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EX-32 - EX-32 - Franklin Financial Network Inc.fsb-ex32_7.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

or

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 every Interactive Data File required to be submitted 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 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

  

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 Exchange Act).    Yes      No  

The number of shares outstanding of the registrant’s common stock, no par value per share, as of October 31, 2018, was 14,525,973.

 

 

 

 


TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

 

 

Cautionary Note Regarding Forward-Looking Statements

1

Item 1. Consolidated Financial Statements (unaudited)

2

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

30

Item  3. Quantitative and Qualitative Disclosures About Market Risk

49

Item 4. Controls and Procedures

49

 

 

PART II OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

50

Item 1A. Risk Factors

50

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

50

Item 3. Defaults Upon Senior Securities

50

Item 4. Mine Safety Disclosures

50

Item 5. Other Information

50

Item 6. Exhibits

50

 

 

SIGNATURES

 

 


 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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 Part I of our Annual Report on Form 10-K for the year ended December 31, 2017.

1


 

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,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

144,660

 

 

$

251,543

 

Certificates of deposit at other financial institutions

 

 

3,104

 

 

 

2,855

 

Securities available for sale

 

 

1,115,187

 

 

 

999,881

 

Securities held to maturity (fair value 2018—$199,927 and 2017—$217,608)

 

 

204,587

 

 

 

214,856

 

Loans held for sale, at fair value

 

 

14,563

 

 

 

12,024

 

Loans

 

 

2,550,121

 

 

 

2,256,608

 

Allowance for loan losses

 

 

(22,479

)

 

 

(21,247

)

Net loans

 

 

2,527,642

 

 

 

2,235,361

 

Restricted equity securities, at cost

 

 

21,793

 

 

 

18,492

 

Premises and equipment, net

 

 

11,852

 

 

 

11,281

 

Accrued interest receivable

 

 

14,391

 

 

 

11,947

 

Bank owned life insurance

 

 

54,859

 

 

 

49,085

 

Deferred tax asset

 

 

17,366

 

 

 

10,007

 

Foreclosed assets

 

 

1,853

 

 

 

1,503

 

Servicing rights, net

 

 

3,465

 

 

 

3,620

 

Goodwill

 

 

18,176

 

 

 

9,124

 

Core deposit intangible, net

 

 

1,109

 

 

 

1,007

 

Other assets

 

 

13,206

 

 

 

10,940

 

Total assets

 

$

4,167,813

 

 

$

3,843,526

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

321,108

 

 

$

272,172

 

Interest bearing

 

 

3,050,442

 

 

 

2,895,056

 

Total deposits

 

 

3,371,550

 

 

 

3,167,228

 

Federal Home Loan Bank advances

 

 

371,500

 

 

 

272,000

 

Federal funds purchased and repurchase agreements

 

 

 

 

 

31,004

 

Subordinated notes, net

 

 

58,649

 

 

 

58,515

 

Accrued interest payable

 

 

4,726

 

 

 

2,769

 

Other liabilities

 

 

5,211

 

 

 

7,357

 

Total liabilities

 

 

3,811,636

 

 

 

3,538,873

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, no par value: 1,000,000 shares authorized; no shares

   outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, no par value: 30,000,000 and 30,000,000 shares authorized

   at September 30, 2018 and December 31, 2017 , respectively; 14,525,351 and

   13,237,128 issued at September 30, 2018 and December 31, 2017 , respectively

 

 

261,623

 

 

 

222,665

 

Retained earnings

 

 

119,433

 

 

 

88,671

 

Accumulated other comprehensive loss

 

 

(24,982

)

 

 

(6,786

)

Total shareholders’ equity

 

 

356,074

 

 

 

304,550

 

Non-controlling interest in consolidated subsidiary

 

 

103

 

 

 

103

 

Total equity

 

 

356,177

 

 

 

304,653

 

Total liabilities and equity

 

$

4,167,813

 

 

$

3,843,526

 

 

See accompanying notes to consolidated financial statements.

 

2


 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income and dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

34,435

 

 

$

25,973

 

 

$

95,541

 

 

$

73,195

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

6,460

 

 

 

5,041

 

 

 

19,476

 

 

 

16,358

 

Tax-Exempt

 

 

1,926

 

 

 

2,217

 

 

 

5,770

 

 

 

6,449

 

Dividends on restricted equity securities

 

 

313

 

 

 

269

 

 

 

916

 

 

 

663

 

Federal funds sold and other

 

 

583

 

 

 

280

 

 

 

2,197

 

 

 

667

 

Total interest income

 

 

43,717

 

 

 

33,780

 

 

 

123,900

 

 

 

97,332

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

14,137

 

 

 

7,311

 

 

 

37,385

 

 

 

19,118

 

Federal funds purchased and repurchase agreements

 

 

69

 

 

 

92

 

 

 

296

 

 

 

309

 

Federal Home Loan Bank advances

 

 

1,867

 

 

 

968

 

 

 

4,390

 

 

 

2,228

 

Subordinated notes and other borrowings

 

 

