Franklin Financial Network (FSB) 10-Q 2015 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

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

For the transition period from                    to                    

Commission file number 001-36895

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

Tennessee	20-8839445
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
722 Columbia Avenue Franklin, Tennessee	37064
(Address of principal executive offices)	(Zip Code)

615-236-2265

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

The number of shares outstanding of the registrant’s common stock, no par value per share, as of August 7, 2015, was 10,518,706.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Cautionary Note Regarding Forward-Looking Statements	1
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Income	3
Condensed Consolidated Statements of Comprehensive Income (Loss)	4
Condensed Consolidated Statement of Changes in Shareholders’ Equity	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	49
PART II OTHER INFORMATION
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3. Defaults Upon Senior Securities	50
Item 4. Mine Safety Disclosures	50
Item 5. Other Information	51
Item 6. Exhibits	51
SIGNATURES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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 our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), on March 27, 2015 (the “Prospectus”) and those described in Item 1A of Part II of this Quarterly Report on Form 10-Q.

1

PART I FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2015 and December 31, 2014

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

	June 30, 2015			December 31, 2014
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	43,163		$	49,347
Certificates of deposit at other financial institutions		250			250
Securities available for sale		635,184			395,705
Securities held to maturity (fair value 2015—$46,885 and 2014—$53,741)		46,815			53,332
Loans held for sale, at fair value		16,842			18,462
Loans		962,191			787,188
Allowance for loan losses		(8,016	)		(6,680	)
Net loans		954,175			780,508
Restricted equity securities, at cost		7,685			5,349
Premises and equipment, net		9,584			9,664
Accrued interest receivable		4,886			3,545
Bank owned life insurance		21,938			11,664
Deferred tax asset		8,430			6,780
Buildings held for sale		—			4,080
Foreclosed assets		206			715
Servicing rights, net		3,298			3,053
Goodwill		9,124			9,124
Core deposit intangible, net		2,359			2,698
Other assets		2,813			1,551
Total assets	$	1,766,752		$	1,355,827
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	167,749		$	150,337
Interest bearing		1,324,237			1,021,896
Total deposits		1,491,986			1,172,233
Federal funds purchased and repurchase agreements		36,567			39,078
Federal Home Loan Bank advances		57,000			19,000
Accrued interest payable		578			421
Other liabilities		3,540			3,296
Total liabilities		1,589,671			1,234,028
Shareholders’ equity
Senior non-cumulative preferred stock, no par value, $10,000 liquidation value: Series A, 1,000,000 shares authorized; 10,000 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively		10,000			10,000
Common stock, no par value; 20,000,000 shares authorized; 10,502,671 and 7,756,411 shares issued and outstanding at June 30, 2015 and December 31 2014, respectively		146,017			94,251
Retained earnings		21,588			15,372
Accumulated other comprehensive income (loss)		(524	)		2,176
Total shareholders’ equity		177,081			121,799
Total liabilities and shareholders’ equity	$	1,766,752		$	1,355,827

See accompanying notes to condensed consolidated financial statements.

2

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Interest income and dividends
Loans, including fees	$	12,173		$	6,380		$	23,327		$	12,298
Securities:
Taxable		2,957			2,234			5,622			4,537
Tax-exempt		169			20			189			40
Dividends on restricted equity securities		83			51			150			91
Federal funds sold and other		31			14			51			32
Total interest income		15,413			8,699			29,339			16,998
Interest expense
Deposits		1,913			1,214			3,546			2,362
Federal funds purchased and repurchase agreements		92			57			163			84
Federal Home Loan Bank advances		81			80			146			109
Total interest expense		2,086			1,351			3,855			2,555
Net interest income		13,327			7,348			25,484			14,443
Provision for loan losses		805			440			1,430			825
Net interest income after provision for loan losses		12,522			6,908			24,054			13,618
Noninterest income
Service charges on deposit accounts		18			12			34			24
Other service charges and fees		690			313			1,308			549
Net gains on sale of loans		1,463			1,567			3,110			2,351
Loan servicing fees, net of amortization of servicing assets		60			88			103			100
Gain on sales and calls of securities		109			63			524			71
Net gain (loss) on foreclosed assets		21			(2	)		27			31
Investment services		301			35			587			77
Other		189			354			373			648
Total noninterest income		2,851			2,430			6,066			3,851
Noninterest expense
Salaries and employee benefits		6,071			3,805			11,752			7,350
Occupancy and equipment		1,699			1,009			3,278			1,795
FDIC assessment expense		216			120			430			239
Marketing		198			135			418			246
Professional fees		507			279			866			633
Amortization of core deposit intangible		167			—			339			—
Indirect expenses related to public offering		309			—			326			—
Other		1,405			730			2,784			1,307
Total noninterest expense		10,572			6,078			20,193			11,570
Income before income tax expense		4,801			3,260			9,927			5,899
Income tax expense		1,667			1,225			3,661			2,335
Net income		3,134			2,035			6,266			3,564
Dividends paid on Series A preferred stock		(25	)		(25	)		(50	)		(50	)
Net income available to common shareholders	$	3,109		$	2,010		$	6,216		$	3,514
Earnings per share:
Basic	$	0.30		$	0.41		$	0.67		$	0.72
Diluted		0.28			0.40			0.64			0.70

See accompanying notes to condensed consolidated financial statements.

