UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

 

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

For the quarterly period ended September 30, 20162017

 

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

For the transition period from                    to                    

Commission file number001-36895

 

 

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 RegulationS-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, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule12b-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 Rule12b-2 of the Act).    Yes  ☐    No  ☒

The number of shares outstanding of the registrant’s common stock, no par value per share, as of October 31, 2016,November 7, 2017, was 10,758,458.13,215,564.

 

 

 


TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Cautionary Note Regarding Forward-Looking Statements

   1 

Item 1. Consolidated Financial Statements (unaudited)

  

Consolidated Balance Sheets

   2 

Consolidated Statements of Income

   3 

Consolidated Statements of Comprehensive Income (Loss)

   4 

Consolidated StatementsStatement 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

   5047 

Item 4. Controls and Procedures

   5148 

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

   5148 

Item 1A. Risk Factors

   5148 

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

   5249 

Item 3. Defaults Upon Senior Securities

   5349 

Item 4. Mine Safety Disclosures

   5349 

Item 5. Other Information

   5349 

Item 6. Exhibits

   5450 

SIGNATURES

  


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-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 Form10-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 Form10-K for the year ended December 31, 2015 and those described in Item 1A of Part II of this Quarterly Report on Form 10-Q.2016.

PART I FINANCIAL INFORMATION

ITEM 1.CONSOLIDATED FINANCIAL STATEMENTS

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

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

 

  September 30,
2016
 December 31,
2015
   September 30,
2017
 December 31,
2016
 
  (Unaudited)     (Unaudited)   

ASSETS

      

Cash and due from financial institutions

  $55,749   $52,394    $155,842  $90,927 

Certificates of deposit at other financial institutions

   1,055   250     2,365  1,055 

Securities available for sale

   670,756   575,838     980,737  754,755 

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

   235,050   158,200  

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

   217,312  228,894 

Loans held for sale, at fair value

   26,819   14,079     11,823  23,699 

Loans

   1,654,058   1,303,826     2,115,930  1,773,592 

Allowance for loan losses

   (15,590 (11,587   (19,944 (16,553
  

 

  

 

   

 

  

 

 

Net loans

   1,638,468   1,292,239     2,095,986  1,757,039 
  

 

  

 

   

 

  

 

 

Restricted equity securities, at cost

   11,829   7,998     18,472  11,843 

Premises and equipment, net

   8,796   7,640     11,217  9,551 

Accrued interest receivable

   7,871   7,299     11,156  9,931 

Bank owned life insurance

   23,105   22,619     23,732  23,267 

Deferred tax asset

   5,590   9,430     13,592  15,013 

Assets held for sale

   —    1,640  

Foreclosed assets

   —    200     1,503   —   

Servicing rights, net

   3,566   3,455     3,639  3,621 

Goodwill

   9,124   9,124     9,124  9,124 

Core deposit intangible, net

   1,612   2,043     1,117  1,480 

Other assets

   3,805   3,344     7,663  2,990 
  

 

  

 

   

 

  

 

 

Total assets

  $2,703,195   $2,167,792    $3,565,278  $2,943,189 
  

 

  

 

   

 

  

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

LIABILITIES AND EQUITY

   

Deposits

      

Non-interest bearing

  $232,118   $176,742    $257,177  $233,781 

Interest bearing

   1,985,836   1,637,297     2,567,648  2,158,037 
  

 

  

 

   

 

  

 

 

Total deposits

   2,217,954   1,814,039     2,824,825  2,391,818 

Federal Home Loan Bank advances

   337,000  132,000 

Federal funds purchased and repurchase agreements

   45,843   101,086     32,862  83,301 

Federal Home Loan Bank advances

   162,000   57,000  

Subordinated notes, net of issuance costs

   58,292    —   

Subordinated notes, net

   58,470  58,337 

Accrued interest payable

   1,399   644     2,597  1,924 

Other liabilities

   8,063   6,207     5,827  5,448 
  

 

  

 

   

 

  

 

 

Total liabilities

   2,493,551   1,978,976     3,261,581  2,672,828 

Shareholders’ equity

   

Preferred stock, no par value: 1,000,000 shares authorized; Senior non-cumulative preferred stock, Series A, no par value, $1,000 liquidation value per share, 10,000 shares authorized; no shares outstanding at September 30, 2016 and 10,000 shares issued and outstanding at December 31, 2015

   —    10,000  

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

   150,852   147,784  

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

   51,591   31,352     85,075  59,386 

Accumulated other comprehensive income (loss)

   7,201   (320

Accumulated other comprehensive loss

   (3,123 (7,482
  

 

  

 

   

 

  

 

 

Total shareholders’ equity

   209,644   188,816     303,594  270,258 

Noncontrolling interest in consolidated subsidiary

   103  103 
  

 

  

 

   

 

  

 

 

Total liabilities and shareholders’ equity

  $2,703,195   $2,167,792  

Total equity

  $303,697  $270,361 
  

 

  

 

   

 

  

 

 

Total liabilities and equity

  $3,565,278  $2,943,189 
  

 

  

 

 

See accompanying notes to consolidated financial statements.

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,

   

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
  2016 2015 2016 2015   2017 2016 2017 2016 

Interest income and dividends

          

Loans, including fees

  $20,192   $14,744   $56,864   $38,071    $25,973  $20,192  $73,195  $56,864 

Securities:

          

Taxable

   3,889   3,462   11,402   9,084     5,041  3,889  16,358  11,402 

Tax-exempt

   1,457   966   3,776   1,155  

Tax-Exempt

   2,217  1,457  6,449  3,776 

Dividends on restricted equity securities

   133   100   354   250     269  133  663  354 

Federal funds sold and other

   53   29   175   80     280  53  667  175 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest income

   25,724   19,301   72,571   48,640     33,780  25,724  97,332  72,571 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Interest expense

          

Deposits

   3,683   2,417   10,118   5,963     7,311  3,683  19,118  10,118 

Federal funds purchased and repurchase agreements

   69   69   237   232     92  69  309  237 

Federal Home Loan Bank advances

   215   79   511   225     968  215  2,228  511 

Subordinated notes and other borrowings

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

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest expense

   5,049   2,565   12,686   6,420     9,454  5,049  24,894  12,686 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net interest income

   20,675   16,736   59,885   42,220     24,326  20,675  72,438  59,885 

Provision for loan losses

   1,392   1,724   4,095   3,154     590  1,392  3,018  4,095 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net interest income after provision for loan losses

   19,283   15,012   55,790   39,066     23,736  19,283  69,420  55,790 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noninterest income

          

Service charges on deposit accounts

   44   44   139   78     39  44  114  139 

Other service charges and fees

   845   679   2,245   1,987     787  845  2,297  2,245 

Net gains on sale of loans

   2,942   2,463   6,859   5,573     1,517  2,942  5,918  6,859 

Wealth management

   446   327   1,343   914     643  446  1,884  1,343 

Loan servicing fees, net

   (40 84   (2 187     70  (40 230  (2

Gain on sale or call of securities

   430   5   1,535   529     350  430  470  1,535 

Net gain on sale of foreclosed assets

   30   3   36   30  

Net (loss) gain on sale of foreclosed assets

   (16 30  (10 36 

Other

   179   193   432   566     179  179  554  432 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total noninterest income

   4,876   3,798   12,587   9,864     3,569  4,876  11,457  12,587 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noninterest expense

          

Salaries and employee benefits

   7,979   6,208   22,099   17,960     9,011  7,979  26,172  22,099 

Occupancy and equipment

   2,001   1,683   5,563   4,961     2,399  2,001  6,689  5,563 

FDIC assessment expense

   570   362   1,388   792     900  570  2,675  1,388 

Marketing

   206   277   611   695     192  206  744  611 

Professional fees

   935   516   3,006   1,382     821  935  2,558  3,006 

Amortization of core deposit intangible

   138   160   431   499     115  138  363  431 

Indirect expenses related to public offering

   —     —     —    314  

Other

   1,879   1,647   5,354   4,443     1,840  1,879  5,636  5,354 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total noninterest expense

   13,708   10,853   38,452   31,046     15,278  13,708  44,837  38,542 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income before income tax expense

   10,451   7,957   29,925   17,884     12,027  10,451  36,040  29,925 

Income tax expense

   3,421   2,807   9,663   6,468     3,138  3,314  10,343  9,047 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

   7,030   5,150   20,262   11,416     8,889  7,137  25,697  20,878 

Earnings attributable to noncontrolling interest

   —     —    (8  —   

Dividends paid on Series A preferred stock

   —    (25 (23 (75   —     —     —    (23
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income available to common shareholders

  $7,030   $5,125   $20,239   $11,341    $8,889  $7,137  $25,689  $20,855 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per share:

          

Basic

  $0.66   $0.49   $1.90   $1.17    $0.67  $0.67  $1.96  $1.96 

Diluted

   0.62   0.46   1.80   1.12     0.65  0.63  1.86  1.84 

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Nine Months Ended September 30, 2016 and 2015

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

(Unaudited)

 

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

   

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
  2016 2015 2016 2015   2017 2016 2017 2016 

Net income

  $7,030   $5,150   $20,262   $11,416    $8,889  $7,137  $25,697  $20,878 

Other comprehensive income, net of tax:

          

Unrealized gains (losses) on securities:

     

Unrealized gains on securities:

     

Unrealized holding gain (loss) arising during the period

   (3,664 7,871   13,910   4,006     1,610  (3,664 7,641  13,910 

Reclassification adjustment for gains included in net income

   (430 (5 (1,535 (529   (350 (430 (470 (1,535
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net unrealized gains (losses)

   (4,094 7,866   12,375   3,477     1,260  (4,094 7,171  12,375 

Tax effect

   1,606   (3,090 (4,854 (1,401   (494 1,606  (2,812 (4,854
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total other comprehensive income (loss)

   (2,488 4,776   7,521   2,076     766  (2,488 4,359  7,521 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income

  $4,542   $9,926   $27,783   $13,492    $9,655  $4,649  $30,056  $28,399 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

See accompanying notes to consolidated financial statements.

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 20162017 and 20152016

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

(Unaudited)

 

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

Accumulated

Other

       
 Shares Amount   Preferred Common Stock Retained Comprehensive Noncontrolling   Total 

Balance at December 31, 2014

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

Exercise of common stock options

   —    80,331   780    —     —    780  

Exercise of common stock warrants

   —    4,970   60    —     —    60  

Dividends paid on Series A preferred stock

   —     —     —    (75  —    (75

Issuance of restricted stock, net of forfeitures

   —    28,229    —     —     —     —   

Stock based compensation expense, net of restricted share forfeitures

   —     —    619    —     —    619  

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

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

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

   —    14,689   365    —     —    365  

Excess tax benefit from exercise of stock options

   —     —    147    —     —    147  

Net income

   —     —     —    11,416    —    11,416  

Other comprehensive income

   —     —     —     —    $2,076   2,076  
  

 

  

 

  

 

  

 

  

 

  

 

 

Balance at September 30, 2015

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

 

  

 

  

 

  

 

  

 

  

 

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

Exercise of common stock options, net

   —    152,003   1,357     1,357     —    152,003  1,357     —      1,357 

Exercise of common stock warrants

   —    6,575   79     79     —    6,575  79     —      79 

Redemption of Series A preferred stock

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

Dividends paid on Series A preferred stock

   —     —     —    (23  —    (23   —     —     —    (23  —     —      (23

Stock based compensation expense, net of restricted share forfeitures

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

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

   —    (6,952 (185  —     —    (185   —    (6,952 (185  —     —     —      (185

Excess tax benefit from restricted stock vesting

   —     —    94    —     —    94  

Excess tax benefit from exercise of stock options

   —     —    522    —     —    522  

Net income

   —     —     —    20,262    —    20,262     —     —     —    20,878   —     —      20,878 

Other comprehensive income

   —     —     —     —    7,521   7,521     —     —     —     —    7,521   —      7,521 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Balance at September 30, 2016

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

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,

   

Nine Months Ended

September 30,

 
  2016 2015   2017 2016 

Cash flows from operating activities

      

Net income

  $20,262   $11,416    $25,697  $20,878 

Adjustments to reconcile net income to net cash from operating activities

      

Depreciation and amortization on premises and equipment

   986   996     1,118  986 

Accretion of purchase accounting adjustments

   (488 (1,551   (873 (488

Net amortization of securities

   5,428   3,426     7,654  5,428 

Amortization of loan servicing right asset

   905   644     721  905 

Amortization of core deposit intangible

   431   499     363  431 

Amortization of debt issuance costs

   79    —      133  79 

Provision for loan losses

   4,095   3,154     3,018  4,095 

Deferred income tax benefit

   (1,015�� (567   (1,394 (1,015

Origination of loans held for sale

   (260,598 (236,831   (270,876 (260,598

Proceeds from sale of loans held for sale

   253,701   245,194     290,669  253,701 

Net gain on sale of loans

   (6,859 (5,573   (5,918 (6,859

Gain on sale of available for sale securities

   (1,535 (380   (470 (1,535

Gain on call of held to maturity securities

   —    (149

Income from bank owned life insurance

   (486 (444   (465 (486

Net gain on foreclosed assets

   (36 (30

Net loss/(gain) on foreclosed assets

   10  (36

Loss on sale of assets held for sale

   98    —      —    98 

Stock-based compensation

   1,201   619     1,970  1,201 

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

   404   356     —    404 

Deferred gain on sale of loans

   (46 (27   (58 (46

Net change in:

      

Accrued interest receivable and other assets

   (1,033 (3,986   (5,949 (1,033

Accrued interest payable and other liabilities

   2,261   2,190     1,120  2,261 
  

 

  

 

   

 

  

 

 

Net cash from operating activities

   17,755   18,956     46,470  18,371 

Cash flows from investing activities

      

Securities available for sale :

      

Sales

   74,203   52,064     122,837  74,203 

Purchases

   (223,432 (467,067   (455,700 (223,432

Maturities, prepayments and calls

   64,502   187,222     108,339  64,502 

Securities held to maturity :

      

Purchases

   (92,646 (88,550   (1,996 (92,646

Maturities, prepayments and calls

   14,088   9,394     12,110  14,088 

Net change in loans

   (349,944 (335,238   (346,595 (349,944

Purchase of bank owned life insurance

   —    (10,344

Proceeds from sale of assets held for sale

   1,542   4,080     —    1,542 

Purchase of restricted equity securities

   (3,831 (2,342   (6,629 (3,831

Proceeds from sale of foreclosed assets

   336   531     1,330  336 

Purchases of premises and equipment, net

   (2,142 (692   (2,784 (2,142

Capitalization of foreclosed assets

   (35  —   

Increase in certificates of deposits at other financial institutions

   (805  —      (1,310 (805
  

 

  

 

   

 

  

 

 

Net cash from investing activities

   (518,129 (650,942   (570,433 (518,129

Cash flows from financing activities

      

Increase in deposits

   403,915   542,422     433,007  403,915 

Decrease in federal funds purchased and repurchase agreements

   (55,243 (1,460   (50,439 (55,243

Proceeds from Federal Home Loan Bank advances

   305,000   157,000     370,000  305,000 

Repayment of Federal Home Loan Bank advances

   (200,000 (119,000   (165,000 (200,000

Proceeds from other borrowings

   10,000    —      —    10,000 

Repayment of other borrowings

   (10,000  —      —    (10,000

Proceeds from issuance of subordinated notes, net of issuance costs

   58,213    —      —    58,213 

Proceeds from exercise of common stock warrants

   79   60     150  79 

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

   1,879   927  

Excess tax benefit from restricted stock vesting

   94    —   

Proceeds from issuance of common stock, net of offering costs

   —    50,423  

Proceeds from exercise of common stock options

   1,361  1,357 

Divestment of common stock issued to 401(k) plan

   (185  —      (193 (185

Redemption of Series A preferred stock

   (10,000  —      —    (10,000

Dividends paid on preferred stock

   (23 (75   —    (23

Earnings attributable to noncontrolling interest

   (8  —   
  

 

  

 

   

 

  

 

 

Net cash from financing activities

   503,729   630,297     588,878  503,113 
  

 

  

 

   

 

  

 

 

Net change in cash and cash equivalents

   3,355   (1,689   64,915  3,355 

Cash and cash equivalents at beginning of period

   52,394   49,347     90,927  52,394 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $55,749   $47,658    $155,842  $55,749 
  

 

  

 

   

 

  

 

 

Supplemental information:

      

Interest paid

  $11,931   $6,254    $24,221  $11,931 

Income taxes paid

   9,650   6,339     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.

