (10,000     —    

Dividends paid on preferred stock

     (23     (75
  

 

 

   

 

 

 

Net cash from financing activities

     503,729        630,297   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     3,355        (1,689

Cash and cash equivalents at beginning of period

     52,394        49,347   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 55,749      $ 47,658   
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 11,931      $ 6,254   

Income taxes paid

     9,650        6,339   

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 (“Franklin Synergy” or 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 the Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at September 30, 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
 

September 30, 2016

           

U.S. government sponsored entities and agencies

   $ 3,000       $ 138       $ —        $ 3,138   

Mortgage-backed securities: residential

     546,805         10,346         (354      556,797   

Mortgage-backed securities: commercial

     19,526         233         —          19,759   

State and political subdivisions

     89,576         1,820         (334      91,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 658,907       $ 12,537       $ (688    $ 670,756   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 securities held to maturity portfolio at September 30, 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
 

September 30, 2016

           

U.S. government sponsored entities and agencies

   $ 203       $ 7       $ —        $ 210   

Mortgage backed securities: residential

     112,071         1,014         (124      112,961   

State and political subdivisions

     122,776         7,999         —          130,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 235,050       $ 9,020       $ (124    $ 243,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

The proceeds from sales and calls of securities available for sale and the associated gains and losses were as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2016      2015      2016      2015  

Proceeds

   $ 11,939       $ 19,776       $ 74,203       $ 54,064   

Gross gains

     430       $ 95         1,920         485   

Gross losses

     —          (90      (385      (105

The proceeds from calls of securities held to maturity that were called at a price in excess of par value and the associated gains were as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2016      2015      2016      2015  

Proceeds

   $ —          —        $ —        $ 2,300   

Gross gains

     —          —          —          149   

Gross losses

     —          —          —          —    

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

 

     September 30, 2016  
     Amortized
Cost
     Fair
Value
 

Available for sale

     

Over one year through five years

   $ 3,000       $ 3,138   

Over ten years

     89,576         91,062   

Mortgage-backed securities: residential

     546,805         556,797   

Mortgage-backed securities: commercial

     19,526         19,759   
  

 

 

    

 

 

 

Total

   $ 658,907       $ 670,756   
  

 

 

    

 

 

 

Held to maturity

     

Over one year through five years

   $ 706       $ 750   

Over five years through ten years

     5,073         5,351   

Over ten years

     117,200         124,884   

Mortgage-backed securities: residential

     112,071         112,961   
  

 

 

    

 

 

 

Total

   $ 235,050       $ 243,946   
  

 

 

    

 

 

 

Securities pledged at September 30, 2016 and December 31, 2015 had a carrying amount of $742,828 and $595,524, respectively, and were pledged to secure public deposits and repurchase agreements.

 

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Table of Contents

At September 30, 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.

The following table summarizes the securities with unrealized and unrecognized losses at September 30, 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
 

September 30, 2016

               

Available for sale

               

Mortgage-backed securities: residential

   $ 36,585       $ (269   $ 13,659       $ (85   $ 50,244       $ (354

State and political subdivisions

     43,314         (334     —          —         43,314         (334
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 79,899       $ (603   $ 13,659       $ (85   $ 93,558       $ (688
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     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

   $ 19,200       $ (54   $ 3,826       $ (70   $ 23,026       $ (124
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 19,200       $ (54   $ 3,826       $ (70   $ 23,026       $ (124
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     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 and unrecognized 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 September 30, 2016 and December 31, 2015 were as follows:

 

     September 30,
2016
     December 31,
2015
 

Loans that are not PCI loans

     

Construction and land development

   $ 474,255       $ 372,767   

Commercial real estate:

     

Nonfarm, nonresidential

     403,382         353,268   

Other

     26,866         10,955   

Residential real estate:

     

Closed-end 1-4 family

     228,672         162,933   

Other

     142,374         112,001   

Commercial and industrial

     372,784         283,888   

Consumer and other

     3,458         6,577   
  

 

 

    

 

 

 

Loans before net deferred loan fees

     1,651,791         1,302,389   

Deferred loan fees, net

     (820      (2,476
  

 

 

    

 

 

 

Total loans that are not PCI loans

     1,650,971         1,299,913   
  

 

 

    

 

 

 

PCI loans

     

Construction and land development

   $ 81       $ 78   

Commercial real estate:

     

Nonfarm, nonresidential

     576         1,460   

Other

     —          —    

Residential real estate:

     

Closed-end 1-4 family

     497         562   

Other

     —          1   

Commercial and industrial

     1,933         1,812   

Consumer and other

     —          —    
  

 

 

    

 

 

 

Total PCI loans

     3,087         3,913   
  

 

 

    

 

 

 

Allowance for loan losses

     (15,590      (11,587
  

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 1,638,468       $ 1,292,239   
  

 

 

    

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2016 and 2015:

 

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

Three Months Ended September 30, 2016

             

Allowance for loan losses:

             

Beginning balance

   $ 3,624      $ 3,865       $ 2,060      $ 4,655      $ 49      $ 14,253   

Provision for loan losses

     427        43         451        455        16        1,392   

Loans charged-off

     (11     —          (40     —         (19     (70

Recoveries

     —         —          13        —         2        15   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 4,040      $ 3,908       $ 2,484      $ 5,110      $ 48      $ 15,590   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2015

             

Allowance for loan losses:

             

