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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, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

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 November 7, 2017, was 13,215,564.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Cautionary Note Regarding Forward-Looking Statements

     1  

Item 1. Consolidated Financial Statements (unaudited)

  

Consolidated Balance Sheets

     2  

Consolidated Statements of Income

     3  

Consolidated Statements of Comprehensive Income

     4  

Consolidated Statement of Changes in Shareholders’ Equity

     5  

Consolidated Statements of Cash Flows

     6  

Notes to Consolidated Financial Statements

     7  

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

     27  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     47  

Item 4. Controls and Procedures

     48  

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     48  

Item 1A. Risk Factors

     48  

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

     49  

Item 3. Defaults Upon Senior Securities

     49  

Item 4. Mine Safety Disclosures

     49  

Item 5. Other Information

     49  

Item 6. Exhibits

     50  

SIGNATURES

  


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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,
2017
    December 31,
2016
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 155,842     $ 90,927  

Certificates of deposit at other financial institutions

     2,365       1,055  

Securities available for sale

     980,737       754,755  

Securities held to maturity (fair value 2017—$220,089 and 2016—$227,892)

     217,312       228,894  

Loans held for sale, at fair value

     11,823       23,699  

Loans

     2,115,930       1,773,592  

Allowance for loan losses

     (19,944     (16,553
  

 

 

   

 

 

 

Net loans

     2,095,986       1,757,039  
  

 

 

   

 

 

 

Restricted equity securities, at cost

     18,472       11,843  

Premises and equipment, net

     11,217       9,551  

Accrued interest receivable

     11,156       9,931  

Bank owned life insurance

     23,732       23,267  

Deferred tax asset

     13,592       15,013  

Foreclosed assets

     1,503       —    

Servicing rights, net

     3,639       3,621  

Goodwill

     9,124       9,124  

Core deposit intangible, net

     1,117       1,480  

Other assets

     7,663       2,990  
  

 

 

   

 

 

 

Total assets

   $ 3,565,278     $ 2,943,189  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Deposits

    

Non-interest bearing

   $ 257,177     $ 233,781  

Interest bearing

     2,567,648       2,158,037  
  

 

 

   

 

 

 

Total deposits

     2,824,825       2,391,818  

Federal Home Loan Bank advances

     337,000       132,000  

Federal funds purchased and repurchase agreements

     32,862       83,301  

Subordinated notes, net

     58,470       58,337  

Accrued interest payable

     2,597       1,924  

Other liabilities

     5,827       5,448  
  

 

 

   

 

 

 

Total liabilities

     3,261,581       2,672,828  

Equity

    

Preferred stock, no par value: 1,000,000 shares authorized; no shares outstanding at September 30, 2017 and December 31, 2016

     —         —    

Common stock, no par value: 30,000,000 and 20,000,000 shares authorized at September 30, 2017 and December 31, 2016, respectively; 13,209,055 and 13,036,954 issued at September 30, 2017 and December 31, 2016, respectively

     221,642       218,354  

Retained earnings

     85,075       59,386  

Accumulated other comprehensive loss

     (3,123     (7,482
  

 

 

   

 

 

 

Total shareholders’ equity

     303,594       270,258  

Noncontrolling interest in consolidated subsidiary

     103       103  
  

 

 

   

 

 

 

Total equity

   $ 303,697     $ 270,361  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,565,278     $ 2,943,189  
  

 

 

   

 

 

 

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,

 
     2017     2016     2017     2016  

Interest income and dividends

        

Loans, including fees

   $ 25,973     $ 20,192     $ 73,195     $ 56,864  

Securities:

        

Taxable

     5,041       3,889       16,358       11,402  

Tax-Exempt

     2,217       1,457       6,449       3,776  

Dividends on restricted equity securities

     269       133       663       354  

Federal funds sold and other

     280       53       667       175  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     33,780       25,724       97,332       72,571  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     7,311       3,683       19,118       10,118  

Federal funds purchased and repurchase agreements

     92       69       309       237  

Federal Home Loan Bank advances

     968       215       2,228       511  

Subordinated notes and other borrowings

     1,083       1,082       3,239       1,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     9,454       5,049       24,894       12,686  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     24,326       20,675       72,438       59,885  

Provision for loan losses

     590       1,392       3,018       4,095  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     23,736       19,283       69,420       55,790  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Service charges on deposit accounts

     39       44       114       139  

Other service charges and fees

     787       845       2,297       2,245  

Net gains on sale of loans

     1,517       2,942       5,918       6,859  

Wealth management

     643       446       1,884       1,343  

Loan servicing fees, net

     70       (40     230       (2

Gain on sale or call of securities

     350       430       470       1,535  

Net (loss) gain on sale of foreclosed assets

     (16     30       (10     36  

Other

     179       179       554       432  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     3,569       4,876       11,457       12,587  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense

        

Salaries and employee benefits

     9,011       7,979       26,172       22,099  

Occupancy and equipment

     2,399       2,001       6,689       5,563  

FDIC assessment expense

     900       570       2,675       1,388  

Marketing

     192       206       744       611  

Professional fees

     821       935       2,558       3,006  

Amortization of core deposit intangible

     115       138       363       431  

Other

     1,840       1,879       5,636       5,354  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     15,278       13,708       44,837       38,542  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     12,027       10,451       36,040       29,925  

Income tax expense

     3,138       3,314       10,343       9,047  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     8,889       7,137       25,697       20,878  

Earnings attributable to noncontrolling interest

     —         —         (8     —    

Dividends paid on Series A preferred stock

     —         —         —         (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 8,889     $ 7,137     $ 25,689     $ 20,855  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.67     $ 0.67     $ 1.96     $ 1.96  

Diluted

     0.65       0.63       1.86       1.84  

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

    

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     2017     2016     2017     2016  

Net income

   $ 8,889     $ 7,137     $ 25,697     $ 20,878  

Other comprehensive income, net of tax:

        

Unrealized gains on securities:

        

Unrealized holding gain (loss) arising during the period

     1,610       (3,664     7,641       13,910  

Reclassification adjustment for gains included in net income

     (350     (430     (470     (1,535
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     1,260       (4,094     7,171       12,375  

Tax effect

     (494     1,606       (2,812     (4,854
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     766       (2,488     4,359       7,521  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,655     $ 4,649     $ 30,056     $ 28,399  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Nine Months Ended September 30, 2017 and 2016

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

(Unaudited)

 

                      

Accumulated

Other

              
     Preferred     Common Stock     Retained     Comprehensive     Noncontrolling      Total  
     Stock     Shares     Amount     Earnings     Income (Loss)     Interest      Equity  

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

Net income

     —         —         —         20,878       —         —          20,878  

Other comprehensive income

     —         —         —         —         7,521       —          7,521  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2016

   $ —         10,757,483     $ 150,236     $ 52,207     $ 7,201       —        $ 209,644  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2016

   $ —         13,036,954     $ 218,354     $ 59,386     $ (7,482     103      $ 270,361  

Exercise of common stock options, net

     —         138,007       1,361       —         —         —          1,361  

Exercise of common stock warrants

     —         12,461       150       —         —         —          150  

Stock based compensation expense, net of restricted share forfeitures

     —         26,718       1,970       —         —         —          1,970  

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

     —         (5,085     (193     —         —         —          (193

Earnings attributable to noncontrolling interest

     —         —         —         (8     —         —          (8

Net income

     —         —         —         25,697       —         —          25,697  

Other comprehensive income

     —         —         —         —         4,359       —          4,359  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2017

   $ —         13,209,055     $ 221,642     $ 85,075     $ (3,123   $ 103      $ 303,697  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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,

 
     2017     2016  

Cash flows from operating activities

    

Net income

   $ 25,697     $ 20,878  

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation and amortization on premises and equipment

     1,118       986  

Accretion of purchase accounting adjustments

     (873     (488

Net amortization of securities

     7,654       5,428  

Amortization of loan servicing right asset

     721       905  

Amortization of core deposit intangible

     363       431  

Amortization of debt issuance costs

     133       79  

Provision for loan losses

     3,018       4,095  

Deferred income tax benefit

     (1,394     (1,015

Origination of loans held for sale

     (270,876     (260,598

Proceeds from sale of loans held for sale

     290,669       253,701  

Net gain on sale of loans

     (5,918     (6,859

Gain on sale of available for sale securities

     (470     (1,535

Income from bank owned life insurance

     (465     (486

Net loss/(gain) on foreclosed assets

     10       (36

Loss on sale of assets held for sale

     —         98  

Stock-based compensation

     1,970       1,201  

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

     —         404  

Deferred gain on sale of loans

     (58     (46

Net change in:

    

Accrued interest receivable and other assets

     (5,949     (1,033

Accrued interest payable and other liabilities

     1,120       2,261  
  

 

 

   

 

 

 

Net cash from operating activities

     46,470       18,371  

Cash flows from investing activities

    

Securities available for sale :

    

Sales

     122,837       74,203  

Purchases

     (455,700     (223,432

Maturities, prepayments and calls

     108,339       64,502  

Securities held to maturity :

    

Purchases

     (1,996     (92,646

Maturities, prepayments and calls

     12,110       14,088  

Net change in loans

     (346,595     (349,944

Proceeds from sale of assets held for sale

     —         1,542  

Purchase of restricted equity securities

     (6,629     (3,831

Proceeds from sale of foreclosed assets

     1,330       336  

Purchases of premises and equipment, net

     (2,784     (2,142

Capitalization of foreclosed assets

     (35     —    

Increase in certificates of deposits at other financial institutions

     (1,310     (805
  

 

 

   

 

 

 

Net cash from investing activities

     (570,433     (518,129

Cash flows from financing activities

    

Increase in deposits

     433,007       403,915  

Decrease in federal funds purchased and repurchase agreements

     (50,439     (55,243

Proceeds from Federal Home Loan Bank advances

     370,000       305,000  

Repayment of Federal Home Loan Bank advances

     (165,000     (200,000

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

     150       79  

Proceeds from exercise of common stock options

     1,361       1,357  

Divestment of common stock issued to 401(k) plan

     (193     (185

Redemption of Series A preferred stock

     —         (10,000

Dividends paid on preferred stock

     —         (23

Earnings attributable to noncontrolling interest

     (8     —    
  

 

 

   

 

 

 

Net cash from financing activities

     588,878       503,113  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     64,915       3,355  

Cash and cash equivalents at beginning of period

     90,927       52,394  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 155,842     $ 55,749  
  

 

 

   

 

 

 

Supplemental information:

    

Interest paid

   $ 24,221     $ 11,931  

Income taxes paid

     12,380       9,650  

Non-cash supplemental information:

    

Transfers from loans to foreclosed assets

   $ 2,818     $ —    

Transfers from loans to loans held for sale

     2,685       —    

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 complete 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 16, 2017.

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, 2017 and December 31, 2016 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, 2017

           

U.S. government sponsored entities and agencies

   $ 20,147      $ —        $ (65    $ 20,082  

Mortgage-backed securities: residential

     729,014        1,113        (5,460      724,667  

Mortgage-backed securities: commercial

     15,675        —          (65      15,610  

State and political subdivisions

     161,223        2,197        (2,855      160,565  

U.S Treasury bills

     59,816        1        (4      59,813  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 985,875      $ 3,311      $ (8,449    $ 980,737  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

December 31, 2016

           

Mortgage-backed securities: residential

   $ 614,344      $ 949      $ (8,208    $ 607,085  

Mortgage-backed securities: commercial

     19,439        27        (132      19,334  

State and political subdivisions

     133,280        238        (5,182      128,336  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 767,063      $ 1,214      $ (13,522    $ 754,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of the securities held to maturity portfolio at September 30, 2017 and December 31, 2016 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, 2017

           

Mortgage backed securities: residential

   $ 95,560      $ 354      $ (1,502    $ 94,412  

State and political subdivisions

     121,752        3,957        (32      125,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 217,312      $ 4,311      $ (1,534    $ 220,089  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

December 31, 2016

           

U.S. government sponsored entities and agencies

   $ 203      $ 6      $ —        $ 209  

Mortgage backed securities: residential

     106,169        328        (2,343      104,154  

State and political subdivisions

     122,522        1,214        (207      123,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 228,894      $ 1,548      $ (2,550    $ 227,892  
  

 

 

    

 

 

    

 

 

    

 

 

 

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,

 
     2017      2016      2017      2016  

Proceeds

   $ 61,647      $ 11,939      $ 122,837      $ 74,203  

Gross gains

     414        430        659        1,920  

Gross losses

     (64      —          (189      (385

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, 2017  
     Amortized
Cost
     Fair
Value
 

Available for sale

     

One year or less

   $ 74,815      $ 74,800  

Over one year through five years

     20,147        20,082  

Over five years through ten years

     4,681        4,811  

Over ten years

     141,543        140,767  

Mortgage-backed securities: residential

     729,014        724,667  

Mortgage-backed securities: commercial

     15,675        15,610  
  

 

 

    

 

 

 

Total

   $ 985,875      $ 980,737  
  

 

 

    

 

 

 

Held to maturity

     

Over one year through five years

   $ 1,607      $ 1,665  

Over five years through ten years

     6,322        6,496  

Over ten years

     113,823        117,516  

Mortgage-backed securities: residential

     95,560        94,412  
  

 

 

    

 

 

 

Total

   $ 217,312      $ 220,089  
  

 

 

    

 

 

 

Securities pledged at September 30, 2017 and December 31, 2016 had a carrying amount of $944,463 and $808,224, respectively, and were pledged to secure public deposits and repurchase agreements.

At September 30, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

 

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The following table summarizes the securities with unrealized and unrecognized losses at September 30, 2017 and December 31, 2016, 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, 2017

               

Available for sale

               

U.S. government sponsored entities and agencies

   $ 20,082      $ (65   $ —        $ —       $ 20,082      $ (65

Mortgage-backed securities: Residential

     369,300        (2,279     130,043        (3,181     499,343        (5,460

Mortgage-backed securities: Commercial

     15,610        (65     —          —         15,610        (65

State and political subdivisions

     22,134        (82     61,297        (2,773     83,431        (2,855

U.S. Treasury bills

     19,827        (4     —          —         19,827        (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 446,953      $ (2,495   $ 191,340      $ (5,954   $ 638,293      $ (8,449
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $ 25,405      $ (335   $ 55,224      $ (1,167   $ 80,629      $ (1,502

State and political subdivisions

     263        (1     1,154        (31     1,417        (32
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 25,668      $ (336   $ 56,378      $ (1,198   $ 82,046      $ (1,534
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

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

December 31, 2016

               

Available for sale

               

Mortgage-backed securities: residential

   $ 465,416      $ (7,833   $ 9,907      $ (375   $ 475,323      $ (8,208

Mortgage-backed securities: commercial

     15,752        (132     —          —         15,752        (132

State and political subdivisions

     100,020        (5,182     —          —         100,020        (5,182
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 581,188      $ (13,147   $ 9,907      $ (375   $ 591,095      $ (13,522
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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

   $ 89,523      $ (2,244   $ 3,025      $ (99   $ 92,548      $ (2,343

State and political subdivisions

     18,907        (207     —          —         18,907        (207
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held to maturity

   $ 108,430      $ (2,451   $ 3,025      $ (99   $ 111,455      $ (2,550
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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NOTE 3—LOANS

Loans at September 30, 2017 and December 31, 2016 were as follows:

 

     September 30,
2017
     December 31,
2016
 

Loans that are not PCI loans

     

Construction and land development

   $ 514,934      $ 489,562  

Commercial real estate:

     

Nonfarm, nonresidential

     565,536        458,569  

Other

     33,310        38,571  

Residential real estate:

     

Closed-end 1-4 family

     373,536        254,474  

Other

     158,577        150,515  

Commercial and industrial

     464,747        376,476  

Consumer and other

     3,933        3,359  
  

 

 

    

 

 

 

Loans before net deferred loan fees

     2,114,573        1,771,526  

Deferred loan fees, net

     (1,201      (793
  

 

 

    

 

 

 

Total loans that are not PCI loans

     2,113,372        1,770,733  

Total PCI loans

     2,558        2,859  

Allowance for loan losses

     (19,944      (16,553
  

 

 

    

 

 

 

Total loans, net of allowance for loan losses

   $ 2,095,986      $ 1,757,039  
  

 

 

    

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2017 and 2016:

 

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

Three Months Ended September 30, 2017

             

Allowance for loan losses:

             