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 Form10-Q and therefore do not include all information and footnotes necessary for a faircomplete 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 RegulationS-X, Rule10-01. 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 onForm 10-K filed with the SEC on March 15, 2016.16, 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, 20162017 and December 31, 20152016 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
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

September 30, 2016

        

September 30, 2017

        

U.S. government sponsored entities and agencies

  $3,000    $138    $—     $3,138    $20,147   $—     $(65  $20,082 

Mortgage-backed securities: residential

   546,805     10,346     (354   556,797     729,014    1,113    (5,460   724,667 

Mortgage-backed securities: commercial

   19,526     233     —      19,759     15,675    —      (65   15,610 

State and political subdivisions

   89,576     1,820     (334   91,062     161,223    2,197    (2,855   160,565 

U.S Treasury bills

   59,816    1    (4   59,813 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $658,907    $12,537    $(688  $670,756    $985,875   $3,311   $(8,449  $980,737 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

December 31, 2015

        

U.S. government sponsored entities and agencies

  $6,792    $72    $(47  $6,817  

December 31, 2016

        

Mortgage-backed securities: residential

   502,916     2,386     (4,347   500,955    $614,344   $949   $(8,208  $607,085 

Mortgage-backed securities: commercial

   19,993     22     (180   19,835     19,439    27    (132   19,334 

State and political subdivisions

   46,664     1,570     (3   48,231     133,280    238    (5,182   128,336 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $576,365    $4,050    $(4,577  $575,838    $767,063   $1,214   $(13,522  $754,755 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The amortized cost and fair value of the securities held to maturity portfolio at September 30, 20162017 and December 31, 20152016 and the corresponding amounts of gross unrecognized gains and losses were as follows:

 

  Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair
Value
   Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair
Value
 

September 30, 2016

        

U.S. government sponsored entities and agencies

  $203    $7    $—     $210  

September 30, 2017

        

Mortgage backed securities: residential

   112,071     1,014     (124   112,961    $95,560   $354   $(1,502  $94,412 

State and political subdivisions

   122,776     7,999     —      130,775     121,752    3,957    (32   125,677 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $235,050    $9,020    $(124  $243,946    $217,312   $4,311   $(1,534  $220,089 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

  Gross
Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair
Value
   Gross
Amortized
Cost
   Gross
Unrecognized
Gains
   Gross
Unrecognized
Losses
   Fair
Value
 

December 31, 2015

        

December 31, 2016

        

U.S. government sponsored entities and agencies

  $3,300    $11    $(72  $3,239    $203   $6   $—     $209 

Mortgage backed securities: residential

   30,398     410     (408   30,400     106,169    328    (2,343   104,154 

State and political subdivisions

   124,502     3,841     (13   128,330     122,522    1,214    (207   123,529 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

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

 
   2016   2015   2016   2015 

Proceeds

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

Gross gains

   430    $95     1,920     485  

Gross losses

   —      (90   (385   (105

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

  

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
  2016   2015   2016   2015   2017   2016   2017   2016 

Proceeds

  $—      —     $—     $2,300    $61,647   $11,939   $122,837   $74,203 

Gross gains

   —      —      —      149     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, 2016   September 30, 2017 
  Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 

Available for sale

        

One year or less

  $74,815   $74,800 

Over one year through five years

  $3,000    $3,138     20,147    20,082 

Over five years through ten years

   4,681    4,811 

Over ten years

   89,576     91,062     141,543    140,767 

Mortgage-backed securities: residential

   546,805     556,797     729,014    724,667 

Mortgage-backed securities: commercial

   19,526     19,759     15,675    15,610 
  

 

   

 

   

 

   

 

 

Total

  $658,907    $670,756    $985,875   $980,737 
  

 

   

 

   

 

   

 

 

Held to maturity

        

Over one year through five years

  $706    $750    $1,607   $1,665 

Over five years through ten years

   5,073     5,351     6,322    6,496 

Over ten years

   117,200     124,884     113,823    117,516 

Mortgage-backed securities: residential

   112,071     112,961     95,560    94,412 
  

 

   

 

   

 

   

 

 

Total

  $235,050    $243,946    $217,312   $220,089 
  

 

   

 

   

 

   

 

 

Securities pledged at September 30, 20162017 and December 31, 20152016 had a carrying amount of $742,828$944,463 and $595,524,$808,224, respectively, and were pledged to secure public deposits and repurchase agreements.

At September 30, 20162017 and December 31, 2015,2016, 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.

The following table summarizes the securities with unrealized and unrecognized losses at September 30, 20162017 and December 31, 2015,2016, 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, 2016

          

Available for sale

          

Mortgage-backed securities: residential

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

State and political subdivisions

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total available for sale

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

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

Held to maturity

          

Mortgage-backed securities: residential

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total held to maturity

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

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

December 31, 2015

          

Available for sale

          

U.S. government sponsored entities and agencies

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

Mortgage-backed securities: residential

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

Mortgage-backed securities: commercial

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

State and political subdivisions

   716     (3  —      —     716     (3
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total available for sale

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

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

Held to maturity

                    

U.S. government sponsored entities and agencies

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

Mortgage-backed securities: residential

   9,788     (97 5,481     (311 15,269     (408  $25,405   $(335 $55,224   $(1,167 $80,629   $(1,502

State and political subdivisions

   3,351     (13  —      —    3,351     (13   263    (1 1,154    (31 1,417    (32
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total held to maturity

  $15,096    $(153 $6,452    $(340 $21,548    $(493  $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 and unrecognized losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

NOTE 3—LOANS

Loans at September 30, 20162017 and December 31, 20152016 were as follows:

 

  September 30,
2016
   December 31,
2015
   September 30,
2017
   December 31,
2016
 

Loans that are not PCI loans

        

Construction and land development

  $474,255    $372,767    $514,934   $489,562 

Commercial real estate:

        

Nonfarm, nonresidential

   403,382     353,268     565,536    458,569 

Other

   26,866     10,955     33,310    38,571 

Residential real estate:

        

Closed-end 1-4 family

   228,672     162,933  

Closed-end1-4 family

   373,536    254,474 

Other

   142,374     112,001     158,577    150,515 

Commercial and industrial

   372,784     283,888     464,747    376,476 

Consumer and other

   3,458     6,577     3,933    3,359 
  

 

   

 

   

 

   

 

 

Loans before net deferred loan fees

   1,651,791     1,302,389     2,114,573    1,771,526 

Deferred loan fees, net

   (820   (2,476   (1,201   (793
  

 

   

 

   

 

   

 

 

Total loans that are not PCI loans

   1,650,971     1,299,913     2,113,372    1,770,733 
  

 

   

 

 

PCI loans

    

Construction and land development

  $81    $78  

Commercial real estate:

    

Nonfarm, nonresidential

   576     1,460  

Other

   —      —   

Residential real estate:

    

Closed-end 1-4 family

   497     562  

Other

   —      1  

Commercial and industrial

   1,933     1,812  

Consumer and other

   —      —   
  

 

   

 

 

Total PCI loans

   3,087     3,913     2,558    2,859 
  

 

   

 

 

Allowance for loan losses

   (15,590   (11,587   (19,944   (16,553
  

 

   

 

   

 

   

 

 

Total loans, net of allowance for loan losses

  $1,638,468    $1,292,239    $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, 20162017 and 2015:2016:

 

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

Three Months Ended September 30, 2016

        

Allowance for loan losses:

        

Beginning balance

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

Provision for loan losses

   427    43     451    455    16    1,392  

Loans charged-off

   (11  —      (40  —     (19  (70

Recoveries

   —     —      13    —     2    15  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total ending allowance balance

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

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended September 30, 2015

        

Allowance for loan losses:

        

Beginning balance

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

Provision for loan losses

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

Loans charged-off

   —     —      (15  (15  (33  (63

Recoveries

   —     —      6    —     61    67  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total ending allowance balance

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

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

   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 

Loanscharged-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 

Loanscharged-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, 20162017 and 2015:2016:

 

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

Nine Months Ended September 30, 2016

        

Nine Months Ended September 30, 2017

        

Allowance for loan losses:

                

Beginning balance

  $3,186   $3,146    $1,861   $3,358   $36   $11,587    $3,776  $4,266   $2,398  $6,068  $45  $16,553 

Provision for loan losses

   865   762     609   1,817   42   4,095     (487 957    687  1,833  28  3,018 

Loans charged-off

   (11  —      (39 (65 (35 (150   —     —      (1 (309 (36 (346

Recoveries

   —     —      53    —    5   58     668   —      38   —    13  719 
  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Total ending allowance balance

  $4,040   $3,908    $2,484   $5,110   $48   $15,590    $3,957  $5,223   $3,122  $7,592  $50  $19,944 
  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

 

Nine Months Ended September 30, 2015

        

Allowance for loan losses:

        

Beginning balance

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

Provision for loan losses

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

Loans charged-off

   —     —      (32 (15 (121 (168

Recoveries

   —     —      14    —    64   78  
  

 

  

 

   

 

  

 

  

 

  

 

 

Total ending allowance balance

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

 

  

 

   

 

  

 

  

 

  

 

 

   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 

Loanscharged-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, 20162017 and December 31, 2015.2016. 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   Construction
and Land
Development
   Commercial
Real
Estate
   Residential
Real
Estate
   Commercial
and
Industrial
   Consumer
and
Other
   Total 

September 30, 2016

            

September 30, 2017

            

Allowance for loan losses:

                        

Ending allowance balance attributable to loans:

                        

Individually evaluated for impairment

  $—     $—     $—     $115    $—     $115    $—     $—     $—     $1,011   $—     $1,011 

Collectively evaluated for impairment

   4,040     3,908     2,484     4,995     48     15,475     3,957    5,223    3,122    6,581    50    18,933 

Purchased credit-impaired loans

   —      —      —      —      —      —      —      —      —      —      —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total ending allowance balance

  $4,040    $3,908    $2,484    $5,110    $48    $15,590    $3,957   $5,223   $3,122   $7,592   $50   $19,944 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans:

                        

Individually evaluated for impairment

  $—     $835    $1,070    $509    $—     $2,414    $—     $—     $116   $3,090   $—     $3,206 

Collectively evaluated for impairment

   474,255     429,413     369,976     372,275     3,458     1,649,377     514,934    598,846    531,997    461,657    3,933    2,111,367 

Purchased credit-impaired loans

   81     576     497     1,933     —      3,087     —      387    182    1,989    —      2,558 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total ending loans balance

  $474,336    $430,824    $371,543    $374,717    $3,458    $1,654,878    $514,934   $599,233   $532,295   $466,736   $3,933   $2,117,131 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

            

December 31, 2016

            

Allowance for loan losses:

                        

Ending allowance balance attributable to loans:

                        

Individually evaluated for impairment

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

 

   

 

   

 

   

 

   

 

   

 

 

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

Collectively evaluated for impairment

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

Purchased credit-impaired loans

   —       9     —       —       —       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

            

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Purchased credit-impaired loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans collectively evaluated for impairment reported at September 30, 20162017 include certain acquired loans. At September 30, 2016,2017, thesenon-PCI loans had a carrying value of $82,669,$57,663, comprised of contractually unpaid principal totaling $84,848$59,227 and discounts totaling $2,179.$1,564. Management evaluated these loans for credit deterioration since acquisition and determined that $32$11 in allowance for loan losses was necessary at September 30, 2017. As of December 31, 2016, thesenon-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, 20162017 and December 31, 2015:2016:

 

  Unpaid
Principal
Balance*
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 

September 30, 2016

      

September 30, 2017

      

With no allowance recorded:

            

Construction and land development

  $—     $—     $—   

Commercial real estate:

            

Nonfarm, nonresidential

  $2,421    $835    $—      —      —      —   

Residential real estate:

            

Closed-end 1-4 family

   238     238     —   

Closed-end1-4 family

   —      —      —   

Other

   832     832     —      116    116    —   

Commercial and industrial

   19     19     —      92    92    —   

Consumer and other

   —      —      —      —      —      —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   3,510     1,924     —      208    208    —   

With an allowance recorded:

            

Commercial and industrial

   490     490     115     2,998    2,998    1,011 
  

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   490     490     115     2,998    2,998    1,011 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $4,000    $2,414    $115    $3,206   $3,206   $1,011 
  

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2015

      

December 31, 2016

      

With no allowance recorded:

            

Construction and land development

  $1,943    $1,943    $—     $1,275   $1,275   $—   

Commercial real estate:

            

Nonfarm, nonresidential

   2,495     908     —      4,423    2,836    —   

Residential real estate:

            

Closed-end 1-4 family

   476     476     —   

Closed-end1-4 family

   2,069    2,069    —   

Other

   709     709     —      121    121    —   

Commercial and industrial

   21     21     —      934    934    —   
  

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   5,644     4,057     —      8,822    7,235    —   
  

 

   

 

   

 

   

 

   

 

   

 

 

With an allowance recorded:

            

Commercial and industrial

   113     113     113     2,864    2,674    1,024 
  

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   113     113     113     2,864    2,674    1,024 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $5,757    $4,170    $113    $11,686   $9,909   $1,024 
  

 

   

 

   

 

   

 

   

 

   

 

 

* Principal balance before partial charge-off.

      

The following table presents the average recorded investment of impaired loans by class of loans for the three and nine months ended September 30, 20162017 and 2015:2016:

 

  

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 

Average Recorded Investment

  2016   2015   2016   2015   2017   2016   2017   2016 

With no allowance recorded:

                

Construction and land development

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

Commercial real estate:

                

Nonfarm, nonresidential

   1,427     918     1,307     873     812    1,427    2,394    1,307 

Residential real estate:

                

Closed-end 1-4 family

   451     33     533     188  

Closed-end1-4 family

   112    451    863    533 

Other

   837     712     768     317     199    837    245    768 

Commercial and industrial

   46     23     110     77     499    46    657    110 

Consumer and other

   —      25     10     8     —      —      1    10 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   2,761     1,711     3,068     1,463     2,970    2,761    5,359    3,068 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

With an allowance recorded:

                

Commercial and industrial

  $490    $90    $247    $50    $2,998   $490   $2,820   $247 

Residential real estate:

                

Closed-end 1-4 family

   70     —      23     —   

Consumer and other

   —      16     —      10  

Closed-end1-4 family

   —      70    —      23 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

   560     106     270     60     2,998    560    2,820    270 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $3,321    $1,817    $3,338    $1,523    $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, 20162017 and 2015.2016.

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, 20162017 and December 31, 2015:2016:

 

  Nonaccrual   Loans Past Due
Over 90 Days
   Nonaccrual   Loans Past Due
Over 90 Days
 

September 30, 2016

    

Construction and land development

  $—     $149  

Commercial real estate:

    

Nonfarm, nonresidential

   835     —   

September 30, 2017

    

Residential real estate:

        

Closed-end1-4 family

  $—     $262 

Other

   123     —      116    —   

Commercial and industrial

   490     —      2,466    16 
  

 

   

 

   

 

   

 

 

Total

  $1,448    $149    $2,582   $278 
  

 

   

 

   

 

   

 

 

December 31, 2015

    

December 31, 2016

    

Construction and land development

  $—     $1,943    $—     $1,950 

Commercial real estate:

        

Nonfarm, nonresidential

   835     —      835    —   

Residential real estate:

        

Closed-end 1-4 family

   41     435  

Closed-end1-4 family

   —      452 

Other

   121    —   

Commercial and industrial

   32     —      2,674    150 
  

 

   

 

   

 

   

 

 

Total

  $908    $2,378    $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.

The following table presents the aging of the recorded investment in past due loans as of September 30, 20162017 and December 31, 20152016 by class of loans:

 

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

September 30, 2016

              

Construction and land development

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

Commercial real estate:

              

Nonfarm, nonresidential

   79     —      835     914     402,468     576     403,958  

Other

   —      —      —      —      26,866     —      26,866  

Residential real estate:

              

Closed-end 1-4 family

   11     —      —      11     228,661     497     229,169  

Other

   714     —      123     837     141,537     —      142,374  

Commercial and industrial

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

Consumer and other

   —      —      —      —      3,458     —      3,458  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

December 31, 2015

              

September 30, 2017

                

Construction and land development

  $—     $149    $1,943    $2,092    $370,675    $78    $372,845    $1,370   $—     $—     $—     $1,370   $513,564   $—     $514,934 

Commercial real estate:

                              

Nonfarm, nonresidential

   258     —      835     1,093     352,175     1,460     354,728     —      —      —      —      —      565,536    387    565,923 

Other

   —      —      —      —      10,955     —      10,955     —      —      —      —      —      33,310    —      33,310 

Residential real estate:

                              

Closed-end 1-4 family

   213     —      476     689     162,244     562     163,495  

Closed-end1-4 family

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

Other

   30     —      —      30     111,971     1     112,002     150    —      —      116    266    158,311    —      158,577 

Commercial and industrial

   86     32     —      118     283,770     1,812     285,700     511    301    16    2,466    3,294    461,453    1,989    466,736 

Consumer and other

   2     —      —      2     6,575     —      6,577     5    —      —      —      5    3,928    —      3,933 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $589    $181    $3,254    $4,024    $1,298,365    $3,913    $1,306,302    $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-end1-4 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 includesnon-homogeneous loans, such as commercial and commercial real estate loans as well asnon-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.

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, 20162017 and December 31, 2015:2016:

 

   Pass   Special
Mention
   Substandard   Total 

September 30, 2016

        

Construction and land development

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

Commercial real estate:

        

Nonfarm, nonresidential

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

Other

   26,866     —      —      26,866  

Residential real estate:

        

Closed-end 1-4 family

   228,144     —      1,025     229,169  

Other

   141,305     —      1,069     142,374  

Commercial and industrial

   368,860     —      5,857     374,717  

Consumer and other

   3,458     —      —      3,458  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

   Pass   Special
Mention
   Substandard   Total 

December 31, 2015

        

Construction and land development

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

Commercial real estate:

        

Nonfarm, nonresidential

   352,451     —      2,277     354,728  

Other

   10,955     —      —      10,955  

Residential real estate:

        

1-4 family

   162,160     —      1,335     163,495  

Other

   111,292     —      710     112,002  

Commercial and industrial

   284,144     —      1,556     285,700  

Consumer and other

   6,577     —      —      6,577  
  

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

 

Purchased Credit-impaired (“PCI”) loans

Income is recognized on PCI loans pursuant to ASC Topic 310-30. A portion of the fair value discount is recognized as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

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

   Sept 30, 2016   Dec 31, 2015 

Contractually required principal and interest

  $4,276    $5,618  

Non-accretable difference

   (321   (352
  

 

 

   

 

 

 

Cash flows expected to be collected

   3,955     5,266  

Accretable yield

   (868   (1,353
  

 

 

   

 

 

 

Carrying value of acquired loans

   3,087     3,913  

Allowance for loan losses

       (9
  

 

 

   

 

 

 

Carrying value less allowance for loan losses

  $3,087    $3,904  
  

 

 

   

 

 

 

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

The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three-month periods ended September 30, 2016 and 2015.