3

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three and Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net income	$	3,134		$	2,035		$	6,266		$	3,564
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities:
Unrealized holding gain (loss) arising during the period		(6,900	)		4,892			(3,865	)		8,068
Reclassification adjustment for gains included in net income		(109	)		(63	)		(524	)		(71	)
Net unrealized gains (losses)		(7,009	)		4,829			(4,389	)		7,997
Tax effect		2,754			(1,849	)		1,689			(3,062	)
Total other comprehensive income (loss)		(4,255	)		2,980			(2,700	)		4,935
Comprehensive income (loss)	$	(1,121	)	$	5,015		$	3,566		$	8,499

See accompanying notes to condensed consolidated financial statements.

4

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

	Preferred Stock		Common Stock				Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
			Shares		Amount
Balance at December 31, 2013	$	10,000		4,862,875	$	52,638	$	7,058		$	(4,533	)	$	65,163
Exercise of common stock options		—		119		1		—			—			1
Dividends paid on Series A preferred stock		—		—		—		(50	)		—			(50	)
Issuance of restricted stock, net of forfeitures				32,568
Stock based compensation expense, net of forfeitures		—		—		311		—			—			311
Stock issued in conjunction with 401(k) employer match		—		20,345		275		—			—			275
Net income		—		—		—		3,564			—			3,564
Other comprehensive income		—		—		—		—			4,935			4,935
Balance at June 30, 2014	$	10,000		4,915,907	$	53,225	$	10,572		$	402		$	74,199
Balance at December 31, 2014	$	10,000		7,756,411	$	94,251	$	15,372		$	2,176		$	121,799
Exercise of common stock options		—		71,965		780		—			—			780
Exercise of common stock warrants		—		3,600		43		—			—			43
Dividends paid on Series A preferred stock		—		—		—		(50	)		—			(50	)
Issuance of restricted stock, net of forfeitures				30,695		—		—			—			—
Stock based compensation expense, net of forfeitures		—		—		371		—			—			371
Stock issued related to initial public offering, net of stock issuance costs of $5,015		—		2,640,000		50,425		—			—			50,425
Excess tax benefit from exercise of stock options		—		—		147		—			—			147
Net income		—		—		—		6,266			—			6,266
Other comprehensive income (loss)		—		—		—		—			(2,700	)		(2,700	)
Balance at June 30, 2015	$	10,000		10,502,671	$	146,017	$	21,588		$	(524	)	$	177,081

See accompanying notes to condensed consolidated financial statements.

5

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2015 and 2014

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

(Unaudited)

	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities
Net income	$	6,266		$	3,564
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		659			335
Accretion of purchase accounting adjustments		(1,245	)		—
Net amortization of securities		1,837			1,127
Amortization of loan servicing right asset		441			363
Amortization of core deposit intangible		339			—
Provision for loan losses		1,430			825
Excess tax benefit related to the exercise of stock options		(147	)		—
Origination of loans held for sale		(161,442	)		(109,942	)
Proceeds from sale of loans held for sale		165,486			106,443
Net gain on sale of loans		(3,110	)		(2,351	)
Gain on sale of available for sale securities		(375	)		(71	)
Gain on call of held to maturity securities		(149	)		—
Income from bank owned life insurance		(274	)		(120	)
(Gain) loss on sale of foreclosed assets		(22	)		(31	)
Stock-based compensation		371			311
Compensation expense related to common stock issued to 401(k) plan		240			159
Recognition of deferred gain on sale of loans		(18	)		(21	)
Recognition of deferred gain on sale of foreclosed assets		(5	)		—
Net change in:
Accrued interest receivable and other assets		(2,565	)		(1,061	)
Accrued interest payable and other liabilities		331			(716	)
Net cash from operating activities		8,048			(1,186	)
Cash flows from investing activities
Available for sale securities:
Sales		32,288			24,373
Purchases		(446,795	)		(69,210	)
Maturities, prepayments and calls		169,306			56,491
Held to maturity securities:
Purchases		—			(8,601	)
Maturities, prepayments and calls		6,538			6,370
Net change in loans		(173,912	)		(65,554	)
Purchase of bank owned life insurance		(10,000	)		—
Proceeds from sale of buildings held for sale		4,080			—
Purchase of restricted equity securities		(2,336	)		(745	)
Proceeds from sale of foreclosed assets		531			377
Purchases of premises and equipment, net		(579	)		(2,014	)
Net cash from investing activities		(420,879	)		(58,513	)
Cash flows from financing activities
Increase in deposits		319,813			66,024
Decrease in federal funds purchased and repurchase agreements		(2,511	)		(8,439	)
Proceeds from Federal Home Loan Bank advances		157,000			10,000
Repayment of Federal Home Loan Bank advances		(119,000	)		—
Proceeds from exercise of common stock warrants		43			—
Proceeds from exercise of common stock options, including excess tax benefit		927			1
Proceeds from issuance of common stock, net of offering costs		50,425			—
Dividends paid on preferred stock		(50	)		(50	)
Net cash from financing activities		406,647			67,536
Net change in cash and cash equivalents		(6,184	)		7,837
Cash and cash equivalents at beginning of period		49,347			18,217
Cash and cash equivalents at end of period	$	43,163		$	26,054
Supplemental information:
Interest paid	$	3,698		$	2,403
Income taxes paid		5,150			3,470
Non-cash supplemental information:
Transfers from loans to foreclosed assets	$	—		$	1,315