Beginning balance

   $ 3,796     $ 5,011      $ 2,939     $ 6,894     $ 49     $ 18,689  

Provision for loan losses

     (507     212        169       707       9       590  

Loans charged-off

     —         —          —         (9     (11     (20

Recoveries

     668       —          14       —         3       685  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,957     $ 5,223      $ 3,122     $ 7,592     $ 50     $ 19,944  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2017 and 2016:

 

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

Nine Months Ended September 30, 2017

             

Allowance for loan losses:

             

Beginning balance

   $ 3,776     $ 4,266      $ 2,398     $ 6,068     $ 45     $ 16,553  

Provision for loan losses

     (487     957        687       1,833       28       3,018  

Loans charged-off

     —         —          (1     (309     (36     (346

Recoveries

     668       —          38       —         13       719  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 3,957     $ 5,223      $ 3,122     $ 7,592     $ 50     $ 19,944  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     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  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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, 2017 and December 31, 2016. 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, 2017

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —        $ —        $ —        $ 1,011      $ —        $ 1,011  

Collectively evaluated for impairment

     3,957        5,223        3,122        6,581        50        18,933  

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,957      $ 5,223      $ 3,122      $ 7,592      $ 50      $ 19,944  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ —        $ —        $ 116      $ 3,090      $ —        $ 3,206  

Collectively evaluated for impairment

     514,934        598,846        531,997        461,657        3,933        2,111,367  

Purchased credit-impaired loans

     —          387        182        1,989        —          2,558  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 514,934      $ 599,233      $ 532,295      $ 466,736      $ 3,933      $ 2,117,131  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ —        $ —        $ —        $ 1,024      $ —        $ 1,024  

Collectively evaluated for impairment

     3,776        4,266        2,398        5,044        45        15,529  

Purchased credit-impaired loans

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,776      $ 4,266      $ 2,398      $ 6,068      $ 45      $ 16,553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Individually evaluated for impairment

   $ 1,275      $ 2,836      $ 2,190      $ 3,608      $ —        $ 9,909  

Collectively evaluated for impairment

     488,287        494,304        402,799        372,868        3,359        1,761,617  

Purchased credit-impaired loans

     —          394        496        1,969        —          2,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 489,562      $ 497,534      $ 405,485      $ 378,445      $ 3,359      $ 1,774,385  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Loans collectively evaluated for impairment reported at September 30, 2017 include certain acquired loans. At September 30, 2017, these non-PCI loans had a carrying value of $57,663, comprised of contractually unpaid principal totaling $59,227 and discounts totaling $1,564. Management evaluated these loans for credit deterioration since acquisition and determined that $11 in allowance for loan losses was necessary at September 30, 2017. As of December 31, 2016, these non-PCI loans had a carrying value of $72,367, comprised of contractually unpaid principal totaling $74,373 and discounts totaling $2,006. Management evaluated these loans for credit deterioration since acquisition and determined that a $23 allowance for loan losses was necessary at December 31, 2016.

The following table presents information related to impaired loans by class of loans as of September 30, 2017 and December 31, 2016:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

September 30, 2017

        

With no allowance recorded:

        

Construction and land development

   $ —        $ —        $ —    

Commercial real estate:

        

Nonfarm, nonresidential

     —          —          —    

Residential real estate:

        

Closed-end 1-4 family

     —          —          —    

Other

     116        116        —    

Commercial and industrial

     92        92        —    

Consumer and other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     208        208        —    

With an allowance recorded:

        

Commercial and industrial

     2,998        2,998        1,011  
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,998        2,998        1,011  
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,206      $ 3,206      $ 1,011  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

With no allowance recorded:

        

Construction and land development

   $ 1,275      $ 1,275      $ —    

Commercial real estate:

        

Nonfarm, nonresidential

     4,423        2,836        —    

Residential real estate:

        

Closed-end 1-4 family

     2,069        2,069        —    

Other

     121        121        —    

Commercial and industrial

     934        934        —    
  

 

 

    

 

 

    

 

 

 

Subtotal

     8,822        7,235        —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial and industrial

     2,864        2,674        1,024  
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,864        2,674        1,024  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,686      $ 9,909      $ 1,024  
  

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

The following table presents the average recorded investment of impaired loans by class of loans for the three and nine months ended September 30, 2017 and 2016:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 

Average Recorded Investment

   2017      2016      2017      2016  

With no allowance recorded:

           

Construction and land development

   $ 1,348      $ —        $ 1,199      $ 340  

Commercial real estate:

           

Nonfarm, nonresidential

     812        1,427        2,394        1,307  

Residential real estate:

           

Closed-end 1-4 family

     112        451        863        533  

Other

     199        837        245        768  

Commercial and industrial

     499        46        657        110  

Consumer and other

     —          —          1        10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,970        2,761        5,359        3,068  
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Commercial and industrial

   $ 2,998      $ 490      $ 2,820      $ 247  

Residential real estate:

           

Closed-end 1-4 family

     —          70        —          23  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,998        560        2,820        270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,968      $ 3,321      $ 8,179      $ 3,338  
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2017 and 2016.

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, 2017 and December 31, 2016:

 

     Nonaccrual      Loans Past Due
Over 90 Days
 

September 30, 2017

     

Residential real estate:

     

Closed-end 1-4 family

   $ —        $ 262  

Other

     116        —    

Commercial and industrial

     2,466        16  
  

 

 

    

 

 

 

Total

   $ 2,582      $ 278  
  

 

 

    

 

 

 

December 31, 2016

     

Construction and land development

   $ —        $ 1,950  

Commercial real estate:

     

Nonfarm, nonresidential

     835        —    

Residential real estate:

     

Closed-end 1-4 family

     —          452  

Other

     121        —    

Commercial and industrial

     2,674        150  
  

 

 

    

 

 

 

Total

   $ 3,630      $ 2,552  
  

 

 

    

 

 

 

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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The following table presents the aging of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loans:

 

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

September 30, 2017

                       

Construction and land development

   $ 1,370      $ —        $ —        $ —        $ 1,370      $ 513,564      $ —        $ 514,934  

Commercial real estate:

                       

Nonfarm, nonresidential

     —          —          —          —          —          565,536        387        565,923  

Other

     —          —          —          —          —          33,310        —          33,310  

Residential real estate:

                       

Closed-end 1-4 family

     939        1,007        262        —          2,208        371,328        182        373,718  

Other

     150        —          —          116        266        158,311        —          158,577  

Commercial and industrial

     511        301        16        2,466        3,294        461,453        1,989        466,736  

Consumer and other

     5        —          —          —          5        3,928        —          3,933  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,975      $ 1,308      $ 278      $ 2,582      $ 7,143      $ 2,107,430      $ 2,558      $ 2,117,131  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                       

Construction and land development

   $ 380      $ —        $ 1,950      $ —        $ 2,330      $ 487,232      $ —        $ 489,562  

Commercial real estate:

                       

Nonfarm, nonresidential

     664        —          —          835        1,499        457,070        394        458,963  

Other

     —          —          —          —          —          38,571        —          38,571  

Residential real estate:

                       

Closed-end 1-4 family

     428        10        452        —          890        253,584        496        254,970  

Other

     231        —          —          121        352        150,163        —          150,515  

Commercial and industrial

     155        39        150        2,674        3,018        373,458        1,969        378,445  

Consumer and other

     —          —          —             —          3,359        —          3,359  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,858      $ 49      $ 2,552      $ 3,630      $ 8,089      $ 1,763,437      $ 2,859      $ 1,774,385  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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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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, 2017 and December 31, 2016:

 

     Pass      Special
Mention
     Substandard      Total  

September 30, 2017

           

Construction and land development

   $ 512,912      $ —        $ 2,022      $ 514,934  

Commercial real estate:

           

Nonfarm, nonresidential

     548,792        12,322        4,809        565,923  

Other

     32,927        —          383        33,310  

Residential real estate:

           

Closed-end 1-4 family

     371,149        —          2,569        373,718  

Other

     156,820        —          1,757        158,577  

Commercial and industrial

     445,736        12,649        8,351        466,736  

Consumer and other

     3,928        5        —          3,933  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,072,264      $ 24,976      $ 19,891      $ 2,117,131  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Pass      Special
Mention
     Substandard      Total  

December 31, 2016

           

Construction and land development

   $ 488,287      $ —        $ 1,275      $ 489,562  

Commercial real estate:

           

Nonfarm, nonresidential

     449,373        1,847        7,743        458,963  

Other

     38,571        —          —          38,571  

Residential real estate:

           

1-4 family

     251,919        —          3,051        254,970  

Other

     149,504        —          1,011        150,515  

Commercial and industrial

     373,243        —          5,202        378,445  

Consumer and other

     3,359        —          —          3,359  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,754,256      $ 1,847      $ 18,282      $ 1,774,385  
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

As of both September 30, 2017 and December 31, 2016, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of $608 and $698, respectively.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at September 30, 2017 and December 31, 2016 are as follows:

 

     September 30,
2017
     December 31,
2016
 

Loan portfolios serviced for:

     

Federal Home Loan Mortgage Corporation

   $ 506,345      $ 499,385  

Other

     4,662        2,954  

 

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Table of Contents

The components of net loan servicing fees for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Loan servicing fees, net:

           

Loan servicing fees

   $ 312      $ 309      $ 951      $ 903  

Amortization of loan servicing fees

     (242      (349      (721      (905

Change in impairment

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70      $ (40    $ 230      $ (2
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of servicing rights was estimated by management to be approximately $4,916 at September 30, 2017. Fair value for September 30, 2017 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%. At December 31, 2016, the fair value of servicing rights was estimated by management to be approximately $5,015. Fair value for December 31, 2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.9%.