Activity during the three month period ended September 30, 2016

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

Contractually required principal and interest

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

Non-accretable difference

   (319  —      —      (2  (321
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Cash flows expected to be collected

   4,143    —      —      (188  3,955  

Accretable yield

   (1,067  —      115     84    (868
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Carrying value of acquired loans

  $3,076   $
 

  
 
 
  $115    $(104 $3,087  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Activity during the three month period ended September 30, 2015

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

Contractually required principal and interest

  $6,000   $
 

  
 
 
  $—     $(128 $5,872  

Non-accretable difference

   (973  —      839     (173  (307
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Cash flows expected to be collected

   5,027    —      839     (301  5,565  

Accretable yield

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

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Carrying value of acquired loans

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

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the nine-month periods ended September 30, 2016 and 2015.

Activity during the nine month period ended September 30, 2016

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

Contractually required principal and interest

  $5,618   $—     $
 

  
 
 
  $(1,342 $4,276  

Non-accretable difference

   (352  —      —      31    (321
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Cash flows expected to be collected

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

Accretable yield

   (1,353  —      444     41    (868
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Carrying value of acquired loans

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

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Activity during the nine month period ended September 30, 2015

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

Contractually required principal and interest

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

Non-accretable difference

   (1,270  —      839     124    (307
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Cash flows expected to be collected

   5,262    —      839     (536  5,565  

Accretable yield

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

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Carrying value of acquired loans

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

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 
   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-end1-4 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

TheAs of both September 30, 2017 and December 31, 2016, the Company’s loan portfolio contains no loansone loan that havehas been modified in a troubled debt restructuring.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, 20162017 and December 31, 20152016 are as follows:

 

  September 30,
2016
   December 31,
2015
   September 30,
2017
   December 31,
2016
 

Loan portfolios serviced for:

        

Federal Home Loan Mortgage Corporation

  $491,466    $463,952    $506,345   $499,385 

Other

   3,249     4,037     4,662    2,954 

The components of net loan servicing fees for the three and nine months ended September 30, 20162017 and 20152016 were as follows:

 

  Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2016   2015   2016   2015   2017   2016   2017   2016 

Loan servicing fees, net:

                

Loan servicing fees

  $309    $287    $903    $831    $312   $309   $951   $903 

Amortization of loan servicing fees

   (349   (203   (905   (644   (242   (349   (721   (905

Change in impairment

   —      —      —      —      —      —      —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $(40  $84    $(2  $187    $70   $(40  $230   $(2
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The fair value of servicing rights was estimated by management to be approximately $3,948$4,916 at September 30, 2016.2017. 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 14.7%. At December 31, 2015, the fair value of servicing rights was estimated by management to be approximately $4,635. Fair value for December 31, 2015 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%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, 20162017 and December 31, 2015,2016, these short-term borrowings totaled $37,343$32,862 and $61,261,$36,496, respectively, and were secured by securities with carrying amounts of $38,333$41,279 and $73,478,$41,136, respectively. At September 30, 2016,2017, all of the Company’s repurchase agreements hadone-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 September 30, 2016

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

Fair value of securities pledged

  $210   $59   $40,565   $40,834  

Borrowings related to pledged amounts

  $—    $
 

  
 
 
 $37,343   $37,343  

Fair value pledged as a % of borrowings

   —    —    109  109

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 allowsallowed the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will bewere exercisable in whole or in part up to seven years following the date of issuance.issuance, and they expired on March 30, 2017. The warrants arewere detachable from the common stock. There were 6,57512,461 and 4,9706,575 warrants exercised during the nine months ended September 30, 20162017 and 2015,2016, respectively. A summary of the stock warrant activity for the nine months ended September 30, 20162017 and 20152016 follows:

   September 30,
2016
   September 30,
2015
 

Stock warrants exercised:

    

Intrinsic value of warrants exercised

  $136    $46  

Cash received from warrants exercised

   79     60  

At

   September 30,
2017
   September 30,
2016
 

Stock warrants exercised:

    

Intrinsic value of warrants exercised

  $329   $136 

Cash received from warrants exercised

   150    79 

The warrants expired on March 30, 2017; therefore at September 30, 2016,2017, there were 18,732no outstanding warrants associated with the 2010 offering.

Since the common stock of the Company is registered under the Securities Act and has been traded on a national securities exchange at $15.00 or more for forty-five (45) consecutive days, the Company may redeem the 2010 warrants at any time with not less than thirty (30) days’ written notice to the holders of such 2010 warrants, in whole or in part, at a redemption price of $1.00 per warrant; provided, however, that the holder of the 2010 warrant may exercise the 2010 warrant, in whole or in part, during such thirty (30) day period.

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $735 and $406 and $248$1,970 and $1,201 for the three and $619nine 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 2015,$616, respectively. The total income tax benefit related to vesting of restricted stock and exercises of stock options was $616 and $147 for the nine months ended September 30, 2016 and 2015. The total income tax benefit for the three months ended September 30, 2016 was $107. There was no excess tax benefit from the exercise of stock options for the three months ended September 30, 2015.

Stock Option PlanOptions: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved, permitted the grant of share options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and to increase the number ofshareholder-approved, provides for authorized shares up to 1,500,000. The Company believes that such awards better align the interests of its employees with those of its shareholders. Shareholders approved amendments to the Plan to increase the number of authorized shares to 2,000,000 in June 2014 and to 4,000,000 in February 2015.4,000,000. At September 30, 2016,2017, there were 2,041,6731,960,041 authorized shares available for issuance.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 aten-year contractual term. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or asnon-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 asnon-qualified.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected stock price volatility is based on historical volatilities of the Company’s common stock.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,
2016
 September 30,
2015
   September 30,
2017
 September 30,
2016
 

Risk-free interest rate

   1.60 1.84   2.16 1.60

Expected term

   7.5 years   7.5 years     6.8 years  7.5 years 

Expected stock price volatility

   30.09 25.00   32.32 30.09

Dividend yield

   0.24 0.22   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 2015 were $9.78, and $6.41, respectively.

A summary of the activity in the stock option plans for the nine months ended September 30, 20162017 follows:

 

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

Outstanding at beginning of year

   1,312,791    $13.04     6.23    $24,070     1,395,016   $16.70    6.39   $35,090 

Granted

   272,087     27.99         267,195    38.04     

Exercised

   (167,899   11.27         (146,944   11.73     

Forfeited, expired, or cancelled

   (2,415   19.43         (3,113   25.37     
  

 

         

 

       

Outstanding at period end

   1,414,564    $16.12     6.49    $30,103     1,512,154   $20.93    6.65   $22,256 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Vested or expected to vest

   1,343,836    $16.12     6.49    $28,598     1,436,546   $20.93    6.65   $21,143 

Exercisable at period end

   784,022    $11.53     4.83    $20,282     787,451   $13.43    4.96   $17,498 

 

  For the nine months
ended September 30,
   For the nine months
ended September 30,
 
  2016   2015   2017   2016 

Stock options exercised:

        

Intrinsic value of options exercised

  $3,463    $839    $4,141   $3,463 

Cash received from options exercised

   1,357     780     1,361    1,357 

Tax benefit realized from option exercises

   522     147     406    522 

As of September 30, 2016,2017, there was $3,583$6,054 of total unrecognized compensation cost related tonon-vested stock options granted under the Plan.plans. The cost is expected to be recognized over a weighted-average period of 4.11.8 years.

Restricted Share Award PlanStock: Additionally, the Company’s 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 fornon-vested restricted share awards for the nine months ended September 30, 20162017 is as follows:

 

Non-vested Shares

  Shares   Weighted-Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2015

   105,864    $15.89  

Granted

   36,396     28.45  

Vested

   (32,607   16.70  

Forfeited

   (1,916   16.00  
  

 

 

   

Non-vested at September 30, 2016

   107,737    $18.80  
  

 

 

   

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, 2016,2017, there was $1,917$2,080 of total unrecognized compensation cost related tonon-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.23.6 years. The total fair value of shares vested during the nine months ended September 30, 2017 and 2016 was $1,457 and 2015$974, respectively.

The total income tax benefit realized from the vesting of restricted stock was $974$215 and $520,$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 certainoff-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, 20152016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

The Basel III rules additionally provide for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This new capital conservation buffer requirement was phased in beginning January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented at 2.5% in January 2019. 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, 2016,2017, 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, 2016, that2017, 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, 20162017 and December 31, 20152016 for the Company and Bank:

 

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

September 30, 2016

          

September 30, 2017

          

Company common equity Tier 1 capital to risk-weighted assets

  $188,225     9.09 $93,188     4.50 N/A     N/A    $293,004    11.58 $113,908    4.50 N/A    N/A 

Company Total Capital to risk weighted assets

  $262,107     12.66 $165,667     8.00 N/A     N/A    $371,510    14.68 $202,502    8.00 N/A    N/A 

Company Tier 1 (Core) Capital to risk weighted assets

  $188,225     9.09 $124,250     6.00 N/A     N/A    $293,004    11.58 $151,877    6.00 N/A    N/A 

Company Tier 1 (Core) Capital to average assets

  $188,225     7.15 $105,361     4.00 N/A     N/A    $293,004    8.58 $136,609    4.00 N/A    N/A 

Bank common equity Tier 1 capital to risk-weighted assets

  $243,995     11.77 $93,314     4.50 $134,787     6.50  $347,043    13.71 $113,901   ��4.50 $164,523    6.50

Bank Total Capital to risk weighted assets

  $259,585     12.52 $165,892     8.00 $207,365     10.00  $367,079    14.50 $202,490    8.00 $253,112    10.00

Bank Tier 1 (Core) Capital to risk weighted assets

  $243,995     11.77 $124,419     6.00 $165,892     8.00  $347,043    13.71 $151,867    6.00 $202,490    8.00

Bank Tier 1 (Core) Capital to average assets

  $243,995     9.26 $105,343     4.00 $131,678     5.00  $347,043    10.17 $136,511    4.00 $170,639    5.00

December 31, 2015

          

December 31, 2016

          

Company common equity Tier 1 capital to risk-weighted assets

  $167,562     10.08 $74,768     4.50 N/A     N/A    $263,693    11.75 $101,022    4.50 N/A    N/A 

Company Total Capital to risk weighted assets

  $186,243     11.21 $132,922     8.00 N/A     N/A    $338,675    15.09 $179,595    8.00 N/A    N/A 

Company Tier 1 (Core) Capital to risk weighted assets

  $174,656     10.51 $99,691     6.00 N/A     N/A    $263,693    11.75 $134,696    6.00 N/A    N/A 

Company Tier 1 (Core) Capital to average assets

  $174,656     8.48 $82,362     4.00 N/A     N/A    $263,693    9.28 $113,697    4.00 N/A    N/A 

Bank common equity Tier 1 capital to risk-weighted assets

  $172,205     10.36 $74,772     4.50 $108,004     6.50  $319,005    14.18 $101,216    4.50 $146,201    6.50

Bank Total Capital to risk weighted assets

  $183,792     11.06 $132,928     8.00 $166,160     10.00  $335,650    14.92 $179,939    8.00 $224,924    10.00

Bank Tier 1 (Core) Capital to risk weighted assets

  $172,205     10.36 $99,696     6.00 $132,928     8.00  $319,005    14.18 $134,954    6.00 $179,939    8.00

Bank Tier 1 (Core) Capital to average assets

  $172,205     8.36 $82,357     4.00 $102,946     5.00  $319,005    11.22 $113,697    4.00 $142,122    5.00

(1) NOTE: TheNote: Minimum ratios presented exclude the capital conservation buffer is not included in capital adequacy amounts.

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. TheNeither the Company nor the Bank currently may notcurrently pay dividends without prior written approval from its primary regulatory agencies.

NOTE 8—FAIR VALUE

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

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

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

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

Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently based on changing circumstances as part of the aforementioned quarterly evaluation.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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:Sale: The Company has elected the fair value option for loans held for sale to align with other accounting policies related to mortgage banking, such as mortgage banking derivatives. These loans are typically sold to an investor following loan origination and the fair value of such accounts are readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices for similar transactions adjusted for specific attributes of that loan (Level 2).

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

 

   Fair Value Measurements at
September 30, 2016 Using:
 
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets

      

Securities available for sale

      

U.S. government sponsored entities and agencies

  $—     $3,138    $—   

Mortgage-backed securities-residential

   —      556,797     —   

Mortgage-backed securities-commercial

   —      19,759     —   

State and political subdivisions

   —      91,062     —   
  

 

 

   

 

 

   

 

 

 

Total securities available for sale

  $—     $670,056    $—   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

  $—     $26,819    $—   
  

 

 

   

 

 

   

 

 

 

Mortgage banking derivatives

  $—     $858    $—   
  

 

 

   

 

 

   

 

 

 

Financial Liabilities

      

Mortgage banking derivatives

  $—     $87    $—   
  

 

 

   

 

 

   

 

 

 

   Fair Value Measurements at
December 31, 2015 Using:
 
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets

      

Securities available for sale

      

U.S. government sponsored entities and agencies

  $—     $6,817    $—   

Mortgage-backed securities-residential

   —      500,955     —   

Mortgage-backed securities-commercial

   —      19,835     —   

State and political subdivisions

   —      48,231     —   
  

 

 

   

 

 

   

 

 

 

Total securities available for sale

  $—     $575,838    $—   
  

 

 

   

 

 

   

 

 

 

Loans held for sale

  $—     $14,079    $—   
  

 

 

   

 

 

   

 

 

 

Mortgage banking derivatives

  $—     $411    $—   
  

 

 

   

 

 

   

 

 

 

Financial Liabilities

      

Mortgage banking derivatives

  $—     $29    $—   
  

 

 

   

 

 

   

 

 

 

   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 $25,937$23,457, resulting in an unrealized gain of $882 included in gains on sale of loans. As of December 31, 2015, the unpaid principal balance of loans held for sale was $13,754, resulting in an unrealized gain of $325$242 included in gains on sale of loans. For the three months ended September 30, 20162017 and 2015,2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $326$(48) and $248,$326, respectively. For the nine months ended September 30, 20162017 and 2015,2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $558$57 and ($22),$558, respectively. None of these loans were 90 days or more past due or on nonaccrual as of September 30, 20162017 and December 31, 2015.2016.

There were no transfers between level 1 and 2 during 20162017 or 2015.2016.

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

There waswere two collateral-dependent commercial and industrial impaired loans carried at fair value of $1,987 as of September 30, 2017 and one collateral dependentcollateral-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, 2016 that totaled $375.2017, 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, and 2015, $115 and $0 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. There were no collateral dependent impaired loans carried at fair value as of December 31, 2015.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of zero$1,503 as of September 30, 20162017 and $200$0 as of December 31, 2015.2016. The foreclosed property was previously collateral for a commercial real estate loan. There were no properties at September 30, 20162017 or 20152016 that had required write-downs to fair value resulting in no write downs for the three and nine months ended September 30, 20162017 and 2015,2016, respectively.

The carrying amounts and estimated fair values of financial instruments at September 30, 20162017 and December 31, 20152016 are as follows:

 

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

Financial assets

          

Cash and cash equivalents

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

Certificates of deposit held at other financial institutions

   1,055     —      1,055     —      1,055  

Securities available for sale

   670,756     —      670,756     —      670,756  

Securities held to maturity

   235,050     —      243,946     —      243,946  

Loans held for sale

   26,819     —      26,819     —      26,819  

Net loans

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

Restricted equity securities

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

Servicing rights, net

   3,566     —      3,948     —      3,948  

Accrued interest receivable

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

Financial liabilities

          

Deposits

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

Federal funds purchased and repurchase agreements

   45,843     —      45,843     —      45,843  

Federal Home Loan Bank advances

   162,000     —      162,024     —      162,024  

Subordinated notes, net

   58,292     —      —      61,867     61,867  

Accrued interest payable

   1,399     123     915     361     1,399  

  Carrying
Amount
   Fair Value Measurements at
December 31, 2015 Using:
   Carrying
Amount
  Fair Value Measurements at
September 30, 2017 Using:
 
  Level 1   Level 2   Level 3   Total    Level 1 Level 2 Level 3   Total 

Financial assets

                 

Cash and cash equivalents

  $52,394    $52,394    $—     $—     $52,394    $155,842  $155,842  $—    $—     $155,842 

Certificates of deposit held at other financial institutions

   250     —      250     —      250     2,365   —    2,365   —      2,365 

Securities available for sale

   575,838     —      575,838     —      575,838     980,737   —    980,737   —      980,737 

Securities held to maturity

   158,200     —      161,969     —      161,969     217,312   —    220,089   —      220,089 

Loans held for sale

   14,079     —      14,079     —      14,079     11,823   —    11,823   —      11,823 

Net loans

   1,292,239     —      —      1,279,849     1,279,849     2,115,930   —     —    2,074,102    2,074,102 

Restricted equity securities

   7,998     n/a     n/a     n/a     n/a     18,472  n/a  n/a  n/a    n/a 

Servicing rights, net

   3,455     —      4,635     —      4,635     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

   7,299     3     3,780     3,516     7,299     9,931   —    5,172  4,759    9,931 

Financial liabilities

                 

Deposits

  $1,814,039    $1,062,587    $748,961    $—     $1,811,548    $2,391,818  $1,551,461  $836,444  $—     $2,387,905 

Federal funds purchased and repurchase agreements

   101,086     —      101,086     —      101,086     83,301   —    83,301   —      83,301 

Federal Home Loan Bank advances

   57,000     —      56,931     —      56,931     132,000   —    131,098   —      131,098 

Subordinated notes, net

   58,337   —     —    61,762    61,762 

Mortgage banking derivative liabilities

   (66  —    (66  —      —   

Accrued interest payable

   644     100     544     —      644     1,924  154  1,075  695    1,924 

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 23 classification.