See accompanying notes to condensed consolidated financial statements.

6

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONDENSED 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 of Franklin Financial Network, Inc. (“FFN”), and its wholly owned subsidiaries, Franklin Synergy Bank and BCG Consulting Group, Inc. (collectively, the “Company”), have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by Regulation S-X, Rule 10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2015.

NOTE 2—ACQUISITIONS

Acquisition of MidSouth Bank

On July 1, 2014 the Company completed the acquisition of MidSouth Bank (“MidSouth”), pursuant to the terms of the Agreement and Plan of Reorganization and Bank Merger (the “merger agreement”) dated November 19, 2013.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805,Business Combinations. The Company recognized goodwill on this acquisition of $9,124, after consideration of a measurement period adjustment discussed below, which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

The Company acquired 100% of the outstanding preferred and common stock of MidSouth. The purchase price consisted of both cash and shares of the Company’s common stock. MidSouth’s common shareholders received 0.425926 shares of FFN common stock for each share of MidSouth common stock. MidSouth’s preferred shareholders received 0.851852 shares of FFN common stock for each share of MidSouth preferred stock. Each MidSouth Series 2009A warrant holder received 0.18 shares of FFN common stock for each MidSouth Series 2009A warrant, and each Series 2011-A warrant holder received 0.146667 shares of FFN common stock for each MidSouth Series 2011-A warrant. In lieu of issuing fractional shares of FFN common stock, FFN paid former MidSouth shareholders an amount in cash determined by multiplying (i) $13.50 by (ii) the fraction of a share (rounded to the nearest ten thousandth when expressed in decimal form) of FFN common stock.

MidSouth common stock options were converted into options to purchase shares of FFN common stock based on the 0.425926 exchange ratio, with the new exercise price becoming the exercise price of the MidSouth options divided by the exchange ratio. On the date of the merger, 2,766,191 shares of FFN common stock were exchanged for the common and preferred stock, and common stock warrants of MidSouth in accordance with the proration and allocation procedures contained in the merger agreement and as noted above. Subsequently, cash totaling $100 was paid to dissenting MidSouth shareholders representing 7,427 shares of FFN common stock. In addition, $18 of cash was paid to MidSouth shareholders for fractional shares in accordance with the merger agreement.

7

Based on a valuation of the FFN’s common stock as of July 1, 2014, the resulting purchase price was $41,094. The following table summarizes the purchase price calculation:

	Number of MidSouth shares outstanding (in thousands)		Per share exchange ratio		Number of FFN shares—as exchanged (in thousands)
Common Shares		3,873		0.425926		1,650
Convertible Voting Preferred Stock, 2009-A		1,018		0.851852		867
Convertible Voting Preferred Stock, 2011-A		242		0.851852		206
Series 2009-A Stock Warrants (strike price $3.25)		193		0.185185		36
Series 2011-A Stock Warrants (strike price $3.68)		44		0.153333		7
						2,766
Multiplied by FFN common stock value at acquisition date					$	14.50
Fair value of FFN common stock issued (“Stock Consideration”)					$	40,110
Cash consideration paid for fractional shares						18
Cash consideration paid for dissenting shares						100
Fair value of MidSouth stock options converted to FFN stock options						866
Total acquisition consideration					$	41,094

On July 1, 2014 the Company acquired MidSouth. As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Based on appraisals received subsequent to the acquisition date, the Company adjusted its initial fair value estimate of foreclosed assets that were acquired. The table below summarizes the fair value of the assets purchased, including goodwill, and liabilities assumed as of the July 1, 2014 purchase date.