Beginning balance

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

Provision for loan losses

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

Loans charged-off

     —         —          (15     (15     (33     (63

Recoveries

     —         —          6        —         61        67   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2016 and 2015:

 

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

Nine Months Ended September 30, 2016

             

Allowance for loan losses:

             

Beginning balance

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

Provision for loan losses

     865        762         609        1,817        42        4,095   

Loans charged-off

     (11     —          (39     (65     (35     (150

Recoveries

     —         —          53        —         5        58   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 4,040      $ 3,908       $ 2,484      $ 5,110      $ 48      $ 15,590   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2015

             

Allowance for loan losses:

             

Beginning balance

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

Provision for loan losses

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

Loans charged-off

     —         —          (32     (15     (121     (168

Recoveries

     —         —          14        —         64        78   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2016 and December 31, 2015. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and deferred loan fees, net due to immateriality.

 

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

September 30, 2016

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —        $ —        $ —        $ 115       $ —        $ 115   

Collectively evaluated for impairment

     4,040         3,908         2,484         4,995         48         15,475   

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,040       $ 3,908       $ 2,484       $ 5,110       $ 48       $ 15,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ —        $ 835       $ 1,070       $ 509       $ —        $ 2,414   

Collectively evaluated for impairment

     474,255         429,413         369,976         372,275         3,458         1,649,377   

Purchased credit-impaired loans

     81         576         497         1,933         —          3,087   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 474,336       $ 430,824       $ 371,543       $ 374,717       $ 3,458       $ 1,654,878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

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

 

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

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 September 30, 2016 include certain acquired loans. At September 30, 2016, these non-PCI loans had a carrying value of $82,669, comprised of contractually unpaid principal totaling $84,848 and discounts totaling $2,179. Management evaluated these loans for credit deterioration since acquisition and determined that $32 in allowance for loan losses was necessary at September 30, 2016.

The following table presents information related to impaired loans by class of loans as of September 30, 2016 and December 31, 2015:

 

     Unpaid
Principal
Balance*
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

September 30, 2016

        

With no allowance recorded:

        

Commercial real estate:

        

Nonfarm, nonresidential

   $ 2,421       $ 835       $ —    

Residential real estate:

        

Closed-end 1-4 family

     238         238         —    

Other

     832         832         —    

Commercial and industrial

     19         19         —    

Consumer and other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,510         1,924         —    

With an allowance recorded:

        

Commercial and industrial

     490         490         115   
  

 

 

    

 

 

    

 

 

 

Subtotal

     490         490         115   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,000       $ 2,414       $ 115   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

* Principal balance before partial charge-off.

        

 

12


Table of Contents

The following table presents the average recorded investment of impaired loans by class of loans for the three months ended September 30, 2016 and 2015:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 

Average Recorded Investment

   2016      2015      2016      2015  

With no allowance recorded:

           

Construction and land development

   $ —        $ —        $ 340       $ —    

Commercial real estate:

           

Nonfarm, nonresidential

     1,427         918         1,307         873   

Residential real estate:

           

Closed-end 1-4 family

     451         33         533         188   

Other

     837         712         768         317   

Commercial and industrial

     46         23         110         77   

Consumer and other

     —          25         10         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,761         1,711         3,068         1,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Commercial and industrial

   $ 490       $ 90       $ 247       $ 50   

Residential real estate:

           

Closed-end 1-4 family

     70         —          23         —    

Consumer and other

     —          16         —          10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     560         106         270         60   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,321       $ 1,817       $ 3,338       $ 1,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended September 30, 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 September 30, 2016 and December 31, 2015:

 

     Nonaccrual      Loans Past Due
Over 90 Days
 

September 30, 2016

     

Construction and land development

   $ —        $ 149   

Commercial real estate:

     

Nonfarm, nonresidential

     835         —    

Residential real estate:

     

Other

     123         —    

Commercial and industrial

     490         —    
  

 

 

    

 

 

 

Total

   $ 1,448       $ 149   
  

 

 

    

 

 

 

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.

 

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Table of Contents

The following table presents the aging of the recorded investment in past due loans as of September 30, 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  

September 30, 2016

                    

Construction and land development

   $ 1,950       $ —        $ 149       $ 2,099       $ 472,156       $ 81       $ 474,336   

Commercial real estate:

                    

Nonfarm, nonresidential

     79         —          835         914         402,468         576         403,958   

Other

     —          —          —          —          26,866         —          26,866   

Residential real estate:

                    

Closed-end 1-4 family

     11         —          —          11         228,661         497         229,169   

Other

     714         —          123         837         141,537         —          142,374   

Commercial and industrial

     521         875         490         1,886         370,898         1,933         374,717   

Consumer and other

     —          —          —          —          3,458         —          3,458   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,275       $ 875       $ 1,597       $ 5,747       $ 1,646,044       $ 3,087       $ 1,654,878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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.

 

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Table of Contents

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table includes PCI loans, which are included in the “Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of September 30, 2016 and December 31, 2015:

 

     Pass      Special
Mention
     Substandard      Total  

September 30, 2016

           

Construction and land development

   $ 472,980       $ —        $ 1,356       $ 474,336   

Commercial real estate:

           

Nonfarm, nonresidential

     395,852         1,791         6,315         403,958   

Other

     26,866         —          —          26,866   

Residential real estate:

           

Closed-end 1-4 family

     228,144         —          1,025         229,169   

Other

     141,305         —          1,069         142,374   

Commercial and industrial

     368,860         —          5,857         374,717   

Consumer and other

     3,458         —          —          3,458   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,637,465       $ 1,791       $ 15,622       $ 1,654,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 is recognized as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of September 30, 2016 and December 31, 2015.