1,082

 

 

 

1,083

 

 

 

3,246

 

 

 

3,239

 

Total interest expense

 

 

17,155

 

 

 

9,454

 

 

 

45,317

 

 

 

24,894

 

Net interest income

 

 

26,562

 

 

 

24,326

 

 

 

78,583

 

 

 

72,438

 

Provision for loan losses

 

 

136

 

 

 

590

 

 

 

1,279

 

 

 

3,018

 

Net interest income after provision for loan losses

 

 

26,426

 

 

 

23,736

 

 

 

77,304

 

 

 

69,420

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

58

 

 

 

39

 

 

 

151

 

 

 

114

 

Other service charges and fees

 

 

747

 

 

 

787

 

 

 

2,321

 

 

 

2,297

 

Net gains on sale of loans

 

 

1,379

 

 

 

1,517

 

 

 

4,759

 

 

 

5,918

 

Wealth management

 

 

705

 

 

 

643

 

 

 

2,198

 

 

 

1,884

 

Loan servicing fees, net

 

 

111

 

 

 

70

 

 

 

333

 

 

 

230

 

Gain (loss) on sale or call of securities

 

 

(1

)

 

 

350

 

 

 

 

 

 

470

 

Net gain on sale of foreclosed assets

 

 

3

 

 

 

(16

)

 

 

9

 

 

 

(10

)

Other

 

 

440

 

 

 

179

 

 

 

1,274

 

 

 

554

 

Total noninterest income

 

 

3,442

 

 

 

3,569

 

 

 

11,045

 

 

 

11,457

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,723

 

 

 

9,011

 

 

 

30,179

 

 

 

26,172

 

Occupancy and equipment

 

 

2,933

 

 

 

2,399

 

 

 

8,412

 

 

 

6,689

 

FDIC assessment expense

 

 

1,020

 

 

 

900

 

 

 

2,458

 

 

 

2,675

 

Marketing

 

 

306

 

 

 

192

 

 

 

855

 

 

 

744

 

Professional fees

 

 

1,023

 

 

 

821

 

 

 

3,254

 

 

 

2,558

 

Amortization of core deposit intangible

 

 

169

 

 

 

115

 

 

 

455

 

 

 

363

 

Other

 

 

2,077

 

 

 

1,840

 

 

 

6,176

 

 

 

5,636

 

Total noninterest expense

 

 

18,251

 

 

 

15,278

 

 

 

51,789

 

 

 

44,837

 

Income before income tax expense

 

 

11,617

 

 

 

12,027

 

 

 

36,560

 

 

 

36,040

 

Income tax expense

 

 

1,068

 

 

 

3,138

 

 

 

5,790

 

 

 

10,343

 

Net income

 

 

10,549

 

 

 

8,889

 

 

 

30,770

 

 

 

25,697

 

Earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

(8

)

 

 

(8

)

Net income available to common shareholders

 

$

10,549

 

 

$

8,889

 

 

$

30,762

 

 

$

25,689

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.73

 

 

$

0.67

 

 

$

2.19

 

 

$

1.96

 

Diluted

 

 

0.70

 

 

 

0.65

 

 

 

2.10

 

 

 

1.86

 

 

See accompanying notes to consolidated financial statements.

 

3


 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

10,549

 

 

$

8,889

 

 

$

30,770

 

 

$

25,697

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during the period

 

 

(6,279

)

 

 

1,610

 

 

 

(24,625

)

 

 

7,641

 

Reclassification adjustment for gains included in net

   income

 

 

1

 

 

 

(350

)

 

 

 

 

 

(470

)

Net unrealized gains (losses)

 

 

(6,278

)

 

 

1,260

 

 

 

(24,625

)

 

 

7,171

 

Tax effect

 

 

1,639

 

 

 

(494

)

 

 

6,429

 

 

 

(2,812

)

Total other comprehensive income (loss)

 

 

(4,639

)

 

 

766

 

 

 

(18,196

)

 

 

4,359

 

Comprehensive income

 

$

5,910

 

 

$

9,655

 

 

$

12,574

 

 

$

30,056

 

 

See accompanying notes to consolidated financial statements.

 

4


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2018 and September 30, 2017

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

(Unaudited)

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

Common Stock

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Noncontrolling

 

 

Total

 

 

 

Stock

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

Interest

 

 

Equity

 

Balance at December 31, 2016

 

$

 

 

 

13,036,954

 

 

$

218,354

 

 

$

59,386

 

 

$

(7,482

)

 

 

103

 

 

$

270,361

 

Exercise of common stock options

 

 

 

 

 

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 in conjunction with 401(k) employer

   match, net of distributions

 

 

 

 

 

(5,085

)

 

 

(193

)

 

 

 

 

 

 

 

 

 

 

 

(193

)

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(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

 

Balance at December 31, 2017

 

$

 

 

 

13,237,128

 

 

$

222,665

 

 

$

88,671

 

 

$

(6,786

)

 

$

103

 

 

$

304,653

 

Exercise of common stock options

 

 

 

 

 