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, 2017 and December 31, 2016, these short-term borrowings totaled $32,862 and $36,496, respectively, and were secured by securities with carrying amounts of $41,279 and $41,136, respectively. At September 30, 2017, all of the Company’s repurchase agreements had one-day maturities.

The following table provides additional details as of September 30, 2017:

 

As of September 30, 2017

   Mortgage-
Backed
Securities:
Residential
    State and
Political
Subdivisions
    Total  

Market value of securities pledged

   $ 651     $ 41,921     $ 42,572  

Borrowings related to pledged amounts

   $ —       $ 32,862     $ 32,862  

Market value pledged as a % of borrowings

     —       128     130

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

 

As of December 31, 2016

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

Market value of securities pledged

   $ 209     $ 117     $ 41,330     $ 41,656  

Borrowings related to pledged amounts

   $ —       $ —       $ 36,496     $ 36,496  

Market value pledged as a % of borrowings

     —       —       113     114

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 allowed 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 were exercisable in whole or in part up to seven years following the date of issuance, and they expired on March 30, 2017. The warrants were detachable from the common stock. There were 12,461 and 6,575 warrants exercised during the nine months ended September 30, 2017 and 2016, respectively. A summary of the stock warrant activity for the nine months ended September 30, 2017 and 2016 follows:

 

     September 30,
2017
     September 30,
2016
 

Stock warrants exercised:

     

Intrinsic value of warrants exercised

   $ 329      $ 136  

Cash received from warrants exercised

     150        79  

 

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Table of Contents

The warrants expired on March 30, 2017; therefore at September 30, 2017, there were no outstanding warrants associated with the 2010 offering.

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $735 and $406 and $1,970 and $1,201 for the three and nine months ended September 30, 2017 and 2016, respectively. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was $261 and $711 for the three and nine months ended September 30, 2017. The total income tax benefit for the three and nine months ended September 30, 2016 was $107 and $616, respectively.

Stock Options: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, provides for authorized shares up to 4,000,000. At September 30, 2017, there were 1,960,041 authorized shares available for issuance under the 2007 Plan, although the Company has ceased issuing awards under the 2007 Plan.

The 2007 Plan provides that no options intended to be ISOs may be granted after April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, a new equity incentive plan, the 2017 Omnibus Equity Incentive Plan. The Company’s shareholders approved the 2017 Omnibus Equity Incentive Plan at the 2017 annual meeting of shareholders. The terms of the 2017 Omnibus Equity Incentive Plan are substantially similar to the terms of the 2007 Omnibus Equity Incentive Plan it was intended to replace. The 2017 Omnibus Equity Incentive Plan provides for authorized shares up to 5,000,000. At September 30, 2017, there were 4,762,750 authorized shares available for issuance under the 2017 Omnibus Equity Incentive Plan.

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

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

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

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

 

     September 30,
2017
    September 30,
2016
 

Risk-free interest rate

     2.16     1.60

Expected term

     6.8 years       7.5 years  

Expected stock price volatility

     32.32     30.09

Dividend yield

     0.03     0.24

The weighted average fair value of options granted for the nine months ended September 30, 2017 and 2016 were $14.51 and $9.78, respectively.

 

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Table of Contents

A summary of the activity in the plans for the nine months ended September 30, 2017 follows:

 

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

Outstanding at beginning of year

     1,395,016      $ 16.70        6.39      $ 35,090  

Granted

     267,195        38.04        

Exercised

     (146,944      11.73        

Forfeited, expired, or cancelled

     (3,113      25.37        
  

 

 

          

Outstanding at period end

     1,512,154      $ 20.93        6.65      $ 22,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest

     1,436,546      $ 20.93        6.65      $ 21,143  

Exercisable at period end

     787,451      $ 13.43        4.96      $ 17,498  

 

     For the nine months
ended September 30,
 
     2017      2016  

Stock options exercised:

     

Intrinsic value of options exercised

   $ 4,141      $ 3,463  

Cash received from options exercised

     1,361        1,357  

Tax benefit realized from option exercises

     406        522  

As of September 30, 2017, there was $6,054 of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock: Additionally, the 2007 Omnibus Equity Incentive Plan and the 2017 Omnibus Equity Incentive Plan each 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, 2017 is as follows:

 

Non-vested Shares

   Shares      Weighted-
Average
Grant-
Date
Fair Value
 

Non-vested at December 31, 2016

     106,458      $ 19.81  

Granted

     27,282        37.35  

Vested

     (36,767      18.22  

Forfeited

     (564      28.66  
  

 

 

    

Non-vested at September 30, 2017

     96,409      $ 25.32  
  

 

 

    

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, 2017, there was $2,080 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 3.6 years. The total fair value of shares vested during the nine months ended September 30, 2017 and 2016 was $1,457 and $974, respectively.

The total income tax benefit realized from the vesting of restricted stock was $215 and $4 and $305 and $170 for the three and nine months ended September 30, 2017 and 2016, 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, 2016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

 

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Table of Contents

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. The capital conservation buffer in effect for 2017 is 1.25%.

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, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes that, as of September 30, 2017, 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, 2017 and December 31, 2016 for the Company and Bank:

 

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

September 30, 2017

               

Company common equity Tier 1 capital to risk-weighted assets

   $ 293,004        11.58   $ 113,908        4.50     N/A        N/A  

Company Total Capital to risk weighted assets

   $ 371,510        14.68   $ 202,502        8.00     N/A        N/A  

Company Tier 1 (Core) Capital to risk weighted assets

   $ 293,004        11.58   $ 151,877        6.00     N/A        N/A  

Company Tier 1 (Core) Capital to average assets

   $ 293,004        8.58   $ 136,609        4.00     N/A        N/A  

Bank common equity Tier 1 capital to risk-weighted assets

   $ 347,043        13.71   $ 113,901        4.50   $ 164,523        6.50

Bank Total Capital to risk weighted assets

   $ 367,079        14.50   $ 202,490        8.00   $ 253,112        10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 347,043        13.71   $ 151,867        6.00   $ 202,490        8.00

Bank Tier 1 (Core) Capital to average assets

   $ 347,043        10.17   $ 136,511        4.00   $ 170,639        5.00

December 31, 2016

               

Company common equity Tier 1 capital to risk-weighted assets

   $ 263,693        11.75   $ 101,022        4.50     N/A        N/A  

Company Total Capital to risk weighted assets

   $ 338,675        15.09   $ 179,595        8.00     N/A        N/A  

Company Tier 1 (Core) Capital to risk weighted assets

   $ 263,693        11.75   $ 134,696        6.00     N/A        N/A  

Company Tier 1 (Core) Capital to average assets

   $ 263,693        9.28   $ 113,697        4.00     N/A        N/A  

Bank common equity Tier 1 capital to risk-weighted assets

   $ 319,005        14.18   $ 101,216        4.50   $ 146,201        6.50

Bank Total Capital to risk weighted assets

   $ 335,650        14.92   $ 179,939        8.00   $ 224,924        10.00

Bank Tier 1 (Core) Capital to risk weighted assets

   $ 319,005        14.18   $ 134,954        6.00   $ 179,939        8.00

Bank Tier 1 (Core) Capital to average assets

   $ 319,005        11.22   $ 113,697        4.00   $ 142,122        5.00

Note: Minimum ratios presented exclude the capital conservation buffer

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. Neither the Company nor the Bank may currently pay dividends without prior written approval from its primary regulatory agencies.