 

     Sept 30, 2016      Dec 31, 2015  

Contractually required principal and interest

   $ 4,276       $ 5,618   

Non-accretable difference

     (321      (352
  

 

 

    

 

 

 

Cash flows expected to be collected

     3,955         5,266   

Accretable yield

     (868      (1,353
  

 

 

    

 

 

 

Carrying value of acquired loans

     3,087         3,913   

Allowance for loan losses

            (9
  

 

 

    

 

 

 

Carrying value less allowance for loan losses

   $ 3,087       $ 3,904   
  

 

 

    

 

 

 

 

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Table of Contents

Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the quarter ended September 30, 2016. These adjustments resulted in changes in expected cash flows, accretable yield, and the non-accretable difference for the three and nine months ended September 30, 2016.

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 ended September 30, 2016 and 2015.

 

Activity during the three month period ended September 30, 2016

   Jun 30, 2016     Effect of
Acquisitions
     Income
Accretion
     All other
Adjustments
    Sep 30, 2016  

Contractually required principal and interest

   $ 4,462      $ —        $ —        $ (186   $ 4,276   

Non-accretable difference

     (319     —          —          (2     (321
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     4,143        —          —          (188     3,955   

Accretable yield

     (1,067     —          115         84        (868
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

   $ 3,076      $
 

  
 
 
   $ 115       $ (104   $ 3,087   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

Activity during the three month period ended September 30, 2015

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

Contractually required principal and interest

   $ 6,000      $
 

  
 
 
   $ —        $ (128   $ 5,872   

Non-accretable difference

     (973     —          839         (173     (307
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,027        —          839         (301     5,565   

Accretable yield

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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 nine-month periods ended September 30, 2016 and 2015.

 

Activity during the nine month period ended September 30, 2016

   Dec 31, 2015     Effect of
Acquisitions
     Income
Accretion
     All other
Adjustments
    Sep 30, 2016  

Contractually required principal and interest

   $ 5,618      $ —        $
 

  
 
 
   $ (1,342   $ 4,276   

Non-accretable difference

     (352     —          —          31        (321
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,266        —          —          (1,311     3,955   

Accretable yield

     (1,353     —          444         41        (868
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

   $ 3,913      $ —        $ 444       $ (1,270   $ 3,087   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

Activity during the nine month period ended September 30, 2015

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

Contractually required principal and interest

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

Non-accretable difference

     (1,270     —          839         124        (307
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     5,262        —          839         (536     5,565   

Accretable yield

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Carrying value of acquired loans

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

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Troubled Debt Restructurings

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

 

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Table of Contents

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at September 30, 2016 and December 31, 2015 are as follows:

 

     September 30,
2016
     December 31,
2015
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 491,466       $ 463,952   

Other

     3,249         4,037   

The components of net loan servicing fees for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Loan servicing fees, net:

           

Loan servicing fees

   $ 309       $ 287       $ 903       $ 831   

Amortization of loan servicing fees

     (349      (203      (905      (644

Change in impairment

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (40    $ 84       $ (2    $ 187   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of servicing rights was estimated by management to be approximately $3,948 at September 30, 2016. Fair value for September 30, 2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 14.7%. 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%.

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 September 30, 2016 and December 31, 2015, these short-term borrowings totaled $37,343 and $61,261, respectively, and were secured by securities with carrying amounts of $38,333 and $73,478, respectively. At September 30, 2016, all of the Company’s repurchase agreements had one-day maturities.

The following table provides additional details as of September 30, 2016:

 

As of September 30, 2016

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

Fair value of securities pledged

   $ 210      $ 59      $ 40,565      $ 40,834   

Borrowings related to pledged amounts

   $ —       $
 

  
 
 
  $ 37,343      $ 37,343   

Fair value pledged as a % of borrowings

     —       —       109     109

 

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Table of Contents

NOTE 6—SHARE-BASED PAYMENTS

In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant allows the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will be exercisable in whole or in part up to seven years following the date of issuance. The warrants are detachable from the common stock. There were 6,575 and 4,970 warrants exercised during the nine months ended September 30, 2016 and 2015, respectively. A summary of the stock warrant activity for the nine months ended September 30, 2016 and 2015 follows:

 

     September 30,
2016
     September 30,
2015
 

Stock warrants exercised:

     

Intrinsic value of warrants exercised

   $ 136       $ 46   

Cash received from warrants exercised

     79         60   

At September 30, 2016, there were 18,732 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 $406 and $248 and $1,201 and $619 for the three and nine months ended September 30, 2016 and 2015, respectively. The total income tax benefit related to vesting of restricted stock and exercises of stock options was $616 and $147 for the nine months ended September 30, 2016 and 2015. The total income tax benefit for the three months ended September 30, 2016 was $107. There was no excess tax benefit from the exercise of stock options for the three months ended September 30, 2015.

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 September 30, 2016, there were 2,041,673 authorized shares available for issuance.