(e) Deposits:The fair values disclosed for demand deposits (e.g., interest andnon-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 foroff-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

NOTE 9—EARNINGS PER SHARE

Thetwo-class method is used in the calculation of basic and diluted earnings per share. Under thetwo-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,

 
   2016   2015   2016   2015 

Basic

        

Net income available to common shareholders

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

Less: earnings allocated to participating securities

   (69   (52   (213   (127
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocated to common shareholders

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

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding including participating securities

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

Less: Participating securities

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

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

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

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $0.66    $0.49    $1.90    $1.17  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

  

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 
  2016   2015   2016   2015  

 

  

 

  

 

  

 

 

Diluted

            

Net income allocated to common shareholders

  $6,961    $5,073    $20,026    $11,214   $8,823  $7,067  $25,483  $20,636 

Weighted average common shares outstanding for basic earnings per common share

   10,615,910     10,408,788     10,540,286     9,559,880   13,090,919  10,615,910  13,013,820  10,540,286 

Add: Dilutive effects of assumed exercises of stock options

   612,955     534,148     585,326     466,955   584,778  668,674  662,890  652,272 

Add: Dilutive effects of assumed exercises of stock warrants

   13,370     13,265     12,937     13,257    —    13,370  2,104  12,937 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Average shares and dilutive potential common shares

   11,242,235     10,956,201     11,138,549     10,040,092   13,675,697  11,297,954  13,678,814  11,205,495 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

Dilutive earnings per common share

  $0.62    $0.46    $1.80    $1.12  

Diluted earnings per common share

 $0.65  $0.63  $1.86  $1.84 
  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

 

For the three months ended September 30, 20162017 and 2015,2016, stock options for 272,087352,042 and 226,040272,087 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 151,544254,204 and 228,691151,544 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 20162017 and 20152016 because they were antidilutive.

NOTE 10—SUBORDINATED NOTESDEBT ISSUANCE

On MarchThe 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 $40,000$60,000 in aggregate principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875%fixed-to-floating rate Subordinated Notes due 2026subordinated notes (the “March 2016 Subordinated Notes”) were issued in a public offering to accredited institutional investors. The March 2016 Notes will mature on March 30, 2026, unless redeemed prior to that date. The Company may redeem the March 2016 Notes in whole or in part on or after March 30, 2021,investors, and in whole, but notJune 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 part, at any time within 90 days following a “Regulatory Capital Treatment Event”, as defined in the First Supplemental Indenture, dated as of March 31, 2016, between the Company and U.S. Bank National Association, as trustee (the “Supplemental Indenture”) governing the March 2016 Notes.private offering. The redemption price for any redemption will be 100% of the principal amount of the March 2016 Notes, plus unpaid interest, if any, accrued to but excluding the date of redemption. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Federal Reserve to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the March 2016 Notes.

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

The March 2016 Notessubordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The March 2016 Notessubordinated notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the Bank,Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the March 2016 Notessubordinated notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

The sale of the March 2016 Notes yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing that had been used to redeem the shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued to the United States Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Small Business Lending Fund and to fund future growth of the Bank.

The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over theten-year term of the March 2016 Notes.

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

The June 2016 Notes have a stated maturity of July 1, 2026, and bear interest at a fixed rate of 7.00% per year through June 30, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears on January 1 and July 1 of each year beginning on January 1, 2017. Beginning July 1, 2021 through the maturity date or an early redemption date, the interest rate shall reset quarterly to an interest rate per year equal to the then current three-month LIBOR rate plus 604 basis points, computed on the basis of a 360-day year and the actual number of days elapsed, payable quarterly in arrears. The June 2016 Notes are redeemable, in whole or in part, on or after July 1, 2021 and at any time upon the occurrence of certain events set forth in the June 2016Subordinated Notes. Any early redemption of the March 2016 Notes will be subject to the receipt of the approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to the extent then required under applicable laws or regulations, including capital regulations. There is no sinking fund for the June 2016 Notes.

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

The June 2016 Notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The June 2016 Notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the Bank, its depositors, and any preferred equity holders of our subsidiaries. The holders of the June 2016 Notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over theten-year term of the June 2016 Subordinated Notes.

For regulatory capital purposes, the March 2016 Notes and the June 2016 Notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.

As ofthree months ended September 30, 2017 and 2016, the Company’s subordinated notes, netamortization of issuance costs totaled $58,292.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.

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.

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 Form10-K filed with the SEC on March 15, 2016,16, 2017, which includes additional information about critical accounting policies and practices and risk factors, and Item 1A of Part II of this report, which updates those risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations. All amounts are in thousands, except per share data or unless otherwise indicated.

Company Overview

We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly-owned bank subsidiary, Franklin Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate through 12 branches and one loan production office in the demographically attractive and growing Williamson, Rutherford and Davidson Counties within the Nashville metropolitan statistical area. As used in this report, unless the context otherwise indicates, any reference to “Franklin Financial,” “our Company,” “the Company,” “us,” “we” and “our” refers to Franklin Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy Bank)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 Form10-K that was filed with the SEC on March 15, 2016.16, 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.

Purchased Loans

The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, we recorded all acquired loans at fair value as of the date of the acquisition. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by the Company for loans with similar characteristics as those acquired other than purchased credit-impaired loans.

Allowance for Loan Losses

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

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

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 acase-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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

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

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

Mortgage Servicing Rights

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

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

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

RecentRecently Adopted Accounting Pronouncements

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

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

In March 2016, the FASB issuedASU2016-09, “Compensation Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. UnderASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards shouldare 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 additionalpaid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additionalpaid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should excludeexcludes the amount of excess tax benefits that would have previously been recognized in additionalpaid-in capital. Additionally, excess tax benefits should beare 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 changes 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. ASU 2016-09 will be effective on January 1, 2017, and early adoption is allowed. The Company has not yet elected to adopt this ASU early, but management is considering potential early adoption duringin the fourth quarter of 2016, effective as of January 1, 2016. Had the Company adoptedThe adoption of this ASU 2016-09 during the quarter ended September 30, 2016, the impact to earnings would have been a decrease indecreased income tax expense of approximately $183 and $755 for the three and nine months ended September 30, 2016 by $616 and the impact toincreased diluted earnings per share would have been increasesby $0.04. The adoption of $0.01this 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 $0.06increasing diluted earnings per share by $0.01.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers (Topic 606). ASU2014-09 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, ASU2014-09 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, ASU2014-09 added a new Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers (“ASC340-40”), 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, andnon-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 ASU2014-09, 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 ASU2014-09 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 threeimpact 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 ASU2016-01,Financial Instruments (Topic 825): Recognition and nineMeasurement 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.

In February 2016, the FASB issued ASU2016-02 which createsTopic 842, Leases and supersedesTopic 840, Leases. ASU2016-02 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 ended September 30, 2016, respectively.on their balance sheet as lease liabilities with a correspondingright-of-use asset. ASU2016-02 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 aright-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 ASU2016-02 will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU2016-13,ASU No. 2016-13, Financial Instruments—Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses within this update is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. The income statement reflectsASU requires the measurement of all expected credit losses for newly recognized financial assets as well asheld at the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses isreporting date based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibilityforecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the reportedloss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of financial assets. An entity mustexpected credit losses. Organizations will continue to use judgment in determining the relevant information andto determine which loss estimation methods that aremethod is appropriate in itsfor their circumstances. The allowanceASU 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 foronavailable-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that are not considered derivatives under ASC 815 and are not unconditionally cancellable are also within the scope of this amendment. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. For public companies, the updatedeterioration. The ASU is effective for annual periods beginning after December 15, 2019, includingthe Company for fiscal years, and interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of the fiscal years, beginning after December 15, 2018, including2019 (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. An entity will apply the amendments in

this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of theyears, beginning of the first reporting period in which the guidance is effective.after December 15, 2018. The Company is currently assessinggathering 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 that this guidance will have on its consolidated financial statements.of adopting ASU2016-13 is not currently known.

In August 2016, the FASB issued guidance within ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in thisThis Accounting Standards Update provide guidance onaddresses the following eight specific cash flow issues with the objective of reducing the existing diversity in presentation and classification in the statement of cash flows. The cash flow issues addressed include: 1)issues: debt prepayment or debt extinguishment costs; 2) settlement ofzero-coupon debt instruments; 3)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; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies including(COLIs) (including bank-owned life insurance policies; 6)policies (BOLIs)); distributions received from equity method investments; 7)investees; beneficial interestinterests in securitization transactions; and 8) separately identifiable cash flows and the 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; however,period. This ASU is not expected to have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU2017-04, 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 ofASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU2017-08,Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20): 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 ofASU 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU2017-09,Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting. ASU2017-09 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 is requiredwill not apply modification accounting to adopta share-based payment award if all of the amendments infollowing are the same period.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. ASU2017-09 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. ASU2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU2017-12,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 requiremake certain targeted improvements to simplify the application using a retrospective transition methodof 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 each period presented. Managementthis Update; however, management may consider hedging activities in the future. Adoption of this Update is in currently evaluating the effects that the Update isnot expected to have a material impact on the Company’s Consolidated Statement of Cash Flows and is currently planning to adopt the guidance during the first quarter of 2018.consolidated financial statements.

COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 20162017 AND 20152016

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $7,030$8,889 and $20,262$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, comparedrespectively. After earnings attributable to $5,150noncontrolling interest and $11,416 for the three and nine months ended September 30, 2015. Afterafter the payment of preferred dividends on the shares of SeniorNon-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, 20162017 was $7,030$8,889 and $20,239,$25,689, respectively, compared to $5,125$7,137 and $11,341$20,855 for the three and nine months ended September 30, 2015.2016, respectively. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 30, 20162017 was increased interest income on loans and investment securities compared with the same periods in 2015.2016. The increase in loans was due to significant organic growth. The growth in the securities portfolio is primarily attributable to the capitalCompany’s leverage programs implemented during the second quarter of 2016program to utilize proceeds received from capital raised during the issuancefourth quarter of subordinated notes at the end of the March 2016.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and nine months ended September 30, 2016,2017, totaled $24,326 and $72,438, respectively, compared to $20,675 and $59,885 respectively, compared to $16,736 and $42,220 for the same periods in 2015,2016, an increase of $3,939$3,651 and $17,665,$12,553, or 23.5%17.7% and 41.8%21.0%, between the respective periods. For the three and nine months ended September 30, 2016,2017, interest income increased $6,423$8,056 and $23,931,$24,761, or 33.3%31.3% and 49.2%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, 2016,2017, interest expense increased $2,484$4,405 and $6,266,$12,208, or 96.8%87.2% and 97.6%96.2%, respectively, compared with the same periods in 2016, as a result of increases in interest-bearing deposits, FHLBFederal Home Loan Bank (“FHLB”) advances and subordinated notes.

Interest-earning assets averaged $2,576,294$3,351,421 and $1,846,372$2,576,294 during the three months ended September 30, 20162017 and 2015,2016, respectively, an increase of $729,922,$775,127, or 39.5%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 oftax-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.

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.

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 55.1%28.6%, and investment securities increased 20.9%46.8%, when comparing the threenine months ended September 30, 20162017 with the same period in 2015.2016. When comparing the threenine months ended September 30, 20162017 and 2015,2016, the yield on average interest earning assets, adjusted for tax equivalent yield decreased 172 basis points to 4.12%4.11% in 2017 compared to 4.29%4.13% for the same period during 2015. 2016.

For the threenine months ended September 30, 2017 and 2016, the tax equivalent yield on loans was 4.96%, compared with 5.61% tax equivalent yield for same period in 2015. The decrease in yield on loans when comparing these two periods is attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the three months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. 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 2.42%2.66%, and for the three months ended September 30, 2015, the yield on available for sale securities was 2.60%. For the three months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.75%, and for the three months ended September 30, 2015, the yield on held to maturity securities was 3.37%. The primary driver for the collective increase in yields on securities for the three-month period ended September 30, 2016 was the volume of tax-exempt municipal securities that have been purchased, which increased tax equivalent yields when comparing the three months ended September 30, 2016 with the same period in 2015.

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

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

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

Interest-earning assets averaged $2,427,824 and $1,575,748 during the nine months ended September 30, 2016 and 2015, respectively, an increase of $852,076, or 54.1%. This increase was due to growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 64.5%, and investment securities increased 41.3%, when comparing the nine months ended September 30, 2016 with the same period in 2015. When comparing the nine months ended September 30, 2016 and 2015, the yield on average interest earning assets, adjusted for tax equivalent yield decreased seven basis points to 4.13% compared to 4.20% for the same period during 2015. For the nine months ended September 30, 2016, the tax equivalent yield on loans was 4.95%, compared with 5.46% tax equivalent yield for the same period in 2015. The decrease in yield on loans when comparing these two periods is primarily attributable to the Company’s receiving a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship, which resulted in an increase in loan interest income for $1,155 for the nine months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the nine months ended September 30, 2016, the tax equivalent yield on available for sale securities was 2.48%, and for. For the nine months ended September 30, 2015,2017, the tax equivalent yield on available for saleheld to maturity securities was 2.42%. For4.18%, and for the nine months ended September 30, 2016, the tax equivalent yield on held to maturity securities was 3.92%, and for the nine months ended September 30, 2015, the yield on held to maturity securities was 3.10%. The primary driver for the increase in yields on securities for the nine monthsnine-month period ended September 30, 20162017 was the volume oftax-exempt municipal securities purchased during the past 12 months.months, which increased tax equivalent yields when comparing the nine-month period in 2017 with the same period in 2016.

Interest-bearing liabilities averaged $2,044,661$2,839,188 during the nine months ended September 30, 2016,2017, compared to $1,311,229$2,044,661 for the same period in 2015,2016, an increase of $733,432,$794,527, or 55.9%38.9%. Total average interest-bearing deposits grew $665,258, which included$606,229, including increases in money market depositsinterest-bearing checking of $157,287$339,569 and average time deposits of $472,321$259,409 for the nine-month period ended September 30, 2016,2017, as compared to the same period during 2015.2016. Rapid growth in the loan portfolio also resulted in increasesan increase in average FHLB advances of $32,522$167,137, and subordinated notes and other borrowings of $32,882,increased $25,516, when comparing the nine months ended September 30, 20162017 with the same period in 2015.2016.