 

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Table of Contents

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.

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).

 

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

 

     Fair Value Measurements at
September 30, 2017 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

   $ —        $ 20,082      $ —    

Mortgage-backed securities-residential

     —          724,667        —    

Mortgage-backed securities-commercial

     —          15,610        —    

State and political subdivisions

     —          160,565        —    

U.S. Treasury bills

     —          59,813        —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —        $ 980,737      $ —    
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ —        $ 11,823      $ —    
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 501      $ —    
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —        $ (88    $ —    
  

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at
December 31, 2016 Using:
 
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets

        

Securities available for sale

        

Mortgage-backed securities-residential

   $ —        $ 607,085      $ —    

Mortgage-backed securities-commercial

     —          19,334        —    

State and political subdivisions

     —          128,336        —    
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —        $ 754,755      $ —    
  

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ —        $ 23,699      $ —    
  

 

 

    

 

 

    

 

 

 

Mortgage banking derivatives

   $ —        $ 229      $ —    
  

 

 

    

 

 

    

 

 

 

Financial Liabilities

        

Mortgage banking derivatives

   $ —        $ (66    $ —    
  

 

 

    

 

 

    

 

 

 

As of September 30, 2017, the unpaid principal balance of loans held for sale was $11,524 resulting in an unrealized gain of $299 included in gains on sale of loans. As of December 31, 2016, the unpaid principal balance of loans held for sale was $23,457, resulting in an unrealized gain of $242 included in gains on sale of loans. For the three months ended September 30, 2017 and 2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $(48) and $326, respectively. For the nine months ended September 30, 2017 and 2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $57 and $558, respectively. None of these loans were 90 days or more past due or on nonaccrual as of September 30, 2017 and December 31, 2016.

There were no transfers between level 1 and 2 during 2017 or 2016.

 

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

There were two collateral-dependent commercial and industrial impaired loans carried at fair value of $1,987 as of September 30, 2017 and one collateral-dependent commercial and industrial impaired loan carried at fair value of $1,650 as of December 31, 2016. For the three and nine months ended September 30, 2017, there was no additional provision for loan losses recorded related to impaired loans recorded at fair value of collateral. For the three and nine months ended September 30, 2016, $115 additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $1,503 as of September 30, 2017 and $0 as of December 31, 2016. The foreclosed property was previously collateral for a commercial real estate loan. There were no properties at September 30, 2017 or 2016 that had required write-downs to fair value resulting in no write downs for the three and nine months ended September 30, 2017 and 2016, respectively.

The carrying amounts and estimated fair values of financial instruments at September 30, 2017 and December 31, 2016 are as follows:

 

     Carrying
Amount
    Fair Value Measurements at
September 30, 2017 Using:
 
       Level 1     Level 2     Level 3      Total  

Financial assets

           

Cash and cash equivalents

   $ 155,842     $ 155,842     $ —       $ —        $ 155,842  

Certificates of deposit held at other financial institutions

     2,365       —         2,365       —          2,365  

Securities available for sale

     980,737       —         980,737       —          980,737  

Securities held to maturity

     217,312       —         220,089       —          220,089  

Loans held for sale

     11,823       —         11,823       —          11,823  

Net loans

     2,115,930       —         —         2,074,102        2,074,102  

Restricted equity securities

     18,472       n/a       n/a       n/a        n/a  

Servicing rights, net

     3,639       —         —         4,916        4,916  

Mortgage banking derivative assets

     501       —         501       —          —    

Accrued interest receivable

     11,156       (13     5,603       5,566        11,156  

Financial liabilities

           

Deposits

   $ 2,824,825     $ 1,438,459     $ 1,352,945     $ —        $ 2,791,404  

Repurchase agreements

     32,862       —         32,862       —          32,862  

Federal Home Loan Bank advances

     337,000       —         355,910       —          355,910  

Subordinated notes, net

     58,470       —         —         61,576        61,576  

Mortgage banking derivative liabilities

     (88     —         (88     —          —    

Accrued interest payable

     2,597       35       2,212       350        2,597  
     Carrying
Amount
    Fair Value Measurements at
December 31, 2016 Using:
 
       Level 1     Level 2     Level 3      Total  

Financial assets

           

Cash and cash equivalents

   $ 90,927     $ 90,927     $ —       $ —        $ 90,927  

Certificates of deposit held at other financial institutions

     1,055       —         1,055       —          1,055  

Securities available for sale

     754,755       —         754,755       —          754,755  

Securities held to maturity

     228,894       —         227,892       —          227,892  

Loans held for sale

     23,699       —         23,699       —          23,699  

Net loans

     1,757,039       —         —         1,727,188        1,727,188  

Restricted equity securities

     11,843       n/a       n/a       n/a        n/a  

Servicing rights, net

     3,621       —         —         5,015        5,015  

Mortgage banking derivative assets

     229       —         229       —          —    

Accrued interest receivable

     9,931       —         5,172       4,759        9,931  

Financial liabilities

           

Deposits

   $ 2,391,818     $ 1,551,461     $ 836,444     $ —        $ 2,387,905  

Federal funds purchased and repurchase agreements

     83,301       —         83,301       —          83,301  

Federal Home Loan Bank advances

     132,000       —         131,098       —          131,098  

Subordinated notes, net

     58,337       —         —         61,762        61,762  

Mortgage banking derivative liabilities

     (66     —         (66     —          —    

Accrued interest payable

     1,924       154       1,075       695        1,924  

 

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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 3 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.

 

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Table of Contents

NOTE 9—EARNINGS PER SHARE

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
    2017     2016     2017     2016  

Basic

       

Net income available to common shareholders

  $ 8,889     $ 7,137     $ 25,689     $ 20,855  

Less: earnings allocated to participating securities

    (66     (70     (206     (219
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocated to common shareholders

  $ 8,823     $ 7,067     $ 25,483     $ 20,636  
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding including participating securities

    13,188,761       10,721,253       13,119,170       10,652,223  

Less: Participating securities

    (97,842     (105,343     (105,350     (111,937
 

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

    13,090,919       10,615,910       13,013,820       10,540,286  
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $ 0.67     $ 0.67     $ 1.96     $ 1.96  
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       

Net income allocated to common shareholders

  $ 8,823     $ 7,067     $ 25,483     $ 20,636  

Weighted average common shares outstanding for basic earnings per common share

    13,090,919       10,615,910       13,013,820       10,540,286  

Add: Dilutive effects of assumed exercises of stock options

    584,778       668,674       662,890       652,272  

Add: Dilutive effects of assumed exercises of stock warrants

    —         13,370       2,104       12,937  
 

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

    13,675,697       11,297,954       13,678,814       11,205,495  
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 0.65     $ 0.63     $ 1.86     $ 1.84  
 

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2017 and 2016, stock options for 352,042 and 272,087 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 254,204 and 151,544 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2017 and 2016 because they were antidilutive.

NOTE 10—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled $58,470 and $58,337 at September 30, 2017 and at December 31, 2016, respectively. For regulatory capital purposes, the subordinated 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.

The Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875% fixed-to-floating rate subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional investors, and in June 2016, $20,000 of 7.00% fixed-to-floating rate subordinated notes (the “June 2016 Subordinated Notes”) were issued to certain accredited institutional investors in a private offering. The subordinated 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 subordinated 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 Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the subordinated 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.

 

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Table of Contents

The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over the ten-year term of the March 2016 Subordinated Notes. The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over the ten-year term of the June 2016 Subordinated Notes. For the three months ended September 30, 2017 and 2016, amortization of issuance costs has amounted to $45 for both periods. For the nine months ended September 30, 2017 and 2016, amortization of issuance costs has amounted to $133 and $79, respectively.

 

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Table of Contents

The following table summarizes the terms of each subordinated note offering:

 

     March 2016
Subordinated
Notes
  June 2016
Subordinated
Notes

Principal amount issued

   $40,000   $20,000

Maturity date

   March 30, 2026   July 1, 2026

Initial fixed interest rate

   6.875%   7.00%

Initial interest rate period

   5 years   5 years

First interest rate change date

   March 30, 2021   July 1, 2021

Interest payment frequency through year five*

   Semiannually   Semiannually

Interest payment frequency after five years*

   Quarterly   Quarterly

Interest repricing index and margin

   3-month LIBOR

plus 5.636%

  3-month LIBOR

plus 6.04%

Repricing frequency after five years

   Quarterly   Quarterly

 

* The Company currently may not make interest payments on either series of subordinated notes without prior written approval from its primary regulatory agencies. Through September 30, 2017 all interest payments have been made in accordance with the terms of the agreements.