In Thousands	July 1, 2014 (as initially reported)		Measurement Period Adjustments			July 1, 2014 (as adjusted)
Assets:
Cash and due from banks	$	1,369	$	—		$	1,369
Interest-bearing accounts at other financial institutions		10,946					10,946
Securities, available-for-sale		57,431					57,431
Loans held for sale		7,071					7,071
Loans		184,345					184,345
Certificates of deposit at other financial institutions		250					250
Restricted equity securities		1,572					1,572
Bank premises and equipment, net		6,650					6,650
Bank-owned life insurance		3,144					3,144
Accrued interest receivable		728					728
Foreclosed assets		800		(260	)		540
Core deposit intangible		3,060					3,060
Deferred tax asset		6,753		100			6,853
Goodwill		8,964		160			9,124
Other assets		747					747
Total assets acquired	$	293,830	$	—		$	293,830
Liabilities:
Deposits	$	244,415	$	—		$	244,415
Short-term borrowings		6,893					6,893
Other liabilities		1,428					1,428
Total liabilities assumed	$	252,736	$	—		$	252,736

At June 30, 2015, there were no circumstances or significant changes that have occurred since July 1, 2014 related to the acquisition of MidSouth that, in management’s assessment, would necessitate recording impairment of goodwill.

8

In the acquisition, the Company purchased $184,345 of loans at fair value, net of $7,347, or 3.8%, estimated discount to the outstanding principal balance, representing 38.0% of the Company’s total loans at June 30, 2014. Of the total loans acquired, management identified loans totaling $5,527 as having credit deficiencies. All loans that were on non-accrual status and all loan relationships that were identified as substandard or impaired as of the acquisition date were considered by management to be credit-impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of July 1, 2014 for purchased credit-impaired (“PCI”) loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

Contractually required principal and interest	$	8,510
Non-accretable difference		(1,745	)
Cash flows expected to be collected		6,765
Accretable yield		(1,238	)
Total purchased credit-impaired loans acquired	$	5,527

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance at acquisition date.

	Unpaid Principal Balance		Fair Value
Loans:
Residential real estate	$	39,425	$	38,618
Commercial real estate		82,465		80,566
Construction and land development		43,766		42,454
Commercial loans		16,311		15,352
Consumer and other loans		1,865		1,828
Purchased credit-impaired		7,860		5,527
Total earning assets	$	191,692	$	184,345

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $3,060, which will be amortized utilizing an accelerated amortization method over an estimated economic life of 8.2 years. When determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

Pro-forma information

Pro-forma data for the three- and six-month periods ending June 30, 2014 listed in the table below present pro-forma information as if the MidSouth acquisition occurred at the beginning of 2014. Because the MidSouth transaction closed on July 1, 2014, and its actual results are included in the Company’s actual operating results for the three- and six-month periods ending June 30, 2015, there is no pro-forma information for those periods.

	Three  months ended Jun 30, 2014		Six  months ended Jun 30, 2014
Net interest income	$	10,645	$	21,048
Net income available to common shareholders		2,217		4,098
Earnings per share—basic	$	0.29	$	0.53
Earnings per share—diluted	$	0.28	$	0.52

Supplemental pro forma earnings for the three and six months ended June 30, 2014 were adjusted to exclude acquisition-related costs that were incurred during the three and six months ended June 30, 2014 of $965 and $1,481, respectively. Supplemental pro forma earnings for the three and six months ended June 30, 2014 were adjusted to include discount accretion and premium amortization related to the fair value adjustments to acquisition date assets and liabilities, as appropriate.

9

During the three months ending June 30, 2014, the acquisition of MidSouth increased pro-forma net interest income by approximately $3,297 and net income available to common shareholders by approximately $207. During the six months ending June 30, 2014, the acquisition of MidSouth increased pro-forma net interest income by approximately $6,605 and net income available to common shareholders by approximately $584.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at June 30, 2015 and December 31, 2014 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
June 30, 2015
U.S. government sponsored entities and agencies	$	14,236	$	154	$	(192	)	$	14,198
Mortgage-backed securities: residential		512,479		3,617		(3,986	)		512,110
Mortgage-backed securities: commercial		20,303		35		(149	)		20,189
State and political subdivisions		89,028		90		(431	)		88,687
Total	$	636,046	$	3,896	$	(4,758	)	$	635,184

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2014
U.S. government sponsored entities and agencies	$	30,070	$	417	$	(314	)	$	30,173
U.S. Treasury securities		20,000		—		—			20,000
Mortgage-backed securities: residential		335,677		4,593		(1,203	)		339,067
Mortgage-backed securities: commercial		6,432		33		—			6,465
Total	$	392,179	$	5,043	$	(1,517	)	$	395,705