For the nine monthnine-month periods ended September 30, 20162017 and 2015,2016, the cost of average interest-bearing liabilities increased 1834 basis points from 0.83% to 0.83% from 0.65%1.17%. The increase was primarily due to increaseincreases in the cost of funds from interest-bearing deposits, FHLB advances, Federal funds purchased and from subordinated notes.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, 20162017 and 2015:2016:

Average Balances—Yields & Rates(7)Rates(7)

(Dollars are in thousands)

 

  Three Months Ended September 30,   Three Months Ended September 30, 
  2016 2015   2017 2016 
  Average
Balance
 Interest
Inc / Exp
   Average
Yield /
Rate
 Average
Balance
 Interest
Inc / Exp
   Average
Yield /
Rate
   Average
Balance
 Interest
Inc / Exp
   Average
Yield / Rate
 Average
Balance
 Interest
Inc / Exp
   Average
Yield / Rate
 

ASSETS:

                  

Loans (1)(6)

  $1,620,347   $20,219     4.96 $1,044,520   $14,763     5.61  $2,049,575  $26,006    5.03 $1,620,347  $20,219    4.96

Securities available for sale (6)

   671,725   4,084     2.42 674,991   4,422     2.60   972,988  6,405    2.61 671,725  4,084    2.42

Securities held to maturity (6)

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

   941   4     1.69 250   2     3.17   2,412  9    1.48 941  4    1.69

Federal funds sold and other (2)

   49,295   182     1.47 52,279   127     0.96   88,737  271    1.21 38,923  49    0.50
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

TOTAL INTEREST EARNING ASSETS

  $2,576,294   $26,692     4.12 $1,846,372   $19,946     4.29  $3,351,421  $35,243    4.17 $2,576,294  $26,692    4.12

Allowance for loan losses

   (14,508    (8,576      (18,891    (14,508   

All other assets

   86,466      74,570        94,334     86,466    
  

 

     

 

      

 

     

 

    

TOTAL ASSETS

  $2,648,252      $1,912,366       $3,426,864     $2,648,252    

LIABILITIES & SHAREHOLDERS’ EQUITY

         

LIABILITIES & EQUITY

         

Deposits:

                  

Interest checking

  $261,350   $256     0.39 $246,584   $170     0.27  $552,502  $1,285    0.92 $261,350  $256    0.39

Money market

   617,913   957     0.62 514,669   703     0.54   604,416  1,703    1.12 617,913  957    0.62

Savings

   51,235   40     0.31 37,888   44     0.46   54,921  42    0.30 51,235  40    0.31

Time deposits

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

   44,974   69     0.61 45,261   69     0.60   37,374  92    0.98 44,974  69    0.61

Federal Home Loan Bank advances

   86,783   215     0.99 57,000   79     0.55

Subordinated Notes and other borrowings

   58,285   1,082     7.39  —     —      —  

Subordinated notes and other borrowings

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

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

TOTAL INTEREST BEARING LIABILITIES

  $2,201,206   $5,049     0.91 $1,550,007   $2,565     0.66  $2,856,337  $9,454    1.31 $2,201,206  $5,049    0.91

Demand deposits

   224,387      169,451        261,127     224,387    

Other liabilities

   16,650      11,368        11,312     16,650    

Total shareholders’ equity

   206,009      181,540     

Total equity

   298,088     206,009    
  

 

     

 

      

 

     

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $2,648,252      $1,912,366     

TOTAL LIABILITIES AND EQUITY

  $3,426,864     $2,648,252    

NET INTEREST SPREAD (4)

      3.21     3.63      2.86     3.21

NET INTEREST INCOME

   $21,643      $17,381       $25,789     $21,643   

NET INTEREST MARGIN (5)

      3.34     3.73      3.05     3.34

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

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

ASSETS:

         

Loans (1)(6)

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

Securities available for sale (6)

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

Securities held to maturity (6)

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

Certificates of deposit at other financial institutions

   751    11     1.96  250    5     2.67

Federal funds sold and other (2)

   55,583    518     1.24  50,207    325     0.87
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

TOTAL INTEREST EARNING ASSETS

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

Allowance for loan losses

   (13,179     (7,705   

All other assets

   41,988       72,387     
  

 

 

     

 

 

    

TOTAL ASSETS

  $2,456,633      $1,640,430     

LIABILITIES & SHAREHOLDERS’ EQUITY

         

Deposits:

         

Interest checking

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

Money market

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

Savings

   48,647    121     0.33  34,018    117     0.46

Time deposits

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

Federal funds purchased and other (3)

   50,100    237     0.63  47,330    232     0.66

Federal Home Loan Bank advances

   75,412    511     0.91  42,890    225     0.70

Subordinated Notes and other borrowings

   32,882    1,820     7.39  —     —      —  
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

TOTAL INTEREST BEARING LIABILITIES

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

Demand deposits

   200,981       159,093     

Other liabilities

   12,707       7,753     

Total shareholders’ equity

   198,284       162,355     
  

 

 

     

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $2,456,633      $1,640,430     

NET INTEREST SPREAD (4)

      3.30     3.55

NET INTEREST INCOME

   $62,391      $43,023    

NET INTEREST MARGIN (5)

      3.43     3.65

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

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

Analysis of Changes in Interest Income and Expenses

 

  Net change three months ended
September 30, 2016 versus September 30, 2015
   Net change three months ended
September 30, 2017 versus September 30, 2016
 
  Volume   Rate   Net Change   Volume   Rate   Net Change 

INTEREST INCOME

            

Loans

  $8,103    $(2,647  $5,456    $5,425   $362   $5,787 

Securities available for sale

   (34   (304   (338   1,855    466    2,321 

Securities held to maturity

   1,347     224     1,571     (120   200    80 

Restricted equity securities

   91    45    136 

Certificates of deposit at other financial institutions

   6     (4   2     6    (1   5 

Federal funds sold and other

   (8   63     55     63    159    222 
  

 

   

 

   

 

   

 

   

 

   

 

 

TOTAL INTEREST INCOME

  $9,414    $(2,668  $6,746    $7,320   $1,231   $8,551 
  

 

   

 

   

 

   

 

   

 

   

 

 

INTEREST EXPENSE

            

Deposits

            

Interest checking

  $7    $79    $86    $291   $738   $1,029 

Money market accounts

   130     124     254     (16   762    746 

Savings

   15     (19   (4   3    (1   2 

Time deposits

   1,011     (81   930     391    1,460    1,851 

Federal Home Loan Bank advances

   40     96     136     505    248    753 

Other borrowed funds

   —      —      —   

Fed funds purchased and other borrowed funds

   (12   35    23 

Subordinated Notes and other borrowings

   1,082     —      1,082     7    (6   1 
  

 

   

 

   

 

   

 

   

 

   

 

 

TOTAL INTEREST EXPENSE

  $2,285    $199    $2,484    $1,169   $3,236   $4,405 
  

 

   

 

   

 

   

 

   

 

   

 

 

NET INTEREST INCOME

  $7,129    $(2,867  $4,262    $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 
  

 

   

 

   

 

 

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

INTEREST INCOME

      

Loans

  $24,670    $(5,864  $18,806  

Securities available for sale

   2,001     288     2,289  

Securities held to maturity

   3,147     1,193     4,340  

Certificates of deposit at other financial institutions

   10     (4   6  

Federal funds sold and other

   39     154     193  
  

 

 

   

 

 

   

 

 

 

TOTAL INTEREST INCOME

  $29,867    $(4,233  $25,634  
  

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

      

Deposits

      

Interest checking

  $51    $197    $248  

Money market accounts

   667     182     849  

Savings

   51     (47   4  

Time deposits

   3,405     (351   3,054  

Federal Home Loan Bank advances

   167     119     286  

Other borrowed funds

   16     (11   5  

Subordinated notes and other borrowings

   1,820     —      1,820  
  

 

 

   

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

  $6,177    $89    $6,266  
  

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

  $23,690    $(4,322  $19,368  
  

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

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

The provision for loan losses was $1,392$590 and $1,724$1,392 for the three months ended September 30, 20162017 and 2015,2016, respectively, and $4,095$3,018 and $3,154$4,095 for the nine months ended September 30, 20162017 and 2015,2016, respectively. The lower provision for the three months ended September 30, 2016 was less than the provision for the same period in 2015 due to loan growth in third quarter 2015 being greater than loan growth in third quarter 2016. The higher provision for theand nine months ended September 30, 20162017 compared to the same periodperiods in 20152016 is due primarily tobased 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, during the nine months ended September 30, 2016, compared to the same period in 2015.required less provision be recorded. Nonperforming loans at September 30, 20162017 totaled $1,597$2,860 compared to $3,286$6,182 at December 31, 2015,2016, representing 0.1% and 0.3% of total loans, respectively.

Non-Interest Income

Non-Interest Income

Non-interest income for the three and nine months ended September 30, 20162017 was $3,569 and $11,457, respectively, compared to $4,876 and $12,587 compared to $3,798 and $9,864 for the same periods in 2015.2016, respectively. The following is a summary of the components ofnon-interest income (in thousands):

 

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

Service charges on deposit accounts

  $44    $44    $    — 

Other service charges and fees

   845     679     166     24.4

Net gains on sale of loans

   2,942     2,463     479     19.4

Wealth management

   446     327     119     36.4

Loan servicing fees, net

   (40   84     (124   (147.6%) 

Gain on sale or call of securities

   430     5     425     8,500.0

Net gain on sale of foreclosed assets

   30     3     27     900.0

Other

   179     193     (14   (7.3%) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

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

 

 

   

 

 

   

 

 

   

 

 

 

  Nine Months Ended
September 30,
   $
Increase
(Decrease)
   %
Increase
(Decrease)
   Three Months Ended
September 30,
   $
Increase
(Decrease)
   %
Increase
(Decrease)
 
  2016   2015     2017   2016   

Service charges on deposit accounts

  $139    $78    $61     78.2  $39   $44   $(5   (11.4%) 

Other service charges and fees

   2,245     1,987     258     13.0   787    845    (58   (6.9%) 

Net gains on sale of loans

   6,859     5,573     1,286     23.1   1,517    2,942    (1,425   (48.4%) 

Wealth management

   1,343     914     429     46.9   643    446    197    44.2

Loan servicing fees, net

   (2   187     (189   (101.1%)    70    (40   110    275.0

Gain on sale or call of securities

   1,535     529     1,006     190.2

Net gain on sale of foreclosed assets

   36     30     6     20.0

Gain on sales of investment securities, net

   350    430    (80   (18.6%) 

Net gain on foreclosed assets

   (16   30    (46   (153.3%) 

Other

   432     566     (134   (23.7%)    179    179    —      —  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total non-interest income

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

 

   

 

   

 

   

 

 

Totalnon-interest income

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

 

   

 

   

 

   

 

 

Service charges on deposit accounts for the three and nine months ended September 30, 2016 increased $61,2017 decreased $5 and $25, or 78.2%11.4% and 18.0%, respectively, from the same periodperiods in 20152016. The decrease for the nine months ended September 30, 2017 was due to changes made to the Company’s schedule ofwaiving service charges and due toon deposit accounts during March 2017 while the reduction of the amount of service charges waived during 2016.Company was going through a core system conversion.

Other service charges and fees for the three and nine months ended September 30, 20162017 decreased $58 and increased $166$52, or 6.9% and $258, or 24.4% and 13.0%2.3%, respectively, from the same periods in 20152016. The fluctuation for the nine months ended September 30, 2017 was due to several variances. The larger variances for thesea combination of increases and decreases, with the following types of fees having the largest fluctuation in the comparative periods were as follows: (1) underwriting, processing and application fees related to mortgage lending activities increased $113 and $91; (2)periods: unused commitment fees increased $39 and $95; and (3)($108), ATM foreign surcharge fees increased $22($42), and $64.underwriting fees ($32).

Net gain on sale of loans increased $479decreased $1,425, or 48.4% and $1,286,$941, or 19.4% and 23.1%13.7%, when comparing the three and nine months ended September 30, 20162017 to the same periodsperiod in 2015.2016, respectively. The increasechanges in both periods waswere due to favorable mark-to-market pricing on mortgage loan derivatives and increasedthe volume of mortgage loans during 2016.sold and the margins related to the loans sold.

Wealth management income for the three and nine months ended September 30, 20162017 increased $119$197 and $429,$541, or 36.4%44.2% and 46.9%40.3%, respectively, in comparison with the same periods in 2015.2016. The increase was attributed to the growth in the client base and the assets under management in the wealth management division, as well as some improvement in the stock markets. As a comparison, the Company had assets under management at September 30, 2017 and 2016 of $351,932 and $262,879, respectively.

GainNet 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 or call of investment securities increased $425decreased $80 and $1,006,$1,065, or 8,500.0%18.6% and 190.2%69.4%, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods in 2015.2016. The increase wasdecreases were primarily due to the gains on securities that were recognized in the second and third quartersquarter of 2016, which were related to management selling a number of smaller securities to consolidate the number of securities carried in the portfolio, and to repositionselling securities of two municipalities whose credit rating had fallen below management’s credit score limit.

Othernon-interest income remained consistent when comparing the Company’s investment portfolio into more tax-exempt municipal securities.

Other non-interest income decreasedthree months ended September 30, 2017 with the same period in 2016 and increased by $14 and $134,$122, or 7.3% and 23.7%28.2%, when comparing three andthe nine months ended September 30, 20162017 with the same periods 2015.period in 2016. The decreaseincrease for the nine months ended September 30, 20162017 is primarily attributed to the loss of $98 recorded on the sale of the Company’s real estate in downtown Murfreesboro, Tennessee during first quarter 2016. That compares with a gain of $15 being recorded in first nine months of 2015 on the sale of three of the Company’s branch locations in Rutherford County, Tennessee.

Non-Interest Expense

Non-interest expense for the three and nine months ended September 30, 20162017 was $15,278 and $44,837, respectively, compared to $13,708 and $38,452 compared to $10,853 and $31,046 for the same periods in 2015.2016, 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)
 
   2016   2015     

Salaries and employee benefits

  $7,979    $6,208    $1,771     28.5

Occupancy and equipment

   2,001     1,683     318     18.9

FDIC assessment expense

   570     362     208     57.5

Marketing

   206     277     (71   (25.6%) 

Professional fees

   935     516     419     81.2

Amortization of core deposit intangible

   138     160     (22   (13.8%) 

Indirect expenses related to public offering

               — 

Other

   1,879     1,647     232     14.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

  $13,708    $10,853    $2,855     26.3
  

 

 

   

 

 

   

 

 

   

 

 

 

  Nine Months Ended
September 30,
   $
Increase
(Decrease)
   %
Increase
(Decrease)
   Three Months Ended
September 30,
   $
Increase
(Decrease)
   %
Increase
(Decrease)
 
  2016   2015     2017   2016   

Salaries and employee benefits

  $22,099    $17,960    $4,139     23.0  $9,011   $7,979   $1,032    12.9

Occupancy and equipment

   5,563     4,961     602     12.1   2,399    2,001    398    19.9

FDIC assessment expense

   1,388     792     596     75.3   900    570    330    57.9

Marketing

   611     695     (84   (12.1%)    192    206    (14   (6.8%) 

Professional fees

   3,006     1,382     1,624     117.5   821    935    (114   (12.2%) 

Amortization of core deposit intangible

   431     499     (68   (13.6%)    115    138    (23   (16.7%) 

Indirect expenses related to public offering

       314     (314   (100.0%) 

Other

   5,354     4,443     911     20.5   1,840    1,879    (39   (2.1%) 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total non-interest expense

  $38,452    $31,046    $7,406     23.9  $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
  

 

   

 

   

 

   

 

 

Totalnon-interest expense

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

 

   

 

   

 

   

 

 

The increase innon-interest expense noted in the table above is related to the Company’s overall growth. The Company’s biggest varianceslargest increases for the three and nine months ended September 30, 2016,2017, in comparison with the same periods of 2015,2016, were in salaries and employee benefits, occupancy and equipment, FDIC assessment expense, professional fees and othernon-interest expense.

Salaries and employee benefits increased $1,771$1,032 and $4,139,$4,073, or 28.5%12.9% and 23.0%18.4%, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods in 2015.2016. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from 219261 full-time equivalent employees as of September 30, 2015,2016, to 261279 as of September 30, 2016,2017, 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 has added key commercial bankers and support staff to provide continued growth forgrow its team of lenders to further grow the Company.loan portfolio. In addition to the increase in salaries, mortgage commissionsincentive expenses increased $732$405 and $887$309, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods of 20152016 due to the volume of loans closedCompany’s financial performance during the three and nine months ended September 30, 2016.2017. Stock-based compensation expense also increased $156$266 and $581$657, respectively, for the three and nine months ended September 30, 20162017 in comparison with the same periods in 2015. Personnel-related insurance expense increased $92 and $235 for the three and nine months ended September 30, 2016 in comparison with the same periods in 2015 due to the Company’s increased number of employees. The Company also experienced growth in incentive expenses related to the Company’s financial performance.2016.

Occupancy and equipment expense increased $318$398 and $602,$1,126, or 18.9%19.9% and 12.1%20.2%, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods in 2015.2016. The variance for the three months ended September 30, 20162017 versus the three months ended September 30, 20152016 is primarily attributable to increases in building rent expense ($232)222), software maintenance fees ($22)114), building maintenanceand software depreciation ($20), utilities ($16), equipment maintenance ($14) and other furniture, fixtures and equipment expense ($18), which were offset by a decrease in property insurance expense ($13)21). The variance when comparing the nine months ended September 30, 20162017 with the nine months ended September 30, 20152016 is attributable to increases in building rent expense ($430)634), software maintenance fees ($77), equipment maintenance281) and leasehold improvement depreciation ($43), utilities ($29) and building maintenance ($27)69). During the first quarter of 2016, the Company opened two new leased facilities – a new branch location in Nolensville, Tennessee and an expansion of its headquarters in downtown Franklin, Tennessee, the latter of which is leased from a related party of the Company. The Company also began leasing space for its loan production office in Nashville, Tennessee during first quarter 2016.

The Company’s FDIC assessment expense increased $208$330 and $596,$1,287, or 57.5%57.9% and 75.3%92.7%, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods in 2015.2016. The increases are due to the year-over-year asset growth of the Company, assets, on which FDIC assessments are calculated, and dueare also related to the impact of the change in the FDIC insurance assessment calculation methodology implemented byin the FDIC effective July 1, 2016.third quarter of 2016, which caused an increase in the Company’s insurance assessments based on the calculation’s components.