 

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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 16, 2017, which includes additional information about critical accounting policies and practices and 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 area. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our Company,” “the Company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy), any reference to “FFN” refers to Franklin Financial Network, Inc. only and any reference to “Franklin Synergy” or the “Bank” refers to our banking subsidiary, Franklin Synergy Bank.

Critical Accounting Policies

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

The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements in the Company’s Form 10-K that was filed with the SEC on March 16, 2017. 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.

Allowance for Loan Losses

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

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

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

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

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

 

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Table of Contents

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.

Recently Adopted Accounting Pronouncements

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 are to 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 excludes the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits are classified along with other income tax cash flows as an operating activity rather than as 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 changed 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. The Company elected to adopt this ASU in the fourth quarter of 2016, effective as of January 1, 2016. The adoption of this ASU decreased income tax expense for the nine months ended September 30, 2016 by $616 and increased diluted earnings per share by $0.04. The adoption of this ASU also impacted previously reported quarterly earnings and earnings per share in the third quarter of 2016 by decreasing income tax expense by $107 and increasing diluted earnings per share by $0.01.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the FASB ASC, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU 2014-09 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 added a new Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers (“ASC 340-40”), to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Most of the Company’s revenues come from financial instruments, like loans, investment securities and other financial instruments which are not included in the scope of this ASU. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts, gains/losses on the sale of OREO and wealth management income, is not expected to change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company is currently planning to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect of adoption is recognized for the impact of the ASU on uncompleted contracts at the date of adoption. Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends prior guidance to require an entity to measure its equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Management has not yet determined the impact that adoption of this guidance will have on the Company’s financial statements.

 

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In February 2016, the FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for the Company for fiscal years beginning on or after December 15, 2018. Early adoption is permitted for all entities. At the time this ASU is adopted, the Company will recognize a right-of-use asset, and a lease liability for all leases, which will initially be measured at the present value of lease payments, and a single lease cost calculated so that the costs of the leases are allocated over the terms of the Company’s leases on a generally straight-line basis. Since an asset will be recognized at the time of adoption, the Company’s regulatory capital ratios will be impacted. Management is evaluating the impact ASU 2016-02 will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering data to enable review scenarios and to determine which calculations will produce the most reliable results. The impact of adopting ASU 2016-13 is not currently known.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This Accounting Standards Update addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for the Company 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. This ASU is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This Update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

 

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In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The objective of this ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and early application is permitted in any interim period after issuance of the Update. The Company currently does not have any hedging activities that would be subject to this Update; however, management may consider hedging activities in the future. Adoption of this Update is not expected to have a material impact on the Company’s consolidated financial statements.

COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $8,889 and $25,697 for the three and nine months ended September 30, 2017, respectively, compared to $7,137 and $20,878 for the three and nine months ended September 30, 2016, respectively. After earnings attributable to noncontrolling interest and 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, 2017 was $8,889 and $25,689, respectively, compared to $7,137 and $20,855 for the three and nine months ended September 30, 2016, respectively. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 30, 2017 was increased interest income on loans and investment securities compared with the same periods in 2016. The increase in loans was due to significant organic growth. The growth in the securities portfolio is primarily attributable to the Company’s leverage program to utilize proceeds received from capital raised during the fourth quarter of 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, 2017, totaled $24,326 and $72,438, respectively, compared to $20,675 and $59,885 for the same periods in 2016, an increase of $3,651 and $12,553, or 17.7% and 21.0%, between the respective periods. For the three and nine months ended September 30, 2017, interest income increased $8,056 and $24,761, or 31.3% and 34.1%, respectively, compared with the same periods in 2016, due to growth in both the loan and investment securities portfolios. For the three and nine months ended September 30, 2017, interest expense increased $4,405 and $12,208, or 87.2% and 96.2%, respectively, compared with the same periods in 2016, as a result of increases in interest-bearing deposits, Federal Home Loan Bank (“FHLB”) advances and subordinated notes.

Interest-earning assets averaged $3,351,421 and $2,576,294 during the three months ended September 30, 2017 and 2016, respectively, an increase of $775,127, or 30.1%. This increase was due to growth in all types of interest-earning assets, but the largest growth occurred in loans and investment securities. Average loans increased 26.5%, and investment securities increased 31.8%, when comparing the three months ended September 30, 2017 with the same period in 2016. When comparing the three months ended September 30, 2017 and 2016, the yield on average interest earning assets, adjusted for tax equivalent yield, increased five basis points in 2017 to 4.17% compared to 4.12% for the same period during 2016. For the three months ended September 30, 2017, the tax equivalent yield on available for sale securities was 2.61%, and for the three months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.42%. For the three months ended September 30, 2017, the tax equivalent yield on held to maturity securities was 4.11%, and for the three months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.75%. The primary driver for the increase in yields on securities for the three-month period ended September 30, 2017 was the volume of tax-exempt municipal securities purchased during the past 12 months, which increased tax equivalent yields when comparing the three-month period in 2017 with the same period in 2016.

Interest-bearing liabilities averaged $2,856,337 during the three months ended September 30, 2017, compared to $2,201,206 for the same period in 2016, an increase of $655,131, or 29.8%. Total average interest-bearing deposits grew $460,127, or 22.9%, including increases in average interest checking of $291,152 and average time deposits of $178,786 for the three-month period ended September 30, 2017, as compared to the same period during 2016. Rapid growth in the loan portfolio also resulted in an increase in average FHLB advances of $202,445 when comparing the three months ended September 30, 2017 with the same period in 2016.

 

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For the three-month periods ended September 30, 2017 and 2016, the cost of average interest-bearing liabilities increased 40 basis points to 1.31% from 0.91%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and Federal funds purchased.

 

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Interest-earning assets averaged $3,304,558 and $2,427,824 during the nine months ended September 30, 2017 and 2016, respectively, an increase of $876,734, or 36.1%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 28.6%, and investment securities increased 46.8%, when comparing the nine months ended September 30, 2017 with the same period in 2016. When comparing the nine months ended September 30, 2017 and 2016, the yield on average interest earning assets, adjusted for tax equivalent yield decreased 2 basis points to 4.11% in 2017 compared to 4.13% for the same period during 2016.

For the nine months ended September 30, 2017 and 2016, the tax equivalent yield on loans was 4.96% and 4.95% respectively. For the three months ended September 30, 2017 and 2016, the tax equivalent yield on loans was 5.03% and 4.96%, respectively. The primary driver for the increase in yields on loans for the three- and nine-month periods ended September 30, 2017 was an increase in loan interest rates when compared with the same periods in 2016.

For the nine months ended September 30, 2017, the tax equivalent yield on available for sale securities was 2.66%, and for the nine months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.48%. For the nine months ended September 30, 2017, the tax equivalent yield on held to maturity securities was 4.18%, and for the nine months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.92%. The primary driver for the increase in yields on securities for the nine-month period ended September 30, 2017 was the volume of tax-exempt municipal securities purchased during the past 12 months, which increased tax equivalent yields when comparing the nine-month period in 2017 with the same period in 2016.

Interest-bearing liabilities averaged $2,839,188 during the nine months ended September 30, 2017, compared to $2,044,661 for the same period in 2016, an increase of $794,527, or 38.9%. Total average interest-bearing deposits grew $606,229, including increases in interest-bearing checking of $339,569 and average time deposits of $259,409 for the nine-month period ended September 30, 2017, as compared to the same period during 2016. Rapid growth in the loan portfolio also resulted in an increase in average FHLB advances of $167,137, and subordinated notes and other borrowings increased $25,516, when comparing the nine months ended September 30, 2017 with the same period in 2016.

For the nine-month periods ended September 30, 2017 and 2016, the cost of average interest-bearing liabilities increased 34 basis points from 0.83% to 1.17%. The increase was due to increases in the cost of funds from interest-bearing deposits, FHLB advances, Federal funds purchased and repurchase agreements.