The amortized cost and fair value of the held to maturity securities portfolio at June 30, 2015 and December 31, 2014 and the corresponding amounts of gross unrecognized gains and losses were as follows:

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
June 30, 2015
U.S. government sponsored entities and agencies	$	3,374	$	15	$	(102	)	$	3,287
Mortgage backed securities: residential		34,551		486		(548	)		34,489
State and political subdivisions		8,890		248		(29	)		9,109
Total	$	46,815	$	749	$	(679	)	$	46,885

	Gross Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
December 31, 2014
U.S. government sponsored entities and agencies	$	5,550	$	162	$	(87	)	$	5,625
Mortgage backed securities: residential		38,587		555		(562	)		38,580
State and political subdivisions		9,195		351		(10	)		9,536
Total	$	53,332	$	1,068	$	(659	)	$	53,741

10

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Proceeds	$	22,999		$	18,922		$	34,288		$	24,373
Gross gains		—			201			390			225
Gross losses		(1	)		(138	)		(15	)		(154	)

Calls of held to maturity securities were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Proceeds	$	1,500	$	—	$	2,300	$	—
Gross gains		110		—		149		—
Gross losses		—		—		—		—

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

	June 30, 2015
	Amortized Cost		Fair Value
Available for sale
Three months or less	$	—	$	—
Over three months through one year		—		—
Over one year through five years		—		—
Over five years through ten years		9,711		9,862
Over ten years		93,553		93,023
Mortgage-backed securities: residential		512,479		512,110
Mortgage-backed securities: commercial		20,303		20,189
Total	$	636,046	$	635,184
Held to maturity
Three months or less	$	—	$	—
Over three months through one year		—		—
Over one year through five years		1,382		1,439
Over five years through ten years		1,106		1,122
Over ten years		9,776		9,835
Mortgage-backed securities: residential		34,551		34,489
Total	$	46,815	$	46,885

Securities pledged at June 30, 2015 and December 31, 2014 had a carrying amount of $479,240 and $366,764 and were pledged to secure public deposits and repurchase agreements.

At June 30, 2015 and December 31, 2014, 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.

11

The following table summarizes the securities with unrealized and unrecognized losses at June 30, 2015 and December 31, 2014, 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
June 30, 2015
Available for sale
U.S. government sponsored entities and agencies	$	1,933	$	(67	)	$	4,325	$	(125	)	$	6,258	$	(192	)
Mortgage-backed securities: residential		259,366		(2,976	)		30,688		(1,010	)		290,054		(3,986	)
Mortgage-backed securities: commercial		16,148		(149	)		—		—			16,148		(149	)
State and political subdivisions		60,330		(431	)		—		—			60,330		(431	)
Total available for sale	$	337,777	$	(3,623	)	$	35,013	$	(1,135	)	$	372,790	$	(4,758	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
U.S. government sponsored entities and agencies	$	1,942	$	(58	)	$	956	$	(44	)	$	2,898	$	(102	)
Mortgage-backed securities: residential		8,909		(102	)		9,338		(446	)		18,247		(548	)
State and political subdivisions		3,971		(29	)		—		—			3,971		(29	)
Total held to maturity	$	14,822	$	(189	)	$	10,294	$	(490	)	$	25,116	$	(679	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2014
Available for sale
U.S. government sponsored entities and agencies	$	9,999	$	(1	)	$	8,232	$	(313	)	$	18,231	$	(314	)
Mortgage-backed securities: residential		59,078		(323	)		41,939		(880	)		101,017		(1,203	)
Total available for sale	$	69,077	$	(324	)	$	50,171	$	(1,193	)	$	119,248	$	(1,517	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
U.S. government sponsored entities and agencies	$	—	$	—		$	2,913	$	(87	)	$	2,913	$	(87	)
Mortgage-backed securities: residential		5,246		(25	)		13,001		(537	)		18,247		(562	)
State and political subdivisions		507		(1	)		592		(9	)		1,099		(10	)
Total held to maturity	$	5,753	$	(26	)	$	16,506	$	(633	)	$	22,259	$	(659	)

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

12

NOTE 4—LOANS

Loans at June 30, 2015 and December 31, 2014 were as follows:

	June 30, 2015			December 31, 2014
Loans that are not PCI loans
Construction and land development	$	293,629		$	239,225
Commercial real estate:
Nonfarm, nonresidential		273,221			240,975
Other		6,370			5,377
Residential real estate:
Closed-end 1-4 family		137,815			130,631
Other		96,292			83,129
Commercial and industrial		144,735			76,570
Consumer and other		7,527			8,025
Loans before net deferred loan fees		959,589			783,932
Deferred loan fees, net		(1,676	)		(1,059	)
Total loans that are not PCI loans		957,913			782,873
PCI loans
Construction and land development	$	77		$	77
Commercial real estate:
Nonfarm, nonresidential		1,752			1,798
Other		—			—
Residential real estate:
Closed-end 1-4 family		703			706
Other		107			108
Commercial and industrial		1,639			1,624
Consumer and other		—			2
Total PCI loans		4,278			4,315
Allowance for loan losses		(8,016	)		(6,680	)
Total loans, net of allowance for loan losses	$	954,175		$	780,508

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ending June 30, 2015 and 2014:

	Construction and Land Development		Commercial Real Estate		Residential Real Estate			Commercial and Industrial		Consumer and Other			Total
Three Months Ending June 30, 2015
Allowance for loan losses:
Beginning balance	$	2,549	$	2,124	$	1,727		$	850	$	58		$	7,308
Provision for loan losses		18		197		24			474		92			805
Loans charged-off		—		—		(17	)		—		(88	)		(105	)
Recoveries		—		—		5			—		3			8
Total ending allowance balance	$	2,567	$	2,321	$	1,739		$	1,324	$	65		$	8,016
Three Months Ending June 30, 2014
Allowance for loan losses:
Beginning balance	$	1,546	$	1,695	$	1,536		$	464	$	63		$	5,304
Provision for loan losses		250		159		(3	)		44		(10	)		440
Loans charged-off		—		—		—			—		—			—
Recoveries		—		—		27			—		—			27
Total ending allowance balance	$	1,796	$	1,854	$	1,560		$	508	$	53		$	5,771

13

There was no allowance for loan losses for PCI loans for the three months ended June 30, 2015 or for the three months ended June 30, 2014.

The following table presents the activity in the allowance for loan losses by portfolio segment for the six-month periods ending June 30, 2015 and 2014:

	Construction and Land Development			Commercial Real Estate		Residential Real Estate			Commercial and Industrial		Consumer and Other			Total
Six Months Ending June 30, 2015
Allowance for loan losses:
Beginning balance	$	2,690		$	1,494	$	1,791		$	650	$	55		$	6,680
Provision for loan losses		(123	)		827		(43	)		674		95			1,430
Loans charged-off		—			—		(17	)		—		(88	)		(105	)
Recoveries		—			—		8			—		3			11
Total ending allowance balance	$	2,567		$	2,321	$	1,739		$	1,324	$	65		$	8,016
Six Months Ending June 30, 2014
Allowance for loan losses:
Beginning balance	$	1,497		$	1,566	$	1,402		$	337	$	98		$	4,900
Provision for loan losses		299			288		112			171		(45	)		825
Loans charged-off		—			—		—			—		—			—
Recoveries		—			—		46			—		—			46
Total ending allowance balance	$	1,796		$	1,854	$	1,560		$	508	$	53		$	5,771

There was no allowance for loan losses for PCI loans for the six months ended June 30, 2015 or for the six months ended June 30, 2014.

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 June 30, 2015 and December 31, 2014. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
June 30, 2015
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	96	$	23	$	119
Collectively evaluated for impairment		2,567		2,321		1,739		1,228		42		7,897
Purchased credit-impaired loans		—		—		—		—		—		—
Total ending allowance balance	$	2,567	$	2,321	$	1,739	$	1,324	$	65	$	8,016
Loans:
Individually evaluated for impairment	$	—	$	927	$	807	$	275	$	23	$	2,032
Collectively evaluated for impairment		293,629		278,664		233,300		144,460		7,504		957,557
Purchased credit-impaired loans		77		1,752		810		1,639		—		4,278
Total ending loans balance	$	293,706	$	281,343	$	234,917	$	146,374	$	7,527	$	963,867

14

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
December 31, 2014
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	18	$	—	$	18
Collectively evaluated for impairment		2,690		1,494		1,791		632		55		6,662
Purchased credit-impaired loans		—		—		—		—		—		—
Total ending allowance balance	$	2,690	$	1,494	$	1,791	$	650	$	55	$	6,680
Loans:
Individually evaluated for impairment	$	—	$	835	$	93	$	18	$	—	$	946
Collectively evaluated for impairment		239,225		245,517		213,667		76,552		8,025		782,986
Purchased credit-impaired loans		77		1,798		814		1,624		2		4,315
Total ending loans balance	$	239,302	$	248,150	$	214,574	$	78,194	$	8,027	$	788,247

Loans collectively evaluated for impairment reported at June 30, 2015 include certain loans acquired from MidSouth on July 1, 2014. The acquired loans were recorded at estimated fair value at date of acquisition, which included an estimated credit discount. On July 1, 2014, acquired non-PCI loans were recorded at an estimated fair value of $178,818, comprised of contractually unpaid principal totaling $183,832 net of estimated discounts totaling $5,014 which included both credit and interest rate discount components. At June 30, 2015, acquired non-PCI loans were recorded at $111,284, comprised of contractually unpaid principal totaling $114,159 net of discounts totaling $2,875. Management evaluated these loans for credit deterioration since acquisition and determined that no allowance for loan losses was necessary at June 30, 2015.