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

 

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Table of Contents

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

 

     September 30,
2016
    September 30,
2015
 

Risk-free interest rate

     1.60     1.84

Expected term

     7.5 years        7.5 years   

Expected stock price volatility

     30.09     25.00

Dividend yield

     0.24     0.22

The weighted average fair value of options granted for the nine months ended September 30, 2016 and 2015 were $9.78 and $6.41, respectively.

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

     272,087         27.99         

Exercised

     (167,899      11.27         

Forfeited, expired, or cancelled

     (2,415      19.43         
  

 

 

          

Outstanding at period end

     1,414,564       $ 16.12         6.49       $ 30,103   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,343,836       $ 16.12         6.49       $ 28,598   

Exercisable at period end

     784,022       $ 11.53         4.83       $ 20,282   

 

     For the nine months
ended September 30,
 
     2016      2015  

Stock options exercised:

     

Intrinsic value of options exercised

   $ 3,463       $ 839   

Cash received from options exercised

     1,357         780   

Tax benefit realized from option exercises

     522         147   

As of September 30, 2016, there was $3,583 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 4.1 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.

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

     36,396         28.45   

Vested

     (32,607      16.70   

Forfeited

     (1,916      16.00   
  

 

 

    

Non-vested at September 30, 2016

     107,737       $ 18.80   
  

 

 

    

 

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Table of Contents

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of September 30, 2016, there was $1,917 of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.2 years. The total fair value of shares vested during the nine months ended September 30, 2016 and 2015 was $974 and $520, respectively.

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 conservation 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 September 30, 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes, as of September 30, 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.

Actual and required capital amounts and ratios are presented below as of September 30, 2016 and December 31, 2015 for the Company and Bank:

 

     Actual     Required
For Capital
Adequacy Purposes(1)
    To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2016

               

Company common equity Tier 1 capital to risk-weighted assets

   $ 188,225         9.09   $ 93,188         4.50     N/A         N/A   

Company Total Capital to risk weighted assets

   $ 262,107         12.66   $ 165,667         8.00     N/A         N/A   

Company Tier 1 (Core) Capital to risk weighted assets

   $ 188,225         9.09   $ 124,250         6.00     N/A         N/A   

Company Tier 1 (Core) Capital to average assets

   $ 188,225         7.15   $ 105,361         4.00     N/A         N/A   

Bank common equity Tier 1 capital to risk-weighted assets

   $ 243,995         11.77   $ 93,314         4.50   $ 134,787         6.50

Bank Total Capital to risk weighted assets

   $ 259,585         12.52   $ 165,892         8.00   $ 207,365         10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 243,995         11.77   $ 124,419         6.00   $ 165,892         8.00

Bank Tier 1 (Core) Capital to average assets

   $ 243,995         9.26   $ 105,343         4.00   $ 131,678         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   $ 102,946         5.00

(1) NOTE: The capital conservation buffer is not included in capital adequacy amounts.

 

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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. The Bank currently may not pay dividends without prior written approval from its primary regulatory agencies.

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).

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.

 

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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 reviewed 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
September 30, 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

   $ —        $ 3,138       $ —    

Mortgage-backed securities-residential

     —          556,797         —    

Mortgage-backed securities-commercial

     —          19,759         —    

State and political subdivisions

     —          91,062         —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —        $ 670,056       $ —    
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ —        $ 26,819       $ —    
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 858       $ —    
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —        $ 87       $ —    
  

 

 

    

 

 

    

 

 

 

 

     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       $ —    
  

 

 

    

 

 

    

 

 

 

 

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As of September 30, 2016, the unpaid principal balance of loans held for sale was $25,937 resulting in an unrealized gain of $882 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 September 30, 2016 and 2015, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $326 and $248, respectively. For the nine months ended September 30, 2016 and 2015, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $558 and ($22), respectively. None of these loans were 90 days or more past due or on nonaccrual as of September 30, 2016 and December 31, 2015.

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

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

There was one collateral dependent impaired loan carried at fair value as of September 30, 2016 that totaled $375. For the three and nine months ended September 30, 2016 and 2015, $115 and $0 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. There were no collateral dependent impaired loans carried at fair value as of December 31, 2015.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of zero as of September 30, 2016 and $200 as of December 31, 2015. There were no properties at September 30, 2016 or 2015 that had required write-downs to fair value resulting in no write downs for the three and nine months ended September 30, 2016 and 2015, respectively.

The carrying amounts and estimated fair values of financial instruments, at September 30, 2016 and December 31, 2015 are as follows:

 

     Carrying
Amount
     Fair Value Measurements at
September 30, 2016 Using:
 
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 55,749       $ 55,749       $ —        $ —        $ 55,749   

Certificates of deposit held at other financial institutions

     1,055         —          1,055         —          1,055   

Securities available for sale

     670,756         —          670,756         —          670,756   

Securities held to maturity

     235,050         —          243,946         —          243,946   

Loans held for sale

     26,819         —          26,819         —          26,819   

Net loans

     1,638,468         —          —          1,621,695         1,621,695   

Restricted equity securities

     11,829         n/a         n/a         n/a         n/a   

Servicing rights, net

     3,566         —          3,948         —          3,948   

Accrued interest receivable

     7,871         —          3,634         4,237         7,871   

Financial liabilities

              

Deposits

   $ 2,217,954       $ 1,223,120       $ 996,482       $ —        $ 2,219,602   

Federal funds purchased and repurchase agreements

     45,843         —          45,843         —          45,843   

Federal Home Loan Bank advances

     162,000         —          162,024         —          162,024   

Subordinated notes, net

     58,292         —          —          61,867         61,867   

Accrued interest payable

     1,399         123         915         361         1,399   

 

     Carrying
Amount
     Fair Value Measurements at
December 31, 2015 Using:
 
        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   

 

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Table of Contents

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.