Professional fees increased $419decreased $114 and $1,624,$448, or 81.2%12.2% and 117.5%14.9%, respectively, when comparing the three and nine months ended September 30, 20162017 with the same periods in 2015.2016. The increase fordecrease when comparing the three months ended September 30, 2016 and2017 with the same period in 20152016 is due to increasesdecreases in other professional fees ($225),85) and compliance fees ($165), accounting/audit fees ($58), and brokerage settlement expenses ($23)152). The increase,decrease, when comparing the nine months ended September 30, 20162017 and 2015,2016, is due to increasesdecreases in other professional fees ($675), merger-related expenses ($317)316), accounting/audit fees ($263), compliance fees ($160), brokerage settlement expenses ($89) legal fees ($72),79) and SEC filing expense ($47)67). The increasesdecreases 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,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, othernon-interest expenses decreased $39, or 2.1%, and for the nine months ended September 30, 2016,2017, other non-interestnoninterest expenses increased $232 and $911,$282, or 14.1% and 20.5%5.3%, from the same comparative periods during 2015.2016. The increase in othernon-interest expense for the three months ended September 30, 2016 versus September 30, 2015 is attributed to increases in the following expense types: insurance loss reserves ($139); and electronic banking expenses ($96). The increase in other non-interest expense for the nine months ended September 30, 20162017 versus September 30, 20152016 is attributed to increases in variousseveral types of expenses, withbut the following expense types havingrepresent the largest increases:variances: insurance expense ($204); electronic banking expenses ($180); insurance loss reserves ($139); loan-related expenses ($115); regulatory expenses ($91)78); franchise taxes ($68)162); travel expenses ($74); management fees ($200); and board-relatedloan servicing expense ($219). These variances were offset by decreases in various expense types, with the following account having the largest decrease: loan-related expenses ($57)283).

Income Tax Expense

The Company recognized income tax expense for the three and nine months ended September 30, 2016,2017, of $3,421$3,138 and $9,663,$10,343, respectively, compared to $2,807$3,314 and $6,468,$9,047, respectively, for the three and nine months ended September 30, 2015.2016. The Company’syear-to-date income tax expense for the nine monthsperiod ended September 30, 20162017 reflects an effective income tax rate of 32.3%28.7%, a decrease compared to 36.2%30.2% for the same period in 2015. The decrease in the effective tax rate resulted from the Company’s investments in tax-exempt municipal securities, from the establishment and funding of a real estate investment trust subsidiary of Franklin Synergy Bank in the first quarter of 2016, and from the establishment of a captive insurance subsidiary at the end of 2015.2016.

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 20162017 AND DECEMBER 31, 20152016

Overview

The Company’s total assets increased by $535,403,$622,089, or 24.7%21.1%, from December 31, 20152016 to September 30, 2016.2017. The increase in total assets has primarily been the result of organic growth in the loan portfolio and from purchases of additional investment securities portfolios.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, 20162017 and December 31, 20152016 were $1,654,058$2,115,930 and $1,303,826,$1,773,592, respectively, an increase of $350,232,$342,338, or 26.9%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 over the last year to help increase penetration in its primary markets in Middle Tennessee, Williamson County, Rutherford County and RutherfordDavidson County.

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

 

  September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 

Types of Loans

  Amount   % of Total
Loans
 Amount   % of Total
Loans
   Amount   % of Total
Loans
 Amount   % of Total
Loans
 

Total loans, excluding PCI loans

       

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

       

Real estate:

              

Construction and land development

  $474,255     28.7 $372,767     28.5  $514,934    24.3 $489,562    27.6

Commercial

   430,248     26.0 364,223     27.9   598,846    28.3 497,140    28.0

Residential

   371,046     22.4 274,934     21.1   532,113    25.1 404,989    22.8

Commercial and industrial

   372,784     22.5 283,888     21.7   464,747    22.0 376,476    21.2

Consumer and other

   3,458     0.2 6,577     0.5   3,933    0.2 3,359    0.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total loans—gross, excluding PCI loans

   1,651,791     99.8 1,302,389     99.7   2,114,573    99.9 1,771,526    99.8
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total PCI loans

   3,087     0.2 3,913     0.3   2,558    0.1 2,859    0.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total gross loans

   1,654,878     100.0 1,306,302     100.0   2,117,131    100.0 1,774,385    100.0
    

 

    

 

     

 

    

 

 

Less: deferred loan fees, net

   (820   (2,476     (1,201   (793  

Allowance for loan losses

   (15,590   (11,587     (19,944   (16,553  
  

 

    

 

     

 

    

 

   

Total loans, net allowance for loan losses

  $1,638,468     $1,292,239      $2,095,986    $1,757,039   
  

 

    

 

     

 

    

 

   

As presentedThe discussion in the above table,following paragraphs includes the PCI loans in the breakdown of the various categories of loans.

Total gross loans increased 26.7%19.3% during the first nine months of 2016,2017, due to organic growth as a result of continued market penetration and the strength of the local economies.economy. During this period, the Company experienced growth in real estate loans of 26.0%18.2% with growth occurring in the construction and land development (27.2%residential real estate (31.3%), commercial real estate (18.1%(20.4%) and residential real estate (35.0%construction and land development (5.2%) segments. The Company also experienced growth of 31.3%23.3% in the commercial and industrial segment during the first nine months of 2016.2017.

Real estate loans comprised 77.2%77.7% of the loan portfolio at September 30, 2016.2017. The largest portion of the real estate segmentsegments as of September 30, 2016,2017, was constructioncommercial real estate loans, which totaled 36.4% of real estate loans. Commercial real estate loans totaled $599,233 at September 30, 2017, and comprised 28.3% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

Construction and land development loans which totaled $474,336$514,934 at September 30, 2016,2017, and comprised 37.2%31.3% of total real estate loans and 28.7%24.3% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.

Commercial real estate loans totaled $430,824 at September 30, 2016, and comprised 33.7% of real estate loans and 26.0% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

The residential real estate classification primarily includes1-4 family residential loans which are typically conventional first-lien home mortgages, not including loansheld-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled $371,543$532,295 and comprised 29.1%32.3% of real estate loans and 22.5%25.1% of total loans at September 30, 2016.2017.

Commercial and industrial loans totaled $374,717$466,736 at September 30, 20162017 and grew 31.2%23.3% during the first nine months of 2016.2017. Loans in this classification comprised 22.6%22.0% of total loans at September 30, 2016.2017. The commercial and industrial classification consists of commercial loans tosmall-to-medium sized businesses, shared national credits, and healthcare loans.

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at September 30, 2016,2017, excluding unearned net fees and costs.

Loan Maturity Schedule

 

  September 30, 2016   September 30, 2017 
  One year
or less
   Over one
year to five
years
   Over five
years
   Total   One year
or less
   Over one
year to five
years
   Over five
years
   Total 

Real estate:

                

Construction and land development

  $240,131    $154,043    $80,162    $474,336    $276,021   $165,429   $73,484   $514,934 

Commercial

   23,838     101,685     305,301     430,824     28,239    154,309    416,685    599,233 

Residential

   26,885     109,889     234,769     371,543     37,849    116,899    377,547    532,295 

Commercial and industrial

   54,808     256,336     63,573     374,717     75,035    308,537    83,164    466,736 

Consumer and other

   1,778     1,571     109     3,458     2,249    1,281    403    3,933 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $347,440    $623,524    $683,914    $1,654,878    $419,393   $746,455   $951,283   $2,117,131 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Fixed interest rate

  $203,971    $327,758    $240,183    $771,912    $205,808   $306,701   $433,595   $946,104 

Variable interest rate

   143,469     295,766     443,731     882,966     213,585    439,754    517,688    1,171,027 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $347,440    $623,524    $683,914    $1,654,878    $419,393   $746,455   $951,283   $2,117,131 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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

Allowance for Loan Losses

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

 

past loan experience;

 

the nature and volume of the portfolio;

 

risks known about specific borrowers;

 

underlying estimated values of collateral securing loans;

 

current and anticipated economic conditions; and

 

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

The allowance for loan losses consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired and (2) a general component which coversnon-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group data over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

The following loan portfolio segments have been identified: (1) Construction and land development loans, (2) Commercial real estate loans, (3) Residential real estate loans, (4) Commercial and industrial loans, and (5) Consumer and other loans. Management evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions, and the borrower’s cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available to provide for probable incurred loan losses in the entire portfolio.

In the table below, the components, as discussed above, of the allowance for loan losses are shown as of September 30, 2017 and December 31, 2016.

  September 30, 2017  December 31, 2016  Increase (Decrease) 
  Loan
Balance
  ALLL
Balance
  %  Loan
Balance
  ALLL
Balance
  %  Loan
Balance
  ALLL
Balance
    

Non impaired loans

 $2,053,704  $18,922   0.92 $1,687,244  $15,506   0.92 $366,460  $3,416   —   

Non-PCI acquired loans (Note 1)

  57,663   11   0.02  74,373   23   0.03  (16,710  (12  -1 bps 

Impaired loans

  3,206   1,011   31.53  9,909   1,024   10.33  (6,703  (13  2,120 bps 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-PCI loans

  2,114,573   19,944   0.94  1,771,526   16,553   0.93  343,047   3,391   bps 

PCI loans

  2,558   —     —    2,859   —     —    (301  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

 $2,117,131  $19,944   0.94 $1,774,385  $16,553   0.93 $342,746  $3,391   bps 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth Bank (“MidSouth”) that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstandingnon-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of September 30, 2017, $11 in allowance for loan loss was recorded at September 30, 2016 and December 31, 2015.2017 related to the loans acquired from MidSouth.

   September 30, 2016  December 31, 2015  Increase (Decrease) 
   Loan
Balance
   ALLL
Balance
   %  Loan
Balance
   ALLL
Balance
   %  Loan
Balance
  ALLL
Balance
    

Non impaired loans

  $1,566,708    $15,443     0.99 $1,198,891    $11,465     0.96 $367,817   $3,978    3 bps  

Non-PCI acquired loans (Note 1)

   82,669     32     0.04  99,328     —      —    (16,659  32    4 bps  

Impaired loans

   2,414     115     4.76  4,170     113     2.71  (1,756  2    205 bps  
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Non-PCI loans

   1,651,791     15,590     0.94  1,302,389     11,578     0.89  349,402    4,012    5 bps  

PCI loans

   3,087     —      —    3,913     9     0.23  (826  (9  -23 bps  
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

  $1,654,878    $15,590     0.94 $1,306,302    $11,587     0.89 $348,576   $4,003    5 bps  
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Note 1:Acquired loans that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstanding non-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of September 30, 2016, $32 in allowance for loan loss was recorded at September 30, 2016 related to the loans acquired from MidSouth.

At September 30, 2016,2017, the allowance for loan losses was $15,590,$19,944, compared to $11,587$16,553 at December 31, 2015.2016. The allowance for loan losses as a percentage of total loans was 0.94% and 0.89% at September 30, 2016 and2017 compared to 0.94% at December 31, 2015, respectively.2016. Loan growth during the first nine months of 20162017 is the primary reason for the increase in the allowance amount.

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

 

  Nine Months Ended
September 30,
2016
 Nine Months Ended
September 30,
2015
  Nine Months Ended
September 30,
2017
 Nine Months Ended
September 30,
2016
 

Beginning balance

  $11,587   $6,680   $16,553  $11,587 

Loans charged-off:

     

Construction & land development

   11    —     —    11 

Commercial real estate

   —     —     —     —   

Residential real estate

   39   32   1  39 

Commercial & industrial

   65   15   309  65 

Consumer & other

   35   121   36  35 
  

 

  

 

  

 

  

 

 

Total loans charged-off

   150   168   346  150 

Recoveries on loans previously charged-off:

     

Construction & land development

   —     —    668   —   

Commercial real estate

   —     —     —     —   

Residential real estate

   53   14   38  53 

Commercial & industrial

   —     —     —     —   

Consumer & other

   5   64   13  5 
  

 

  

 

  

 

  

 

 

Total loan recoveries

   58   78   719  58 

Net recoveries (charge-offs)

   (92 (90 373  (92

Provision for loan losses charged to expense

   4,095   3,154   3,018  4,095 
  

 

  

 

  

 

  

 

 

Total allowance at end of period

  $15,590   $9,744   $19,944  $15,590 
  

 

  

 

  

 

  

 

 

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

  $1,654,878   $1,125,941   $2,117,131  $1,654,878 
  

 

  

 

  

 

  

 

 

Average gross loans (1)

  $1,525,359   $921,412   $1,966,635  $1,525,359 
  

 

  

 

  

 

  

 

 

Allowance to total loans

   0.94 0.87 0.94 0.94
  

 

  

 

  

 

  

 

 

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

   0.01 0.01 (0.03%)  0.01
  

 

  

 

  

 

  

 

 

 

(1)Loan balances exclude loans held for sale

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

 

  September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 
  Amount   % of
Allowance
to Total
 Amount   % of
Allowance
to Total
   Amount   % of
Loans
to Total
 Amount   % of
Loans
to Total
 

Real estate loans:

              

Construction and land development

  $4,040     25.9 $3,186     27.5  $3,957    24.3 $3,776    27.6

Commercial

   3,908     25.1 3,146     27.1   5,223    28.3 4,266    28.0

Residential

   2,484     15.9 1,861     16.1   3,122    25.1 2,398    22.9
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total real estate

   10,432     66.9 8,193     70.7   12,302    77.7 10,440    78.5
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Commercial and industrial

   5,110     32.8 3,358     29.0   7,592    22.1 6,068    21.3

Consumer and other

   48     0.3 36     0.3   50    0.2 45    0.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 
   15,590     100.0 11,587     100.0  $19,944    100.0 $16,553    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Nonperforming Assets

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

The primary component ofnon-performing loans isnon-accrual loans, which as of September 30, 20162017 totaled $1,448.$2,582. The other component ofnon-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed onnon-accrual status, unless they are both well-secured and in the process of collection. There were outstanding loans totaling $149$278 that were past due 90 days or more and still accruing interest at September 30, 2016.2017.

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

 

   September 30, 
2016
  December 31,
2015
 

Non-accrual loans

  $1,448   $908  

Past due loans 90 days or more and still accruing interest

   149    2,378  
  

 

 

  

 

 

 

Total non-performing loans

   1,597    3,286  

Foreclosed real estate (“OREO”)

   —     200  
  

 

 

  

 

 

 

Total non-performing assets

   1,597    3,486  

Total non-performing loans as a percentage of total loans

   0.1  0.3

Total non-performing assets as a percentage of total assets

   0.1  0.2

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

   976  353
   September 30,
2017
  December 31,
2016
 

Non-accrual loans

  $2,582  $3,630 

Past due loans 90 days or more and still accruing interest

   278   2,552 
  

 

 

  

 

 

 

Totalnon-performing loans

   2,860   6,182 

Foreclosed real estate (“OREO”)

   1,503   —   
  

 

 

  

 

 

 

Totalnon-performing assets

   4,363   6,182 

Totalnon-performing loans as a percentage of total loans

   0.1  0.3

Totalnon-performing assets as a percentage of total assets

   0.1  0.2

Allowance for loan losses as a percentage of

non-performing loans

   697  268

As of September 30, 2016,2017, there were three loans onnon-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

 

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

Construction & land development

  $—      —    —     $—      —    —   

Commercial real estate

   835     57.7 1     116    4.5 1 

Residential real estate

   123     8.5 1     —      —    —   

Commercial & industrial

   490     33.8 1     2,466    95.5 2 

Consumer

   —      —    —      —      —    —   
  

 

   

 

  

 

   

 

   

 

  

 

 

Total non-accrual loans

  $1,448     100.0 3    $2,582    100.0 3 
  

 

   

 

  

 

   

 

   

 

  

 

 

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is intended to be structured with minimal credit exposure to the Company and consists of both securities classified asavailable-for-sale and securities classified asheld-to-maturity. Allavailable-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest to do so.interest. Securitiesavailable-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were $670,756$980,737 at September 30, 2016,2017, compared to $575,838$754,755 at December 31, 2015,2016, an increase of $94,918$225,982, or 16.5%29.9%. The increase inavailable-for-sale securities was primarily attributed to the volume of securities purchased during the first nine months of 2016 as part of the Company’s leveraging strategy to deploy capital from the issuance of subordinated notes at the end of the first and second quarters of 2016.2017.

Theheld-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $235,050$217,312 at September 30, 2016,2017, compared to $158,200$228,894 at December 31, 2015, an increase2016, a decrease of $76,850,$11,582, or 48.6%5.1%. The increasedecrease is attributable to securities that were purchasedmatured or had principal pay downs during the second quarterfirst nine months of 2016 as part of the Company’s leveraging strategy to deploy capital from the issuance of subordinated notes at the end of the first and second quarters of 2016.2017.

The combined portfolios represented 33.5%33.6% and 33.9%33.4% of total assets at September 30, 20162017 and December 31, 2015,2016, respectively. At September 30, 2016,2017, the Company had no securities that were classified as having Other Than Temporary Impairment.other than temporary impairment.

The Company also had other investments of $11,829$18,472 and $7,998$11,843 at September 30, 20162017 and December 31, 2015,2016, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

Bank Premises and Equipment

Bank premises and equipment totaled $8,796$11,217 at September 30, 20162017 compared to $7,640$9,551 at December 31, 2015,2016, an increase of $1,156,$1,666, or 15.1%17.4%. This increase was the result of adding leasehold improvements and furniture and equipment as needed in the normal course of business and related to the openingbuild-out of the Nolensville branch in January 2016.

Assets Held for Sale

At September 30, 2016, the balance in assets held for sale was zero, compared with the balance of $1,640 at December 31, 2015. The Company’s College Street branch real estatea new leased bank office building in Murfreesboro, Tennessee, was reclassified at December 31, 2015 as held for sale, since the property had been identified to be sold, and the sale of the property was probable at that time. The sale of the property settled on March 29, 2016,a new leased office space in Franklin, Tennessee, and a loss of $98 was realized as a result of the sale and was recordednew leased bank building located in other noninterest income.Spring Hill, Tennessee.