207,472

 

 

 

2,845

 

 

 

 

 

 

 

 

 

 

 

 

2,845

 

Stock based compensation expense, net

   of forfeitures

 

 

 

 

 

 

 

 

3,454

 

 

 

 

 

 

 

 

 

 

 

 

3,454

 

Stock issued in conjunction with 401(k) employer

   match, net of distributions

 

 

 

 

 

(7,271

)

 

 

(273

)

 

 

 

 

 

 

 

 

 

 

 

(273

)

Issuance of restricted stock, net of forfeitures

 

 

 

 

 

117,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock issued for acquisition (net of issuance costs)

 

 

 

 

 

970,390

 

 

 

32,932

 

 

 

 

 

 

 

 

 

 

 

 

32,932

 

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

30,770

 

 

 

 

 

 

 

 

 

30,770

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,196

)

 

 

 

 

 

(18,196

)

Balance at September 30, 2018

 

$

 

 

 

14,525,351

 

 

$

261,623

 

 

$

119,433

 

 

$

(24,982

)

 

$

103

 

 

$

356,177

 

 

See accompanying notes to consolidated financial statements.

 

5


 

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,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

30,770

 

 

$

25,697

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization on premises and equipment

 

 

1,279

 

 

 

1,118

 

Accretion of purchase accounting adjustments

 

 

(1,122

)

 

 

(873

)

Net amortization of securities

 

 

6,323

 

 

 

7,654

 

Amortization of loan servicing right asset

 

 

643

 

 

 

721

 

Amortization of core deposit intangible

 

 

455

 

 

 

363

 

Amortization of debt issuance costs

 

 

134

 

 

 

133

 

Provision for loan losses

 

 

1,279

 

 

 

3,018

 

Deferred income tax benefit

 

 

(853

)

 

 

(1,394

)

Origination of loans held for sale

 

 

(267,862

)

 

 

(270,876

)

Proceeds from sale of loans held for sale

 

 

269,594

 

 

 

290,669

 

Net gain on sale of loans

 

 

(4,759

)

 

 

(5,918

)

Gain on sale of available for sale securities

 

 

 

 

 

(470

)

Income from bank owned life insurance

 

 

(1,155

)

 

 

(465

)

Net loss on foreclosed assets

 

 

 

 

 

10

 

Stock-based compensation

 

 

3,454

 

 

 

1,970

 

Deferred gain on sale of loans

 

 

(11

)

 

 

(58

)

Deferred gain on sale of foreclosed assets

 

 

(9

)

 

 

-

 

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(4,002

)

 

 

(5,949

)

Accrued interest payable and other liabilities

 

 

(1,984

)

 

 

1,120

 

Net cash from operating activities

 

 

32,174

 

 

 

46,470

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Securities available for sale :

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

122,837

 

Purchases

 

 

(235,319

)

 

 

(455,700

)

Maturities, prepayments and calls

 

 

122,172

 

 

 

108,339

 

Securities held to maturity :

 

 

 

 

 

 

 

 

Purchases

 

 

(1,676

)

 

 

(1,996

)

Maturities, prepayments and calls

 

 

10,571

 

 

 

12,110

 

Net change in loans

 

 

(196,053

)

 

 

(346,595

)

Purchase of restricted equity securities

 

 

(2,425

)

 

 

(6,629

)

Purchases of premises and equipment, net

 

 

(1,597

)

 

 

(2,784

)

Proceeds from sale of foreclosed assets

 

 

 

 

 

1,330

 

Capitalization of foreclosed assets

 

 

 

 

 

(35

)

Decrease (Increase) in certificates of deposits at other financial institutions

 

 

251

 

 

 

(1,310

)

Purchase of bank owned life insurance

 

 

(119

)

 

 

 

Net cash acquired from acquisition (See Note 2)

 

 

24,660

 

 

 

 

Net cash from investing activities

 

 

(279,535

)

 

 

(570,433

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Increase in deposits

 

 

81,160

 

 

 

433,007

 

Decrease in federal funds purchased and repurchase agreements

 

 

(31,004

)

 

 

(50,439

)

Proceeds from Federal Home Loan Bank advances

 

 

270,000

 

 

 

370,000

 

Repayment of Federal Home Loan Bank advances

 

 

(182,000

)

 

 

(165,000

)

Proceeds from issuance of common stock, net of offering costs

 

 

(242

)

 

 

 

Proceeds from exercise of common stock warrants

 

 

 

 

 

150

 

Proceeds from exercise of common stock options

 

 

2,845

 

 

 

1,361

 

Divestment of common stock issued to 401(k) plan

 

 

(273

)

 

 

(193

)

Noncontrolling interest distributions

 

 

(8

)

 

 

(8

)

Net cash from financing activities

 

 

140,478

 

 

 

588,878

 

Net change in cash and cash equivalents

 

 

(106,883

)

 

 

64,915

 

Cash and cash equivalents at beginning of period

 

 

251,543

 

 

 

90,927

 

Cash and cash equivalents at end of period

 

$

144,660