(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:

 

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Table of Contents
    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2016      2015      2016      2015  

Basic

           

Net income available to common shareholders

   $ 7,030       $ 5,125       $ 20,239       $ 11,341   

Less: earnings allocated to participating securities

     (69      (52      (213      (127
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocated to common shareholders

   $ 6,961       $ 5,073       $ 20,026       $ 11,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding including participating securities

     10,721,253         10,516,290         10,652,223         9,668,497   

Less: Participating securities

     (105,343      (107,502      (111,937      (108,617
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares

     10,615,910         10,408,788         10,540,286         9,559,880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.66       $ 0.49       $ 1.90       $ 1.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     2016      2015      2016      2015  

Diluted

           

Net income allocated to common shareholders

   $ 6,961       $ 5,073       $ 20,026       $ 11,214   

Weighted average common shares outstanding for basic earnings per common share

     10,615,910         10,408,788         10,540,286         9,559,880   

Add: Dilutive effects of assumed exercises of stock options

     612,955         534,148         585,326         466,955   

Add: Dilutive effects of assumed exercises of stock warrants

     13,370         13,265         12,937         13,257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares and dilutive potential common shares

     11,242,235         10,956,201         11,138,549         10,040,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive earnings per common share

   $ 0.62       $ 0.46       $ 1.80       $ 1.12   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended September 30, 2016 and 2015, stock options for 272,087 and 226,040 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 151,544 and 228,691 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2016 and 2015 because they were antidilutive.

NOTE 10—SUBORDINATED NOTES

On March 31, 2016, the Company completed the issuance of $40,000 in aggregate principal amount of fixed-to-floating rate Subordinated Notes due 2026 (the “March 2016 Notes”) in a public offering to accredited institutional investors. The March 2016 Notes will mature on March 30, 2026, unless redeemed prior to that date. The Company may redeem the March 2016 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 March 2016 Notes. The redemption price for any redemption will be 100% of the principal amount of the March 2016 Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Federal Reserve to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the March 2016 Notes.

The March 2016 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 March 2016 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.

 

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Table of Contents

The March 2016 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 March 2016 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 the Bank, its depositors, and any preferred equity holders of our subsidiaries. The holders of the March 2016 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 March 2016 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 issuance costs related to the March 2016 Notes amounted to $1,382 and are being amortized as interest expense over the ten-year term of the March 2016 Notes.

On June 30, 2016, the Company completed the issuance of an additional $20,000 aggregate principal amount of its 7.00% fixed-to-floating rate subordinated notes due 2026 (the “June 2016 Notes”) to certain institutional accredited investors in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Rule 506 of Regulation D thereunder.

The June 2016 Notes have a stated maturity of July 1, 2026, and bear interest at a fixed rate of 7.00% per year through June 30, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears on January 1 and July 1 of each year beginning on January 1, 2017. Beginning July 1, 2021 through the maturity date or an early redemption date, the interest rate shall reset quarterly to an interest rate per year equal to the then current three-month LIBOR rate plus 604 basis points, computed on the basis of a 360-day year and the actual number of days elapsed, payable quarterly in arrears. The June 2016 Notes are redeemable, in whole or in part, on or after July 1, 2021 and at any time upon the occurrence of certain events set forth in the June 2016 Notes. Any early redemption of the March 2016 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 June 2016 Notes.

Principal and interest on the June 2016 Notes are subject to acceleration only in limited circumstances. The June 2016 Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness and equal with the Company’s previously issued March 2016 Notes

The June 2016 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 June 2016 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 the Bank, its depositors, and any preferred equity holders of our subsidiaries. The holders of the June 2016 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 issuance costs related to the June 2016 Notes were $404 and are being amortized as interest expense over the ten-year term of the June 2016 Notes.

For regulatory capital purposes, the March 2016 Notes and the June 2016 Notes are treated as Tier 2 capital, subject to certain limitations, 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.

As of September 30, 2016, the Company’s subordinated notes, net of issuance costs, totaled $58,292.

 

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Table of Contents

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 and one loan production office in the demographically attractive and growing Williamson, Rutherford and Davidson Counties within the Nashville metropolitan statistical 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 Bank), 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 the Company’s Form 10-K that was filed with the SEC 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.

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, we recorded all acquired loans at fair value as of the date of the acquisition. 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 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.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

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

 

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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 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 securities 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. The Company has not yet elected to adopt this ASU early, but management is considering potential early adoption during the fourth quarter of 2016. Had the Company adopted ASU 2016-09 during the quarter ended September 30, 2016, the impact to earnings would have been a decrease in income tax expense of approximately $183 and $755 for the three and nine months ended September 30, 2016, and the impact to diluted earnings per share would have been increases of $0.01 per share and $0.06 per share for the three and nine months ended September 30, 2016, respectively.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses within this update is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of financial assets. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that are not considered derivatives under ASC 815 and are not unconditionally cancellable are also within the scope of this amendment. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. For public companies, the update is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in

 

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this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued guidance within ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update provide guidance on eight specific cash flow issues with the objective of reducing the existing diversity in presentation and classification in the statement of cash flows. The cash flow issues addressed include: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investments; 7) beneficial interest in securitization transactions; and 8) separately identifiable cash flows and the application of the predominance principle. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period; however, an entity is required to adopt all of the amendments in the same period. The amendments in this Update require application using a retrospective transition method to each period presented. Management is in currently evaluating the effects that the Update is expected to have on the Company’s Consolidated Statement of Cash Flows and is currently planning to adopt the guidance during the first quarter of 2018.