Deposits

Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number ofnon-deposit investment alternatives available to depositors, such as mutual funds,

money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products ornon-deposit investment alternatives.

At September 30, 2016,2017, total deposits were $2,217,954,$2,824,825, an increase of $403,915,$433,007, or 22.3%18.1%, compared to $1,814,039$2,391,818 at December 31, 2015.2016. The growth in deposits is attributable to growth in brokered deposits, time deposits, money market deposits and noninterest-bearing deposits.

Brokered deposits are an integral part ofIncluded in the Company’s funding strategy.strategy are brokered deposits. Total brokered deposits decreased 1.5%increased from $478,257$472,515 at December 31, 20152016 to $471,187$878,565 at September 30, 2016, primarily2017, due to the Company’s strategyincreased need for funding for the Bank’s loan growth and due to reduce dependence onthe fluctuation in certain brokered deposits by allowing matured brokered certificates of deposit to be redeemed rather than renewing them or replacing them with other brokered depositsthat are interest-bearing checking and money market accounts that can fluctuate daily.

Public funds deposits in the form of county deposits are a part of the Company’s funding strategy and are usually cyclical in nature, with the highest periodpeak of growth beingthose deposit balances occurring during the middle of the first quarter of each calendar year. County deposits increased $26,410,Public funds declined $214,866, or 8.1%32.9%, from $327,766$653,572 at December 31, 20152016 to $354,176$438,706 at September 30, 2016. This growth was attributed to the addition of more county entities during 2016, which brought additional deposits into the Company during 2016.2017.

Time deposits excluding brokered deposits as of September 30, 2016,2017, amounted to $720,417,$736,067, compared to $470,284$555,732 as of December 31, 2015,2016, an increase of $250,133,$180,335, or 53.2%. Of the32.4%, primarily due to an increase in time deposits, 64.0% is attributed to the Company’s addition of Local Government Investment Pool (LGIP) deposits during 2016, which have become a component of the Company’s funding strategy. As of September 30, 2016, the Company’s LGIP deposits amounted to $280,000, compared with $120,000 of those deposits at December 31, 2015.

Other non-maturity deposits also increased$185,030 during the first nine months of 2016.2017.Non-public funds money market accounts, excluding brokered deposits, increased $90,039, or 33.8%, from December 31, 2016 to September 30, 2017. Noninterest-bearing checking deposits grew $55,375,$23,396, or 31.3%; money market accounts increased $65,407, or 31.4%; savings deposits increased $7,519, or 17.2%;10.0%, and interest-bearingnon-public funds interest checking accounts, increased $6,141,excluding brokered deposits, grew $12,560, or 5.6%11.0%, respectively, when comparing deposit balances from September 30, 20162017 with balances at December 31, 2015.2016.

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

Maturity of non-brokered time deposits of $100 or morematurity:

 

  September 30, 2016   September 30,
2017
 

Three months or less

  $316,713    $448,951 

Three through six months

   57,739     92,911 

Six through twelve months

   59,151     76,147 

Over twelve months

   136,297     151,497 
  

 

   

 

 

Total

  $569,900    $769,506 
  

 

   

 

 

Federal Funds Purchased and Repurchase Agreements

As of September 30, 2016,2017, the Company had $8,500$0 in federal funds purchased from correspondent banks compared to $39,825$46,805 outstanding as of December 31, 2015.2016. Securities sold under agreements to repurchase had an outstanding balance of $37,343$32,862 as of September 30, 2016,2017, compared to $61,261$36,496 as of December 31, 2015.2016. Securities sold under agreements to repurchase are financing arrangements that mature daily or within a short period of time. At maturity, the securities underlying the agreements are returned to the Company.

Federal Home Loan Bank Advances

The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of1-4 family residential mortgages and home equity lines of credit. At September 30, 20162017 and at December 31, 2015,2016, advances totaled $162,000$337,000 and $57,000,$132,000, respectively. The Company strategically added $110,000 in FHLB advances in the third quarter of 2016, replacing brokered deposits that were maturing in the third quarter.

At September 30, 2016,2017, the scheduled maturities and weighted average interest rates of these advances were as follows:

 

Scheduled Maturities

  Amount   Weighted
Average Rates
   Amount   Weighted
Average Rates
 

2016

   110,000     0.49

2017

   10,000     1.27  $75,000    1.17

2018

   7,000     1.61   157,000    1.19

2019

   35,000     1.30   50,000    1.41

2020

   55,000    1.72
  

 

   

 

   

 

   

 

 

Total

  $162,000     0.76  $337,000    1.31
  

 

   

 

   

 

   

 

 

Subordinated Notes

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

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

The sale of the March 2016 Notes initially yielded net proceeds of approximately $38,843 after deducting the placement agents’ fees and estimated expenses payable by the Company. The Company used the net proceeds from the offering to pay off a $10 million borrowing, which had been used to redeem the shares of Series A Preferred Stock issued to Treasury in connection with2017, the Company’s participation in the SBLF, and to fund future growthsubordinated notes, net of the Bank.

The issuance costs, totaled $58,470, compared with $58,337 at December 31, 2016. For more information related to the March 2016 Notes amounted to $1,382 and are being amortized as interest expense over the ten-year term of the March 2016 Notes.

On June 30, 2016, the Company issued $20,000 in aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “June 2016 Notes”) in a private offering to certain institutional accredited investors. The June 2016 Notes have a stated maturity of July 1, 2026, and bear interest at a fixed rate of 7.00% per year, from and including June 30, 2016 through June 30, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears on January 1 and July 1 of each year beginning on January 1, 2017. Beginning July 1, 2021 through the maturity date or an early redemption date, the interest rate shall reset quarterly to an interest rate per year equal to the then current three-month LIBOR rate plus 6.04%, computed on the basis of a 360-day yearnotes and the actual number of days elapsed, payable quarterly in arrears. The June 2016 Notes are redeemable, in whole or in part, on or after July 1, 2021 and at any time upon the occurrence of certain events set forth in the June 2016 Notes.

The June 2016 Notes were offered and sold by the Company to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and the provisions of Rule 506 of Regulation D thereunder.

The June 2016 Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries and are not subject to redemption at the option of the holder. Prior to July 1, 2021, the Company may redeem the June 2016 Notes, in whole at any time, or in part from time to time, only under certain limited circumstances set forth in the June 2016 Notes. On or after July 1, 2021, the Company may redeem the June 2016 Notes at its option, in whole at any time, or in part on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the outstanding principal amount of the June 2016 Notes being redeemed, together with any accrued and unpaid interest on the June 2016 Notes being redeemed up to the date of redemption.

Principal and interest on the June 2016 Notes are subject to acceleration only in limited circumstances. The June 2016 Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness and equal with the Company’s previously issued and outstanding March 2016 Notes, initially issued in the aggregate principal amount of $40,000 pursuant to that certain Indenture and that certain Supplemental Indenture, each by and between the Company and U.S. Bank National Association, as Trustee, and each dated March 31, 2016.

The sale of the June 2016 Notes initially yielded net proceeds of approximately $19,660 after deducting the estimated expenses payable by the Company. The net proceeds from the offering of the June 2016 Notes were used to inject capital into the Bank to fund future growth.

Therelated issuance costs, related to the June 2016 Notes amounted to $404 and are being amortized as interest expense over the ten-year term of the June 2016 Notes.

For regulatory capital purposes, the March 2016 Notes and the June 2016 Notes are treated as Tier 2 capital, subject to certain limitations and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated inplease see Note 710 of the consolidated financial statements.

Liquidity

Liquidity is defined as the ability of the Bank to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis and the ability of the Company to fund the servicing of its subordinated notes.basis.

Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the Company’s needs. The Company’sOur source of funds to pay interest on the previously discussedour subordinated notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash balances held by the Company. Under the terms of the informal agreement with the Federal Reserve Bank of Atlanta (the “Reserve Bank”) and the Tennessee Department of Financial Institutions (“TDFI”), described in “Other Events” in Management’s Discussion and Analysis and in “ITEM 1A. RISK FACTORS” under “PART II OTHER INFORMATION,”below, the Bank is required to receive prior written approval from its regulatory agencies to pay dividends to the Company.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified asavailable-for-sale, and sales of brokered deposits. As of September 30, 2016, $670,7562017, $980,737 of the investment securities portfolio was classified asavailable-for-sale and is reported at fair value on the consolidated balance sheet. Another $235,050$217,312 of the portfolio was classified asheld-to-maturity and is reported at amortized cost. Approximately $742,828$944,463 of the total $905,806$1,198,049 investment securities portfolio on hand at September 30, 2016,2017, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.

Shareholders’ Equity

As of September 30, 2016,2017, the Company’s shareholders’ equity was $209,644,$303,697, as compared with $188,816$270,361 as of December 31, 2015.2016. The increase in shareholders’ equity was primarily due to the Company’s earnings of $20,262$25,697 in the first nine months of 2016,2017, the increase in accumulatedcommon stock of $3,288 during the first nine months of 2017, and the $4,359 increase in other comprehensive income from the increase in the valuation of $7,521, exercises of the Company’s warrants and stock options of $1,436, and $1,817 related to the Company’s share-based compensation. These were offset by a $10,000 reduction in preferred stock due to the Company’s redemption of the Series A Preferred Stock related to the SBLF on March 25, 2016 and due to net divestments of $185 in conjunction with the Company’s 401(k) employer match.available for sale securities.

Effects of Inflation and Changing Prices

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

Off Balance Sheet Arrangements

The Company generally does not have anyoff-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At September 30, 2016,2017, the Company had unfunded loan commitments outstanding of $67,489,$43,611, unused lines of credit of $448,542,$563,178, and outstanding standby letters of credit of $23,995.$41,523.

GAAP Reconciliation and Management Explanation ofNon-GAAP Financial Measures

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

The following reconciliation table provides a more detailed analysis of thesenon-GAAP financial measures:

 

   As of or for the Three Months Ended 

(Amounts in thousands, except share/

per share data and percentages)

  Sept 30,
2016
  Jun 30,
2016
  Mar 31,
2016
  Dec 31,
2015
  Sept 30,
2015
 

Total shareholders’ equity

  $209,644   $204,276   $191,910   $188,816   $187,610  

Less: Preferred stock

   —     —     —     10,000    10,000  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total common shareholders’ equity

   209,644    204,276    191,910    178,816    177,610  

Common shares outstanding

   10,757,483    10,689,481    10,586,592    10,571,377    10,524,630  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Book value per share

  $19.49   $19.11   $18.13   $16.92   $16.88  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total shareholders’ equity

  $209,644   $204,276   $191,910   $188,816   $187,610  

Less: Preferred stock

   —     —     —     10,000    10,000  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total common shareholders’ equity

   209,644    204,276    191,910    178,816    177,610  

Less: Goodwill and other intangibles

   10,774    10,916    11,070    11,231    11,373  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tangible common shareholders’ equity

  $198,870   $193,360   $180,840   $167,585   $166,237  

Common shares outstanding

   10,757,483    10,689,481    10,586,592    10,571,377    10,524,630  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tangible book value per share

  $18.49   $18.09   $17.08   $15.85   $15.80  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average total shareholders’ equity

   206,009    194,385    194,383    188,460    181,540  

Less: Average preferred stock

   —     —     9,231    10,000    10,000  

Less: Average goodwill and other intangibles

   10,885    11,006    11,165    11,309    11,469  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average tangible common shareholders’ equity

  $195,154   $183,379   $173,987   $167,151   $160,071  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income available to common shareholders

  $7,030   $6,999   $6,210   $4,639   $5,125  

Average tangible common equity

   195,154    183,379    173,987    167,151    160,071  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Return on average tangible common equity

   14.33  15.35  14.36  11.01  12.70
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Efficiency Ratio:

      

Net interest income

  $20,675   $19,934   $19,276   $17,195   $16,736  

Noninterest income

   4,876    4,626    3,085    2,992    3,798  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating revenue

   25,551    24,560    22,361    20,187    20,534  

Expense

      

Total noninterest expense

   13,708    12,913    11,831    11,094    10,853  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Efficiency ratio

   53.65  52.58  52.91  54.96  52.85
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Annualized interest and fees on loans(1)

  $80,329   $76,136   $71,358   $61,506   $58,495  

Average loans

   1,620,347    1,497,556    1,364,467    1,232,218    1,044,520  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Yield on loans

   4.96  5.08  5.23  4.99  5.60
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Annualized accretion income on acquired loans

  $841   $1,108   $1,447   $1,409   $4,374  

Less: Effect of accretion income on acquired loans

   (0.05%)   (0.07%)   (0.11%)   (0.11%)   (0.42%) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted yield on loans

   4.91  5.01  5.12  4.88  5.18
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)This item does not include tax-equivalent adjustments.

  As of or for the Three Months Ended 

(Amounts in thousands, except share/

per share data and percentages)

 Sept 30,
2016
  Jun 30,
2016
  Mar 31,
2016
  Dec 31,
2015
  Sept 30,
2015
 

Annualized net interest income(1)

 $82,251   $80,174   $77,528   $68,219   $66,398  

Average earning assets

  2,576,294    2,404,060    2,177,905    2,009,481    1,846,372  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net interest margin

  3.19  3.33  3.56  3.39  3.60
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Annualized accretion income on acquired loans

 $841   $1,108   $1,447   $1,409   $4,374  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: Effect of accretion income on acquired loans

  (0.03%)   (0.05%)   (0.07%)   (0.07%)   (0.24%) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Annualized premium amortization of acquired deposits

 $—    $—    $—    $—    $4  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Less: Effect of premium amortization of acquired deposits

  (0.00%)   (0.00%)   (0.00%)   (0.00%)   (0.00%) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted net interest margin

  3.16  3.28  3.49  3.32  3.36
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)This item does not include tax-equivalent adjustments.

(Amounts in thousands, except share/per share data and

percentages)

  As of or for the Three Months Ended 
  Sept 30,
2017
  Jun 30,
2017
  Mar 31,
2017
  Dec 31,
2016
  Sept 30,
2016
 

Total shareholders’ equity

  $303,594  $292,918  $278,407  $270,258  $209,644 

Less: Preferred stock

   —     —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total common shareholders’ equity

   303,594   292,918   278,407   270,258   209,644 

Less: Goodwill and other intangible assets

   10,294   10,356   10,477   10,633   10,774 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tangible common shareholders’ equity

  $293,300  $282,562  $267,930  $259,625  $198,870 

Common shares outstanding

   13,209,055   13,181,501   13,064,110   13,036,954   10,757,483 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tangible book value per share

  $22.20  $21.44  $20.51  $19.91  $18.49 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average total common equity

   298,088   285,659  $272,713  $235,984  $206,009 

Less: Average Goodwill and other intangible assets

   10,321   10,427   10,565   10,719   10,855 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Average tangible common shareholders’ equity

  $287,767  $275,232  $262,148  $225,265  $195,154 

Net income available to common shareholders

   8,889   8,866   7,934   7,179   7,137 

Average tangible common equity

   287,767   275,232   262,148   225,265   195,154 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Return on average tangible common equity

   12.26  12.92  12.27  12.68  14.55
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Efficiency Ratio:

      

Net interest income

  $24,326  $24,469  $23,643  $21,699  $20,675 

Noninterest income

   3,569   3,880   4,008   2,553   4,876 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating revenue

   27,895   28,349   27,651   24,252   25,551 

Expense

      

Total noninterest expense

   15,278   15,283   14,276   13,229   13,708 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Efficiency ratio

   54.77  53.91  51.63  54.55  53.65
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

FRANKLIN FINANCIAL NETWORK, INC.

SUMMARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)

(Amounts in thousands, except per share data and percentages)

 

  As of and for the three months ended   As of and for the three months ended 
  Sept 30,
2016
   Jun 30,
2016
   Mar 31,
2016
   Dec 31,
2015
   Sept 30,
2015
   Sept 30, 2017 Jun 30, 2017   Mar 31, 2017   Dec 31, 2016   Sept 30, 2016 

Income Statement Data ($):

          

Income Statement Data ($):

 

      

Interest income

   25,724     24,286     22,561     20,081     19,301     33,780  33,011    30,541    27,336    25,724 

Interest expense

   5,049     4,352     3,285     2,886     2,565     9,454  8,542    6,898    5,637    5,049 

Net interest income

   20,675     19,934     19,276     17,195     16,736     24,326  24,469    23,643    21,699    20,675 

Provision for loan losses

   1,392     1,567     1,136     1,876     1,724     590  573    1,855    1,145    1,392 

Noninterest income

   4,876     4,626     3,085     2,992     3,798     3,569  3,880    4,008    2,553    4,876 

Noninterest expense

   13,708     12,913     11,831     11,094     10,853     15,278  15,283    14,276    13,229    13,708 

Net Income before taxes

   10,451     10,080     9,394     7,217     7,957  

Provision for taxes

   3,421     3,081     3,161     2,553     2,807  

Net income before taxes

   12,027  12,493    11,520    9,878    10,451 

Income tax expense(1)

   3,138  3,619    3,586    2,699    3,314 

Net income(1)

   7,030     6,999     6,233     4,664     5,150     8,889  8,874    7,934    7,179    7,137 

Earnings before interest and taxes

   15,500     14,432     12,679     10,103     10,522     21,481  21,035    18,418    15,515    15,500 

Net income available to common shareholders

   7,030     6,999     6,210     4,639     5,125     8,889  8,866    7,934    7,179    7,137 

Weighted average diluted common shares

   13,773,539  13,701,762    13,657,357    12,473,725    11,415,422 

Earnings per share, basic

   0.66     0.66     0.59     0.44     0.49     0.67  0.68    0.61    0.61    0.67 

Earnings per share, diluted

   0.62     0.62     0.56     0.41     0.46     0.65  0.64    0.58    0.58    0.63 

Profitability (%)

                   

Return on average assets

   1.06     1.14     1.12     0.89     1.07     1.03  1.03    0.99    1.00    1.07 

Return on average equity

   13.58     14.48     12.90     9.82     11.25     11.83  12.46    11.80    12.10    13.78 

Return on average tangible common equity

   14.33     15.35     14.36     11.01     12.70  

Efficiency ratio

   53.65     52.58     52.91     54.96     52.85  

Net Interest margin (1)

   3.19     3.33     3.56     3.39     3.60  

Return on average tangible common equity(3)

   12.26  12.92    12.27    12.68    14.55 

Efficiency ratio(3)

   54.77  53.91    51.63    54.55    53.65 

Net interest margin(4)

   3.05  3.08    3.18    3.27    3.34 

Balance Sheet Data ($):

                   

Loans (including HFS)

   1,680,877     1,567,537     1,433,623     1,317,905     1,138,492     2,127,753  2,023,679    1,962,397    1,797,291    1,680,877 

Loan loss reserve

   15,590     14,253     12,676     11,587     9,744     19,944  18,689    18,105    16,553    15,590 

Cash

   55,749     72,050     62,054     52,394     47,658     155,842  96,741    114,664    90,927    56,804 

Securities

   905,806     909,531     746,781     734,038     756,554     1,198,049  1,243,406    1,299,349    983,649    905,806 

Goodwill

   9,124     9,124     9,124     9,124     9,124     9,124  9,124    9,124    9,124    9,124 

Intangible assets

   1,650     1,792     1,946     2,107     2,249  

Intangible assets (Sum of core deposit intangible and SBA servicing rights)

   1,170  1,232    1,353    1,509    1,650 

Assets

   2,703,195     2,607,101     2,300,094     2,167,792     2,002,538     3,565,278  3,443,593    3,454,788    2,943,189    2,703,195 

Deposits

   2,217,954     2,249,735     1,953,573     1,814,039     1,714,594     2,824,825  2,754,425    2,817,212    2,391,818    2,217,954 

Liabilities

   2,493,551     2,402,825     2,108,184     1,978,976     1,814,928     3,261,581  3,150,572    3,176,278    2,672,828    2,493,551 

Total equity

   209,644     204,276     191,910     188,816     187,610     303,697  293,021    278,510    270,361    209,644 

Common equity

   209,644     204,276     191,910     178,816     177,610     303,594  292,918    278,407    270,258    209,644 

Tangible common equity

   198,870     193,360     180,840     167,585     166,237  

Tangible common equity(3)

   293,300  282,562    267,930    259,625    198,870 

Asset Quality (%)

                   

Nonperforming loans/ total loans (2)

   0.10     0.10     0.12     0.25     0.07     0.14  0.19    0.21    0.35    0.10 

Nonperforming assets / total loans(2) + foreclosed assets

   0.10     0.12     0.14     0.27     0.09  

Loan loss reserve / loans(2)

   0.94     0.92     0.89     0.89     0.87  

Nonperforming assets / (total loans(2) + foreclosed assets)

   0.21  0.26    0.27    0.35    0.10 

Loan loss reserve / total loans(2)

   0.94  0.93    0.93    0.93    0.94 

Net charge-offs / average loans

   0.01     0.00     0.01     0.01     0.00     (0.13 0.00    0.07    0.04    0.01 

Capital (%)

                   

Tangible common equity to tangible assets

   7.39     7.45     7.90     7.77     8.35  

Tangible common equity to tangible assets(3)

   8.25  8.23    7.78    8.85    7.39 

Leverage ratio

   7.15     7.33     7.69     8.48     8.90     8.58  8.21    8.36    9.28    7.15 

Common equity Tier 1 ratio

   9.09     9.22     9.60     10.08     11.03  

Common Equity Tier 1 ratio

   11.58  11.54    11.32    11.75    9.09 

Tier 1 risk-based capital ratio

   9.09     9.22     9.60     10.51     11.52     11.58  11.54    11.32    11.75    9.09 

Total risk-based capital ratio

   12.66     12.93     12.49     11.21     12.18     14.68  14.69    14.51    15.09    12.66 

 

(1) Net interest margins shownThis item reflects the retrospective adoption of Accounting Standard Update2016-09 during fourth quarter 2016, which impacted previously reported quarterly earnings and/or earnings per share (“EPS”) in the table above do not include tax-equivalent adjustments.2016, as follows: third quarter 2016 – decreased income tax expense by $107 and increased diluted EPS by $0.01.
(2) Total loans in this ratio exclude loans held for sale.
(3)SeeNon-GAAP table in the preceding pages.
(4)Net interest margins shown in the table above includetax-equivalent adjustments to adjust interest income ontax-exempt loans andtax-exempt investment securities to a fully taxable basis.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the effectiveness of our Registration Statement on FormS-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have more than $1.0$1.07 billion in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act; or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion innon-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply tonon-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or revised standard. This election is irrevocable.

Other Events

On October 18, 2017, the Bank received regulatory approval from the Reserve Bank to open a new branch at 1605 Medical Center Parkway, Murfreesboro, Tennessee. The TDFI previously approved this new branch on July 14, 2017. The Bank plans to open this new branch during the fourth quarter of 2017.

On November 3, 2016, the Bank entered into an informal agreement with the Federal Reserve Bank of Atlanta (“Reserve Bank”) and the Tennessee Department of Financial Institutions (“TDFI”)TDFI in the form of a Memorandum of Understanding (“MOU”). Under the terms of the MOU, the Bank agreed, among other things, to (1) enhance and periodically update its Commercial Real Estate (“CRE”) concentration risk management policy; (2) augment credit risk management practices; and (3) enhance capital and liquidity plans. The Bank has also agreed that it will seek prior written approval of the Reserve Bank and the TDFI to pay dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s subordinated debt. In addition, the Company currently may not make interest payments on its subordinated debt without prior written approval from its primary regulatory agencies.

The Company has also expects to executeexecuted an agreement with the Board of Governors of the Federal Reserve System (the “Agreement”) under section 4(m)(2) of the Bank Holding Company Act, which will includeincludes specific actions designed to address the Bank’s risk profile and to strengthen the underlying condition of the Bank. Until the Bank and Company satisfy the requirements of the MOU and the Agreement, any plans for business combinations or location expansion will be limited and subject to prior written approval from the appropriate regulatory body.

Management believes the effect of these regulatory actions will not have a material impact on the Bank’s ability to continue to serve its customers and communities. In addition, the company’s ongoing investment in its people and technology has and will continue to support solid growth, asset quality measures, and safety and soundness standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing interest rates using various rate change (shock) scenarios. The Company’s rate sensitivity position has an important impact on earnings. Senior management monitors the Company’s rate sensitivity position throughout each month, and then the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.

Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a12-month time period ended September 30, 2016,2017, net interest income was estimated to decrease 1.14%3.02% and 4.20%7.13% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to increase 1.26% and decrease 5.71% and 16.91%5.25% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of September 30, 2016.2017.

 

Projected Interest Rate
Change

 

Net Interest
Income

 

Net Interest Income $
Change from Base

 

% Change from Base

  Net Interest
Income
   Net Interest Income $
Change from Base
   % Change
from Base
 
-200 60,738 -12,360 -16.91%   90,629    (5,024   (5.25%) 
-100 68,923 -4,175 -5.71%   96,857    1,205    1.26
Base 73,098 —   0.00%   95,652    —      0.00
+100 72,266 -832 -1.14%   92,762    (2,890   (3.02%) 
+200 70,030 -3,067 -4.20%   88,832    (6,820   (7.13%) 
+300 67,468 -5,630 -7.70%   84,852    (10,800   (11.29%) 
+400 65,627 -7,470 -10.22%   81,364    (14,288   (14.94%) 

The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any management action that might be taken in responding to or anticipating changes in interest rates. The simulation results are one indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.

ITEM 4. CONTROLS AND PROCEDURES.

ITEM 4.CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule13a-15(e) under the Exchange Act) as of September 30, 2016,2017, the end of the fiscal quarter covered by this Quarterly Report on Form10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1.LEGAL PROCEEDINGS.

Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

ITEM 1A.RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form10-K filed with the SEC on March 15, 2016, as supplemented by the risk factors disclosed in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, other than the additional disclosure of the risk factors listed below.

We are Required to Comply with the Terms of a Memorandum of Understanding (“MOU”) that the Bank has Entered into with the Reserve Bank and the TDFI, and Lack of Compliance Could Result in Additional Regulatory Actions.

On November 3, 2016, the Bank entered into an MOU with the Reserve Bank and the TDFI. Under the terms of the MOU, the Bank agreed, among other things, to enhance its policies, practices and processes to reflect the Bank’s increasingly complex business model and risk profile. The Bank has also agreed that it will seek prior written approval of the Reserve Bank and the TDFI to pay dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s subordinated debt.

The MOU will remain in effect until stayed, modified, terminated or suspended by the Reserve Bank and the TDFI. Management has been actively implementing plans and processes to comply with the requirements of the MOU. The Reserve Bank and the TDFI may determine in their sole discretion that the matters covered by the MOU have not been addressed satisfactorily, which could result in limitations on our business, including restricting growth and requiring increased capital, and negatively affect our ability to implement our business plan or the value of our common stock, as well as our financial condition, liquidity and results of operations.

The Rights of Our Common Shareholders Are Subordinate to the Rights of the Holders of Our Debt Securities and May Be Subordinate to the Holders of Any Class of Preferred Stock That We May Issue in the Future

On March 31, 2016, we completed the public offering of $40,000,000 aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “March 2016 Notes”). The net proceeds from the offering of the March 2016 Notes was used, in part, to pay down a line of credit, which we used on March 25, 2016 to redeem 10,000 outstanding shares of our Series A Preferred Stock issued to the Treasury pursuant to our participation in the Small Business Lending Fund program.

On June 30, 2016, we completed the private offering of $20,000,000 aggregate principal amount of fixed-to-floating rate subordinated Notes due 2026 (the “June 2016 Notes”). The net proceeds from the offering of the June 2016 Notes were used to inject capital into Franklin Synergy Bank, the Company’s primary subsidiary, to fund growth and for other corporate purposes.16, 2017.

Upon our voluntary or involuntary dissolution, liquidation, or winding up of affairs, holders of shares of our common stock will not receive a distribution, if any, until after the payment in full of our debts and other liabilities, and the payment of any accrued but unpaid dividends and any liquidation preference on outstanding shares of preferred stock. Our Board of Directors has the authority to issue in the aggregate up to 1,000,000 shares of preferred stock and to determine the terms of each issue of preferred stock without shareholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will be senior to our common stock and could have a preference on liquidating distributions or a preference on dividends that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital-raising efforts is uncertain. Thus, common shareholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.

The Amount of Interest Payable on the March 2016 Notes Will Vary Beginning on March 30, 2021

The interest rate on the March 2016 Notes will vary beginning on March 30, 2021. From and including the date of issuance of the March 2016 Notes, to but excluding March 30, 2021, the March 2016 Notes will bear interest at an initial rate of 6.875% per annum. From and including March 30, 2021 and thereafter, the March 2016 Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination, plus a spread of 5.636%. If interest rates rise, the cost of the March 2016 Notes may increase, thereby negatively affecting our net income.

The Amount of Interest Payable on the June 2016 Notes Will Vary Beginning on July 1, 2021

The interest rate on the June 2016 Notes will vary beginning on July 1, 2021. From and including the date of issuance of the June 2016 Notes, to and including June 30, 2021, the June 2016 Notes will bear interest at an initial rate of 7.00% per annum. From and including July 1, 2021 and thereafter, the June 2016 Notes will bear interest at a floating rate equal to three-month LIBOR as calculated on each applicable date of determination, plus a spread of 6.04%. If interest rates rise, the cost of the June 2016 Notes may increase, thereby negatively affecting our net income.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Shares of the Company’s common stock were issued during the third quarter of 2016 pursuant to the exercise of warrants and options issued by the Company, as follows:None.

 

Date of Sale

  Number of Shares of
Common Stock Sold
   

Type of Issuance

  Price Per Share   Aggregate Price 

07/22/2016

   500    Warrants Exercised  $12.00    $6,000.00  
   500    Warrants Exercised  $12.00    $6,000.00  
   125    Warrants Exercised  $12.00    $1,500.00  

07/28/2016

   4,000    Options Exercised  $10.00    $40,000.00  
   6,000    Options Exercised  $11.75    $70,500.00  
   1,296    Options Exercised  $10.00    $12,960.00  
   600    Options Exercised  $13.00    $7,800.00  
   480    Options Exercised  $13.50    $6,480.00  
   290    Options Exercised  $20.69    $6,000.10  

08/03/2016

   401    Options Exercised  $8.57    $3,436.57  

08/04/2016

   877    Options Exercised  $8.57    $7,515.89  

08/09/2016

   7,500    Options Exercised  $10.00    $75,000.00  
   781    Options Exercised  $10.00    $7,810.00  
   1,719    Options Exercised  $10.00    $17,190.00  

08/10/2016

   50    Warrants Exercised  $12.00    $600.00  

08/12/2016

   7,500    Options Exercised  $10.00    $75,000.00  
   2,313    Options Exercised  $11.75    $27,177.75  
   2,225    Options Exercised  $10.00    $22,250.00  
   3,500    Options Exercised  $10.50    $36,750.00  
   4,500    Options Exercised  $12.00    $54,000.00  
   1,229    Options Exercised  $13.00    $15,977.00  
   819    Options Exercised  $13.50    $11,056.50  
   438    Options Exercised  $20.69    $9,062.22  

08/16/2016

   1,141    Options Exercised  $11.75    $13,406.75  
   652    Options Exercised  $10.00    $6,520.00  

Date of Sale

  Number of Shares of
Common Stock Sold
   

Type of Issuance

  Price Per Share   Aggregate Price 
   1,139    Options Exercised  $10.50    $11,959.50  

08/17/2016

   839    Options Exercised  $10.00    $8,390.00  

08/18/2016

   1,842    Options Exercised  $10.00    $18,420.00  
   12    Options Exercised  $10.50    $126.00  

08/25/2016

   2,680    Options Exercised  $11.75    $31,490.00  
   60    Options Exercised  $11.75    $705.00  
   398    Options Exercised  $10.50    $4,179.00  
   106    Options Exercised  $20.69    $4,179.00  

08/26/2016

   2,526    Options Exercised  $10.50    $26,523.00  

08/29/2016

   839    Options Exercised  $10.00    $8,390.00  

08/30/2016

   4,569    Options Exercised  $11.75    $53,685.75  

09/01/2016

   125    Warrants Exercised  $12.00    $1,500.00  

09/06/2016

   839    Options Exercised  $10.00    $8,390.00  
   838    Options Exercised  $10.00    $8,380.00  

09/07/2016

   1,000    Options Exercised  $10.00    $10,000.00  

09/08/2016

   1,000    Options Exercised  $10.00    $10,000.00  
   1,000    Options Exercised  $10.00    $10,000.00  
   10    Options Exercised  $10.00    $100.00  
   990    Options Exercised  $10.00    $9,900.00  
   125    Warrants Exercised  $12.00    $1,500.00  

09/12/2016

   1,000    Options Exercised  $10.00    $10,000.00  

09/13/2016

   6,196    Options Exercised  $10.50    $65,058.00  

09/16/2016

   500    Warrants Exercised  $12.00    $6,000.00  
   750    Warrants Exercised  $12.00    $9,000.00  

09/20/2016

   1,278    Options Exercised  $8.57    $10,952.46  
   125    Warrants Exercised  $12.00    $1,500.00  

Neither the exercises of the warrants and options nor their original issuances involved any underwriters, underwriting discounts or commissions, or any public offering, and the Company believes that such transactions were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated thereunder) as transactions by an issuer not involving a public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

ITEM 4.MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

ITEM 5.OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

ITEM 6.EXHIBITS

 

Exhibit

No.

  Description
    2.1Amendment No.  3 to the Agreement and Plan of Reorganization and Bank Merger (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on October 5, 2017)
10.1  Standard Form ofTriple Net Office Lease Agreement, Between Owner and Contractor, by and between Petra Real Estate Partners II, LLC and Franklin Synergy Bank and Century Skanska (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 13, 2016) 27, 2017)
  10.2Lease Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form8-K filed with the Securities and Exchange Commission on July 27, 2017)
  31.1*  Certification of Chief Executive Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
  31.2*  Certification of Chief Financial Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
  32*  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101*  Interactive Data Files.

 

*Filed herewith

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FRANKLIN FINANCIAL NETWORK, INC.
November 9, 20162017  By: 

/s/ Sarah Meyerrose

   Sarah Meyerrose
   

On behalf of the registrant and as Chief Financial Officer

(Principal Financial Officer)


EXHIBIT INDEX

Exhibit

No.

Description
  10.1Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2016)
  31.1*Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
  31.2*Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).
  32*Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101*Interactive Data Files.

*Filed herewith