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, 2017 and 2016:

Average Balances—Yields & Rates(7)

(Dollars are in thousands)

 

     Three Months Ended September 30,  
     2017     2016  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans(1)(6)

   $ 2,049,575     $ 26,006        5.03   $ 1,620,347     $ 20,219        4.96

Securities available for sale(6)

     972,988       6,405        2.61     671,725       4,084        2.42

Securities held to maturity(6)

     220,313       2,283        4.11     233,986       2,203        3.75

Restricted equity securities

     17,396       269        6.13     10,372       133        5.10

Certificates of deposit at other financial institutions

     2,412       9        1.48     941       4        1.69

Federal funds sold and other(2)

     88,737       271        1.21     38,923       49        0.50
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 3,351,421     $ 35,243        4.17   $ 2,576,294     $ 26,692        4.12

Allowance for loan losses

     (18,891          (14,508     

All other assets

     94,334            86,466       
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 3,426,864          $ 2,648,252       

LIABILITIES & EQUITY

              

Deposits:

              

Interest checking

   $ 552,502     $ 1,285        0.92   $ 261,350     $ 256        0.39

Money market

     604,416       1,703        1.12     617,913       957        0.62

Savings

     54,921       42        0.30     51,235       40        0.31

Time deposits

     1,259,452       4,281        1.35     1,080,666       2,430        0.89

Federal Home Loan Bank advances

     289,228       968        1.33     86,783       215        0.99

Federal funds purchased and other(3)

     37,374       92        0.98     44,974       69        0.61

Subordinated notes and other borrowings

     58,444       1,083        7.35     58,285       1,082        7.39
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 2,856,337     $ 9,454        1.31   $ 2,201,206     $ 5,049        0.91

Demand deposits

     261,127            224,387       

Other liabilities

     11,312            16,650       

Total equity

     298,088            206,009       
  

 

 

        

 

 

      

TOTAL LIABILITIES AND EQUITY

   $ 3,426,864          $ 2,648,252       

NET INTEREST SPREAD(4)

          2.86          3.21

NET INTEREST INCOME

     $ 25,789          $ 21,643     

NET INTEREST MARGIN(5)

          3.05          3.34

 

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     Nine Months Ended September 30,  
     2017     2016  
     Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Yield / Rate
 

ASSETS:

              

Loans(1)(6)

   $ 1,975,592     $ 73,274        4.96   $ 1,535,894     $ 56,933        4.95

Securities available for sale(6)

     1,002,118       19,958        2.66     641,270       11,917        2.48

Securities held to maturity(6)

     224,174       7,012        4.18     194,326       5,698        3.92

Restricted equity securities

     15,830       663        5.60     9,256       354        5.11

Certificates of deposit at other financial institutions

     2,178       24        1.47     751       11        1.96

Federal funds sold and other(2)

     84,666       643        1.02     46,327       164        0.47
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 3,304,558     $ 101,574        4.11   $ 2,427,824     $ 75,077        4.13

Allowance for loan losses

     (18,182          (13,179     

All other assets

     92,425            41,988       
  

 

 

        

 

 

      

TOTAL ASSETS

   $ 3,378,801          $ 2,456,633       

LIABILITIES & EQUITY

              

Deposits:

              

Interest checking

   $ 631,582     $ 3,586        0.76   $ 292,013     $ 853        0.39

Money market

     608,670       4,412        0.97     608,341       2,767        0.61

Savings

     55,569       127        0.31     48,647       121        0.33

Time deposits

     1,196,675       10,993        1.23     937,266       6,377        0.91

Federal Home Loan Bank advances

     242,549       2,228        1.23     75,412       511        0.91

Federal funds purchased and other(3)

     45,745       309        0.90     50,100       237        0.63

Subordinated notes and other borrowings

     58,398       3,239        7.42     32,882       1,820        7.39
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $ 2,839,188     $ 24,894        1.17   $ 2,044,661     $ 12,686        0.83

Demand deposits

     246,675            200,981       

Other liabilities

     7,358            12,707       

Total equity

     285,580            198,284       
  

 

 

        

 

 

      

TOTAL LIABILITIES AND EQUITY

   $ 3,378,801          $ 2,456,633       

NET INTEREST SPREAD(4)

          2.94          3.30

NET INTEREST INCOME

     $ 76,680          $ 62,391     

NET INTEREST MARGIN(5)

          3.10          3.43

 

(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 and interest-bearing deposits at the Federal Reserve Bank and the Federal Home Loan Bank.
(3)  Includes repurchase agreements.
(4)  Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5)  Represents net interest income (annualized) divided by total average earning assets.
(6)  Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.
(7)  Average balances are average daily balances.

 

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Analysis of Changes in Interest Income and Expenses

 

     Net change three months ended
September 30, 2017 versus September 30, 2016
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 5,425      $ 362      $ 5,787  

Securities available for sale

     1,855        466        2,321  

Securities held to maturity

     (120      200        80  

Restricted equity securities

     91        45        136  

Certificates of deposit at other financial institutions

     6        (1      5  

Federal funds sold and other

     63        159        222  
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 7,320      $ 1,231      $ 8,551  
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 291      $ 738      $ 1,029  

Money market accounts

     (16      762        746  

Savings

     3        (1      2  

Time deposits

     391        1,460        1,851  

Federal Home Loan Bank advances

     505        248        753  

Fed funds purchased and other borrowed funds

     (12      35        23  

Subordinated Notes and other borrowings

     7        (6      1  
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 1,169      $ 3,236      $ 4,405  
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 6,151      $ (2,005    $ 4,146  
  

 

 

    

 

 

    

 

 

 
     Net change nine months ended
September 30, 2017 versus September 30, 2016
 
     Volume      Rate      Net Change  

INTEREST INCOME

        

Loans

   $ 16,193      $ 148      $ 16,341  

Securities available for sale

     6,692        1,349        8,041  

Securities held to maturity

     878        436        1,314  

Restricted equity securities

     251        58        309  

Certificates of deposit at other financial institutions

     21        (8      13  

Federal funds sold and other

     131        348        479  
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

   $ 24,166      $ 2,331      $ 26,497  
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

        

Interest checking

   $ 985      $ 1,748      $ 2,733  

Money market accounts

     6        1,639        1,645  

Savings

     14        (8      6  

Time deposits

     1,752        2,864        4,616  

Federal Home Loan Bank advances

     1,136        581        1,717  

Fed funds purchased and other borrowed funds

     (20      92        72  

Subordinated notes and other borrowings

     1,406        13        1,419  
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

   $ 5,279      $ 6,929      $ 12,208  
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $ 18,887      $ (4,598    $ 14,289  
  

 

 

    

 

 

    

 

 

 

 

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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 $590 and $1,392 for the three months ended September 30, 2017 and 2016, respectively, and $3,018 and $4,095 for the nine months ended September 30, 2017 and 2016, respectively. The lower provision for the three and nine months ended September 30, 2017 compared to the same periods in 2016 is based on the Company’s analysis of its allowance for loan losses which, based on the loan portfolio’s risk profile and comparatively less loan growth, required less provision be recorded. Nonperforming loans at September 30, 2017 totaled $2,860 compared to $6,182 at December 31, 2016, representing 0.1% and 0.3% of total loans, respectively.

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2017 was $3,569 and $11,457, respectively, compared to $4,876 and $12,587 for the same periods in 2016, respectively. The following is a summary of the components of non-interest income (in thousands):

 

     Three Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2017      2016        

Service charges on deposit accounts

   $ 39      $ 44      $ (5      (11.4 %) 

Other service charges and fees

     787        845        (58      (6.9 %) 

Net gains on sale of loans

     1,517        2,942        (1,425      (48.4 %) 

Wealth management

     643        446        197        44.2

Loan servicing fees, net

     70        (40      110        275.0

Gain on sales of investment securities, net

     350        430        (80      (18.6 %) 

Net gain on foreclosed assets

     (16      30        (46      (153.3 %) 

Other

     179        179        —          —  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 3,569      $ 4,876      $ (1,307      (26.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2017      2016        

Service charges on deposit accounts

   $ 114      $ 139      $ (25      (18.0 %) 

Other service charges and fees

     2,297        2,245        52        2.3

Net gains on sale of loans

     5,918        6,859        (941      (13.7 %) 

Wealth management

     1,884        1,343        541        40.3

Loan servicing fees, net

     230        (2      232        11,600.0

Gain on sales of investment securities, net

     470        1,535        (1,065      (69.4 %) 

Net gain on foreclosed assets

     (10      36        (46      (127.8 %) 

Other

     554        432        122        28.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 11,457      $ 12,587      $ (1,130      (9.0 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Service charges on deposit accounts for the three and nine months ended September 30, 2017 decreased $5 and $25, or 11.4% and 18.0%, respectively, from the same periods in 2016. The decrease for the nine months ended September 30, 2017 was due to the Company’s waiving service charges on deposit accounts during March 2017 while the Company was going through a core system conversion.