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

SEPTEMBER 30, 2016 AND 2015

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $7,030 and $20,262 for the three and nine months ended September 30, 2016, respectively, compared to $5,150 and $11,416 for the three and nine months ended September 30, 2015. After the payment of preferred dividends on 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”) pursuant to the Small Business Lending Fund (“SBLF”), the Company’s net earnings available to common shareholders for the three and nine months ended September 30, 2016 was $7,030 and $20,239, respectively, compared to $5,125 and $11,341 for the three and nine months ended September 30, 2015. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 30, 2016 was increased interest income on loans and investment securities compared with the same periods in 2015. The increase in loans was due to significant organic growth. The growth in the securities portfolio is primarily attributable to the capital leverage programs implemented during the second quarter of 2016 to utilize proceeds received from the issuance of subordinated notes at the end of the March 2016.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and nine months ended September 30, 2016, totaled $20,675 and $59,885, respectively, compared to $16,736 and $42,220 for the same periods in 2015, an increase of $3,939 and $17,665, or 23.5% and 41.8%, between the respective periods. For the three and nine months ended September 30, 2016, interest income increased $6,423 and $23,931, or 33.3% and 49.2%, respectively, due to growth in both the loan and investment securities portfolios. For the three and nine months ended September 30, 2016, interest expense increased $2,484 and $6,266, or 96.8% and 97.6%, respectively, as a result of increases in interest-bearing deposits, FHLB advances and subordinated notes.

Interest-earning assets averaged $2,576,294 and $1,846,372 during the three months ended September 30, 2016 and 2015, respectively, an increase of $729,922, or 39.5%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 55.1%, and investment securities increased 20.9%, when comparing the three months ended September 30, 2016 with the same period in 2015. When comparing the three months ended September 30, 2016 and 2015, the yield on average interest earning assets, adjusted for tax equivalent yield decreased 17 basis points to 4.12% compared to 4.29% for the same period during 2015. For the three months ended September 30, 2016, the tax equivalent yield on loans was 4.96%, compared with 5.61% tax equivalent yield for same period in 2015. The decrease in yield on loans when comparing these two periods is attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the three months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the three months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.42%, and for the three months ended September 30, 2015, the yield on available for sale securities was 2.60%. For the three months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.75%, and for the three months ended September 30, 2015, the yield on held to maturity securities was 3.37%. The primary driver for the collective increase in yields on securities for the three-month period ended September 30, 2016 was the volume of tax-exempt municipal securities that have been purchased, which increased tax equivalent yields when comparing the three months ended September 30, 2016 with the same period in 2015.

Interest-bearing liabilities averaged $2,201,206 during the three months ended September 30, 2016, compared to $1,550,007 for the same period in 2015, an increase of $651,199, or 42.0%. Total average interest-bearing deposits grew $563,418, which included increases in average money market deposits of $103,244 and average time deposits of $432,061 for the three-month period ended

 

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September 30, 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 (“FHLB”) advances of $29,783 and subordinated notes and other borrowings of $58,285, when comparing the three months ended September 30, 2016 with the same period in 2015. The growth in FHLB advances is discussed in more detail later in this document in the balance sheet discussion items in the section titled, “Federal Home Loan Bank Advances.”

For the three month periods ended September 30, 2016 and 2015, the cost of average interest-bearing liabilities increased 25 basis points to 0.91% from 0.66%. The increase was primarily due to increases in the cost of funds for FHLB advances and from subordinated notes and other borrowings.

Interest-earning assets averaged $2,427,824 and $1,575,748 during the nine months ended September 30, 2016 and 2015, respectively, an increase of $852,076, or 54.1%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 64.5%, and investment securities increased 41.3%, when comparing the nine months ended September 30, 2016 with the same period in 2015. When comparing the nine months ended September 30, 2016 and 2015, the yield on average interest earning assets, adjusted for tax equivalent yield decreased seven basis points to 4.13% compared to 4.20% for the same period during 2015. For the nine months ended September 30, 2016, the tax equivalent yield on loans was 4.95%, compared with 5.46% tax equivalent yield for the same period in 2015. The decrease in yield on loans when comparing these two periods is primarily attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the nine months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the nine months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.48%, and for the nine months ended September 30, 2015, the yield on available for sale securities was 2.42%. For the nine months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.92%, and for the nine months ended September 30, 2015, the yield on held to maturity securities was 3.10%. The primary driver for the increase in yields on securities for the nine months ended September 30, 2016 was the volume of tax-exempt municipal securities purchased during the past 12 months.

Interest-bearing liabilities averaged $2,044,661 during the nine months ended September 30, 2016, compared to $1,311,229 for the same period in 2015, an increase of $733,432, or 55.9%. Total average interest-bearing deposits grew $665,258, which included increases in money market deposits of $157,287 and average time deposits of $472,321 for the nine-month period ended September 30, 2016, as compared to the same period during 2015. Rapid growth in the loan portfolio also resulted in increases in average FHLB advances of $32,522 and subordinated notes and other borrowings of $32,882, when comparing the nine months ended September 30, 2016 with the same period in 2015.

For the nine month periods ended September 30, 2016 and 2015, the cost of average interest-bearing liabilities increased 18 basis points to 0.83% from 0.65%. The increase was primarily due to increase in the cost of funds from FHLB advances and from subordinated notes.

 

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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 and nine months ended September 30, 2016 and 2015:

Average Balances—Yields & Rates(7)

(Dollars are in thousands)

 

     Three Months Ended September 30,  
     2016     2015  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield /
Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield /
Rate
 

ASSETS:

              

Loans (1)(6)

   $ 1,620,347      $ 20,219         4.96   $ 1,044,520      $ 14,763         5.61

Securities available for sale (6)

     671,725        4,084         2.42     674,991        4,422         2.60

Securities held to maturity (6)

     233,986        2,203         3.75     74,332        632         3.37

Certificates of deposit at other financial institutions

     941        4         1.69     250        2         3.17

Federal funds sold and other (2)

     49,295        182         1.47     52,279        127         0.96
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 2,576,294      $ 26,692         4.12   $ 1,846,372      $ 19,946         4.29

Allowance for loan losses

     (14,508          (8,576     

All other assets

     86,466             74,570        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 2,648,252           $ 1,912,366        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 261,350      $ 256         0.39   $ 246,584      $ 170         0.27

Money market

     617,913        957         0.62     514,669        703         0.54

Savings

     51,235        40         0.31     37,888        44         0.46

Time deposits

     1,080,666        2,430         0.89     648,605        1,500         0.92

Federal funds purchased and other (3)

     44,974        69         0.61     45,261        69         0.60

Federal Home Loan Bank advances

     86,783        215         0.99     57,000        79         0.55

Subordinated Notes and other borrowings

     58,285        1,082         7.39     —         —          —  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 2,201,206      $ 5,049         0.91   $ 1,550,007      $ 2,565         0.66

Demand deposits

     224,387             169,451        

Other liabilities

     16,650             11,368        

Total shareholders’ equity

     206,009             181,540        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 2,648,252           $ 1,912,366        

NET INTEREST SPREAD (4)

          3.21          3.63

NET INTEREST INCOME

     $ 21,643           $ 17,381      

NET INTEREST MARGIN (5)

          3.34          3.73

 

(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 include the effects of a tax-equivalent adjustment to adjust tax-exempt investment income on tax exempt investment securities and tax-exempt loans to a fully taxable basis.
(7) Averages balances are average daily balances. Yields and rates are annualized.

 

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     Nine Months Ended September 30,  
     2016     2015  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield /
Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield /
Rate
 

ASSETS:

              

Loans (1)(6)

   $ 1,535,894      $ 56,933         4.95   $ 933,950      $ 38,127         5.46

Securities available for sale (6)

     641,270        11,917         2.48     532,754        9,628         2.42

Securities held to maturity (6)

     194,326        5,698         3.92     58,587        1,358         3.10

Certificates of deposit at other financial institutions

     751        11         1.96     250        5         2.67

Federal funds sold and other (2)

     55,583        518         1.24     50,207        325         0.87
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 2,427,824      $ 75,077         4.13   $ 1,575,748      $ 49,443         4.20

Allowance for loan losses

     (13,179          (7,705     

All other assets

     41,988             72,387        
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 2,456,633           $ 1,640,430        

LIABILITIES & SHAREHOLDERS’ EQUITY

              

Deposits:

              

Interest checking

   $ 292,013      $ 853         0.39   $ 270,992      $ 605         0.30

Money market

     608,341        2,767         0.61     451,054        1,918         0.57

Savings

     48,647        121         0.33     34,018        117         0.46

Time deposits

     937,266        6,377         0.91     464,945        3,323         0.96

Federal funds purchased and other (3)

     50,100        237         0.63     47,330        232         0.66

Federal Home Loan Bank advances

     75,412        511         0.91     42,890        225         0.70

Subordinated Notes and other borrowings

     32,882        1,820         7.39     —         —          —  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 2,044,661      $ 12,686         0.83   $ 1,311,229      $ 6,420         0.65

Demand deposits

     200,981             159,093        

Other liabilities

     12,707             7,753        

Total shareholders’ equity

     198,284             162,355        
  

 

 

        

 

 

      

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 2,456,633           $ 1,640,430        

NET INTEREST SPREAD (4)

          3.30          3.55

NET INTEREST INCOME

     $ 62,391           $ 43,023      

NET INTEREST MARGIN (5)

          3.43          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 include the effects of a tax-equivalent adjustment to adjust tax-exempt investment income on tax exempt investment securities and tax-exempt loans to a fully taxable basis.
(7) Averages balances are average daily balances. Yields and rates are annualized.

The tables below detail the components of the changes in net interest income on a tax-equivalent basis 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.