Other service charges and fees for the three and nine months ended September 30, 2017 decreased $58 and increased $52, or 6.9% and 2.3%, respectively, from the same periods in 2016. The fluctuation for the nine months ended September 30, 2017 was due to a combination of increases and decreases, with the following types of fees having the largest fluctuation in the comparative periods: unused commitment fees ($108), ATM foreign surcharge fees ($42), and underwriting fees ($32).

Net gain on sale of loans decreased $1,425, or 48.4% and $941, or 13.7%, when comparing the three and nine months ended September 30, 2017 to the same period in 2016, respectively. The changes in both periods were due to the volume of loans sold and the margins related to the loans sold.

 

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Wealth management income for the three and nine months ended September 30, 2017 increased $197 and $541, or 44.2% and 40.3%, respectively, in comparison with the same periods in 2016. The increase was attributed to the growth in the client base and assets under management in the wealth management division, as well as improvement in the stock markets. As a comparison, the Company had assets under management at September 30, 2017 and 2016 of $351,932 and $262,879, respectively.

Net loan servicing fees for the three and nine months ended September 30, 2017 increased $110 and $232, or 275.0% and 11,600.0%, respectively, in comparison with the same periods in 2016. The increase was attributed to the growth in the mortgage loans serviced and the related valuation increase of the mortgage servicing rights.

Net gain on sale of investment securities decreased $80 and $1,065, or 18.6% and 69.4%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The decreases were primarily due to the gains on securities that were recognized in the third quarter of 2016, which were related to management selling a number of smaller securities to consolidate the number of securities carried in the portfolio, and selling securities of two municipalities whose credit rating had fallen below management’s credit score limit.

Other non-interest income remained consistent when comparing the three months ended September 30, 2017 with the same period in 2016 and increased by $122, or 28.2%, when comparing the nine months ended September 30, 2017 with the same period in 2016. The increase for the nine months ended September 30, 2017 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.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 2017 was $15,278 and $44,837, respectively, compared to $13,708 and $38,452 for the same periods in 2016, respectively. The increases were the result of the following components listed in the table below (in thousands):

 

     Three Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2017      2016        

Salaries and employee benefits

   $ 9,011      $ 7,979      $ 1,032        12.9

Occupancy and equipment

     2,399        2,001        398        19.9

FDIC assessment expense

     900        570        330        57.9

Marketing

     192        206        (14      (6.8 %) 

Professional fees

     821        935        (114      (12.2 %) 

Amortization of core deposit intangible

     115        138        (23      (16.7 %) 

Other

     1,840        1,879        (39      (2.1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 15,278      $ 13,708      $ 1,570        11.5
  

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended
September 30,
     $
Increase
(Decrease)
     %
Increase
(Decrease)
 
     2017      2016        

Salaries and employee benefits

   $ 26,172      $ 22,099      $ 4,073        18.4

Occupancy and equipment

     6,689        5,563        1,126        20.2

FDIC assessment expense

     2,675        1,388        1,287        92.7

Marketing

     744        611        133        21.8

Professional fees

     2,558        3,006        (448      (14.9 %) 

Amortization of core deposit intangible

     363        431        (68      (15.8 %) 

Other

     5,636        5,354        282        5.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 44,837      $ 38,452      $ 6,385        16.3
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in non-interest expense noted in the table above is related to the Company’s overall growth. The Company’s largest increases for the three and nine months ended September 30, 2017, in comparison with the same periods of 2016, were in salaries and employee benefits, occupancy and equipment, FDIC assessment expense, and other non-interest expense.

Salaries and employee benefits increased $1,032 and $4,073, or 12.9% and 18.4%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from 261 full-time equivalent employees as of September 30, 2016, to 279 as of September 30, 2017, many of which were officer level positions as the Company has worked to enhance its management team to properly oversee the Company’s growth and to grow its team of lenders to further grow the loan portfolio. In addition to salaries, incentive expenses increased $405 and $309, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods of 2016 due to the Company’s financial performance during the three and nine months ended September 30, 2017. Stock-based compensation expense also increased $266 and $657, respectively, for the three and nine months ended September 30, 2017 in comparison with the same periods in 2016.

 

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Occupancy and equipment expense increased $398 and $1,126, or 19.9% and 20.2%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The variance for the three months ended September 30, 2017 versus the three months ended September 30, 2016 is primarily attributable to increases in building rent expense ($222), software maintenance fees ($114), and software depreciation ($21). The variance when comparing the nine months ended September 30, 2017 with the nine months ended September 30, 2016 is attributable to increases in building rent expense ($634), software maintenance fees ($281) and leasehold improvement depreciation ($69).

The Company’s FDIC assessment expense increased $330 and $1,287, or 57.9% and 92.7%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The increases are due to the year-over-year asset growth of the Company, on which FDIC assessments are calculated, and are also related to the change in the FDIC insurance assessment calculation in the third quarter of 2016, which caused an increase in the Company’s insurance assessments based on the calculation’s components.

Professional fees decreased $114 and $448, or 12.2% and 14.9%, respectively, when comparing the three and nine months ended September 30, 2017 with the same periods in 2016. The decrease when comparing the three months ended September 30, 2017 with the same period in 2016 is due to decreases in other professional fees ($85) and compliance fees ($152). The decrease, when comparing the nine months ended September 30, 2017 and 2016, is due to decreases in merger-related expenses ($316), legal fees ($79) and SEC filing expense ($67). The decreases in other professional fees are related to the following 2016 expenses: (1) the design and implementation of subsidiaries (Franklin Synergy Risk Management, Inc., Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc.); (2) a consulting engagement related to the Company’s core systems and related processes; and (3) professional placement service fees for the hiring of several key lending and management professionals.

For the three months ended September 30, 2017, other non-interest expenses decreased $39, or 2.1%, and for the nine months ended September 30, 2017, other noninterest expenses increased $282, or 5.3%, from the same comparative periods during 2016. The increase in other non-interest expense for the nine months ended September 30, 2017 versus September 30, 2016 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: insurance expense ($78); franchise taxes ($162); travel expenses ($74); management fees ($200); and loan servicing expense ($219). These variances were offset by decreases in various expense types, with the following account having the largest decrease: loan-related expenses ($283).

Income Tax Expense

The Company recognized income tax expense for the three and nine months ended September 30, 2017, of $3,138 and $10,343, respectively, compared to $3,314 and $9,047, respectively, for the three and nine months ended September 30, 2016. The Company’s year-to-date income tax expense for the period ended September 30, 2017 reflects an effective income tax rate of 28.7%, a decrease compared to 30.2% for the same period in 2016.

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

Overview

The Company’s total assets increased by $622,089, or 21.1%, from December 31, 2016 to September 30, 2017. The increase in total assets has primarily been the result of organic growth in the loan portfolio and from purchases of additional investment securities.

Loans

Lending-related income is the most important component of the Company’s net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.

The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at September 30, 2017 and December 31, 2016 were $2,115,930 and $1,773,592, respectively, an increase of $342,338, or 19.3%. As a percentage of total assets, total loans, net of deferred fees, at September 30, 2017 and December 31, 2016 were 59.3% and 60.3%, respectively. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. The Company has also attracted a number of experienced commercial and mortgage lenders to help increase penetration in its primary markets in Middle Tennessee, Williamson County, Rutherford County and Davidson County.

 

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

 

     September 30, 2017     December 31, 2016  

Types of Loans

   Amount      % of Total
Loans
    Amount      % of Total
Loans
 

Total loans, excluding purchased credit impaired (“PCI”) loans

          

Real estate:

          

Construction and land development

   $ 514,934        24.3   $ 489,562        27.6

Commercial

     598,846        28.3     497,140        28.0

Residential

     532,113        25.1     404,989        22.8

Commercial and industrial

     464,747        22.0     376,476        21.2

Consumer and other

     3,933        0.2     3,359        0.2
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