 

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Analysis of Changes in Interest Income and Expenses

 

     Net change three months ended
September 30, 2016 versus September 30, 2015
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 8,103       $ (2,647    $ 5,456   

Securities available for sale

     (34      (304      (338

Securities held to maturity

     1,347         224         1,571   

Certificates of deposit at other financial institutions

     6         (4      2   

Federal funds sold and other

     (8      63         55   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 9,414       $ (2,668    $ 6,746   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 7       $ 79       $ 86   

Money market accounts

     130         124         254   

Savings

     15         (19      (4

Time deposits

     1,011         (81      930   

Federal Home Loan Bank advances

     40         96         136   

Other borrowed funds

     —          —          —    

Subordinated Notes and other borrowings

     1,082         —          1,082   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 2,285       $ 199       $ 2,484   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 7,129       $ (2,867    $ 4,262   
  

 

 

    

 

 

    

 

 

 

 

     Net change nine months ended
September 30, 2016 versus September 30, 2015
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 24,670       $ (5,864    $ 18,806   

Securities available for sale

     2,001         288         2,289   

Securities held to maturity

     3,147         1,193         4,340   

Certificates of deposit at other financial institutions

     10         (4      6   

Federal funds sold and other

     39         154         193   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 29,867       $ (4,233    $ 25,634   
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 51       $ 197       $ 248   

Money market accounts

     667         182         849   

Savings

     51         (47      4   

Time deposits

     3,405         (351      3,054   

Federal Home Loan Bank advances

     167         119         286   

Other borrowed funds

     16         (11      5   

Subordinated notes and other borrowings

     1,820         —          1,820   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 6,177       $ 89       $ 6,266   
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 23,690       $ (4,322    $ 19,368   
  

 

 

    

 

 

    

 

 

 

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 $1,392 and $1,724 for the three months ended September 30, 2016 and 2015, respectively, and $4,095 and $3,154 for the nine months ended September 30, 2016 and 2015, respectively. The provision for the three months ended September 30, 2016 was less than the provision for the same period in 2015 due to loan growth in third quarter 2015 being greater than loan growth in third quarter 2016. The higher provision for the nine months ended September 30, 2016 compared to the same period in 2015 is due primarily to the Company’s loan growth during the nine months ended September 30, 2016, compared to the same period in 2015. Nonperforming loans at September 30, 2016 totaled $1,597 compared to $3,286 at December 31, 2015, representing 0.1% and 0.3% of total loans, respectively.

 

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Table of Contents

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2016 was $4,876 and $12,587 compared to $3,798 and $9,864 for the same periods in 2015. The following is a summary of the components of non-interest income (in thousands):

 

     Three Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2016      2015        

Service charges on deposit accounts

   $ 44       $ 44       $        — 

Other service charges and fees

     845         679         166         24.4

Net gains on sale of loans

     2,942         2,463         479         19.4

Wealth management

     446         327         119         36.4

Loan servicing fees, net

     (40      84         (124      (147.6 %) 

Gain on sale or call of securities

     430         5         425         8,500.0

Net gain on sale of foreclosed assets

     30         3         27         900.0

Other

     179         193         (14      (7.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 4,876       $ 3,798       $ 1,078         28.4
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2016      2015        

Service charges on deposit accounts

   $ 139       $ 78       $ 61         78.2

Other service charges and fees

     2,245         1,987         258         13.0

Net gains on sale of loans

     6,859         5,573         1,286         23.1

Wealth management

     1,343         914         429         46.9

Loan servicing fees, net

     (2      187         (189      (101.1 %) 

Gain on sale or call of securities

     1,535         529         1,006         190.2

Net gain on sale of foreclosed assets

     36         30         6         20.0

Other

     432         566         (134      (23.7 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 12,587       $ 9,864       $ 2,723         27.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Service charges on deposit accounts for the nine months ended September 30, 2016 increased $61, or 78.2% 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 2016.

Other service charges and fees for the three and nine months ended September 30, 2016 increased $166 and $258, or 24.4% and 13.0%, from the same periods in 2015 due to several variances. The larger variances for these comparative periods were as follows: (1) underwriting, processing and application fees related to mortgage lending activities increased $113 and $91; (2) unused commitment fees increased $39 and $95; and (3) ATM surcharge fees increased $22 and $64.

Net gain on sale of loans increased $479 and $1,286, or 19.4% and 23.1%, when comparing the three and nine months ended September 30, 2016 to the same periods in 2015. The increase in both periods was due to favorable mark-to-market pricing on mortgage loan derivatives and increased volume of mortgage loans during 2016.

Wealth management income for the three and nine months ended September 30, 2016 increased $119 and $429, or 36.4% and 46.9%, in comparison with the same periods in 2015. The increase was attributed to the growth in the client base and the assets under management in the wealth management division, as well as some improvement in the stock markets.

Gain on sale or call of investment securities increased $425 and $1,006, or 8,500.0% and 190.2%, when comparing the three and nine months ended September 30, 2016 with the same periods in 2015. The increase was primarily due to the gains on securities that were recognized in the second and third quarters of 2016, which were related to management selling a number of smaller securities to consolidate the number of securities carried in the portfolio and to reposition the Company’s investment portfolio into more tax-exempt municipal securities.

Other non-interest income decreased by $14 and $134, or 7.3% and 23.7%, when comparing three and nine months ended September 30, 2016 with the same periods 2015. The decrease for the nine months ended September 30, 2016 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 $15 being recorded in first nine months of 2015 on the sale of three of the Company’s branch locations in Rutherford County, Tennessee.

 

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Table of Contents

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2016 was $13,708 and $38,452, compared to $10,853 and $31,046 for the same periods in 2015. The increases were the result of the following components listed in the table below (in thousands):

 

     Three Months Ended
September 30,