The following table presents information related to impaired loans by class of loans as of June 30, 2015 and December 31, 2014:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
June 30, 2015
With no allowance recorded:
Commercial real estate:
Nonfarm, nonresidential	$	2,514	$	927	$	—
Residential real estate:
Closed-end 1-4 family		97		97		—
Other		710		710		—
Commercial and industrial		179		179		—
Subtotal		3,500		1,913		—
With an allowance recorded:
Commercial and industrial		96		96		96
Consumer and other		23		23		23
Subtotal		119		119		119
Total	$	3,619	$	2,032	$	119
December 31, 2014
With no allowance recorded:
Commercial real estate:
Nonfarm, nonresidential	$	2,422	$	835	$	—
Residential real estate:
Closed-end 1-4 family		93		93		—
Subtotal		2,515		928		—
With an allowance recorded:
Commercial and industrial		18		18		18
Subtotal		18		18		18
Total	$	2,533	$	946	$	18

15

The following table presents the average recorded investment of impaired loans by class of loans for the three and six months ended June 30, 2015 and 2014:

	Three Months Ended June 30,				Six Months Ended June 30,
Average Recorded Investment	2015		2014		2015		2014
With no allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential		865		—		850		603
Residential real estate:
Closed-end 1-4 family		313		—		265		—
Other		238		—		119		—
Commercial and industrial		110		—		104		—
Subtotal		1,526		—		1,338		603
With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential		—		1,375		—		1,375
Residential real estate:
1-4 family		—		229		—		725
Commercial and industrial		43		66		30		66
Consumer and other		16		—		8		—
Subtotal		59		1,670		38		2,166
Total	$	1,585	$	1,670	$	1,376	$	2,769

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and six months ended June 30, 2015 and 2014.

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 June 30, 2015 and December 31, 2014:

	Nonaccrual		Loans Past Due Over 90 Days
June 30, 2015
Commercial real estate:
Nonfarm, nonresidential	$	835	$	—
Residential real estate:
Closed-end1-4 family		96		—
Commercial and industrial		16		—
Total	$	947	$	—
December 31, 2014
Commercial real estate:
Nonfarm, nonresidential	$	835	$	—
Residential real estate:
Closed-end 1-4 family		—		316
Total	$	835	$	316

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.

16

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 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
June 30, 2015
Construction and land development	$	1,328	$	38	$	—	$	1,366	$	292,263	$	77	$	293,706
Commercial real estate:
Nonfarm, nonresidential		—		—		835		835		272,386		1,752		274,973
Other		—		—		—		—		6,370		—		6,370
Residential real estate:
Closed-end 1-4 family		630		35		—		665		137,150		703		138,518
Other		710		40		—		750		95,542		107		96,399
Commercial and industrial		79		—		—		79		144,656		1,639		146,374
Consumer and other		23		—		—		23		7,504		—		7,527
	$	2,770	$	113	$	835	$	3,718	$	955,871	$	4,278	$	963,867
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		PCI Loans		Total
December 31, 2014
Construction and land development	$	354	$	—	$	—	$	354	$	238,871	$	77	$	239,302
Commercial real estate:
Nonfarm, nonresidential		—		—		835		835		240,140		1,798		242,773
Other		—		—		—		—		5,377		—		5,377
Residential real estate:
Closed-end 1-4 family		299		165		316		780		129,851		706		131,337
Other		52		—		—		52		83,077		108		83,237
Commercial and industrial		—		212		—		212		76,358		1,624		78,194
Consumer and other		—		—		—		—		8,025		2		8,027
	$	705	$	377	$	1,151	$	2,233	$	781,699	$	4,315	$	788,247

Credit Quality Indicators:The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans as well as non-homogeneous residential real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention.Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard.Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

17

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 June 30, 2015 and December 31, 2014:

	Pass		Special Mention		Substandard		Total
June 30, 2015
Construction and land development	$	293,629	$	—	$	77	$	293,706
Commercial real estate:
Nonfarm, nonresidential		271,384		—		3,589		274,973
Other		6,370		—		—		6,370
Residential real estate:
Closed-end 1-4 family		136,939		—		1,579		138,518
Other		95,582		—		817		96,399
Commercial and industrial		144,460		—		1,914		146,374
Consumer and other		7,504		—		23		7,527
	$	955,868	$	—	$	7,999	$	963,867
	Pass		Special Mention		Substandard		Total
December 31, 2014
Construction and land development	$	239,225	$	—	$	77	$	239,302
Commercial real estate:
Nonfarm, nonresidential		239,584		—		3,189		242,773
Other		5,377		—		—		5,377
Residential real estate:
1-4 family		128,869		—		2,468		131,337
Other		83,129		—		108		83,237
Commercial and industrial		76,552		—		1,642		78,194
Consumer and other		8,025		—		2		8,027
	$	780,761	$	—	$	7,486	$	788,247

Purchased Credit-impaired (“PCI”) loans

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

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of June 30, 2015 and December 31, 2014. Contractually required principal and interest payments have been adjusted for estimated prepayments.

	Jun 30, 2015			Dec 31, 2014
Contractually required principal and interest	$	6,000		$	6,532
Non-accretable difference		(973	)		(1,270	)
Cash flows expected to be collected		5,027			5,262
Accretable yield		(749	)		(947	)
Carrying value of acquired loans		4,278			4,315
Allowance for loan losses		—			—
Carrying value less allowance for loan losses	$	4,278		$	4,315

18

Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the six months ended June 30, 2015. These adjustments resulted in a decrease in expected cash flows and accretable yield, and a decrease in the non-accretable difference. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three- and six-month periods ending June 30, 2015.

Activity during the three-month period ending June 30, 2015	Mar 31, 2015			Effect of Acquisitions		Income Accretion		All other Adjustments			Jun 30, 2015
Contractually required principal and interest	$	6,135		$	—	$	—	$	(135	)	$	6,000
Non-accretable difference		(989	)		—		—		16			(973	)
Cash flows expected to be collected		5,146			—		—		(119	)		5,027
Accretable yield		(840	)		—		133		(42	)		(749	)
Carry value of acquired loans	$	4,306		$	—	$	133	$	(161	)	$	4,278
Activity during the six-month period ending June 30, 2015	Dec 31, 2014			Effect of Acquisitions		Income Accretion		All other Adjustments			Jun 30, 2015
Contractually required principal and interest	$	6,532		$	—	$	—	$	(532	)	$	6,000
Non-accretable difference		(1,270	)		—		—		297			(973	)
Cash flows expected to be collected		5,262			—		—		(235	)		5,027
Accretable yield		(947	)		—		190		8			(749	)
Carry value of acquired loans	$	4,315		$	—	$	190	$	(227	)	$	4,278

Troubled Debt Restructurings

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

NOTE 5—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at June 30, 2015 and December 31, 2014 are as follows:

	June 30, 2015		December 31, 2014
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	445,816	$	414,222
Other		3,683		3,986

The components of net loan servicing fees for the three and six months ended June 30, 2015 and 2014 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Loan servicing fees, net:
Loan servicing fees	$	278		$	236		$	544		$	463
Amortization of loan servicing fees		(218	)		(148	)		(441	)		(363	)
Change in impairment		—			—			—			—
Total	$	60		$	88		$	103		$	100

The fair value of servicing rights was estimated by management to be approximately $4,679 at June 30, 2015. Fair value for June 30, 2015 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.2%. At December 31, 2014, the fair value of servicing rights was estimated by management to be approximately $4,180. Fair value for December 31, 2014 was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.8%.

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The weighted average amortization period is 6.77 years. Estimated amortization expense for each of the next three years is:

2015	$	668
2016		456
2017		456

NOTE 6—SHARE-BASED PAYMENTS

In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant allows the shareholders to purchase an additional share of common stock at $12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will be exercisable in whole or in part up to seven years following the date of issuance. The warrants are detachable from the common stock. There were 3,600 warrants exercised during the six months ended June 30, 2015, for which the Company received cash proceeds of $43. The exercised warrants had an aggregate intrinsic value of $31 at the date of exercise. No warrants were exercised during the six months ended June 30, 2014. At June 30, 2015, there were 28,277 outstanding warrants associated with the 2010 offering.

Since the common stock of the Company has been 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 holder of such 2010 warrant, 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.

Stock Option Plan: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved, permitted the grant of stock options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan, and to increase the number of authorized shares to 1,500,000. Shareholders approved amendments to the Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”) to increase the number of authorized shares to 2,000,000 in June 2014 and to 4,000,000 in February 2015. At June 30, 2015, there were 2,375,717 authorized shares available for issuance.

Employee, organizer and director awards are 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 3 to 5 years and have a 10-year contractual term. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or as non-qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other grants are expected to be treated as non-qualified.

During 2014, the Company granted 181,680 options, had 23,809 options exercised, and had 31,135 options that were either forfeited, cancelled or expired. In addition, on July 1, 2014, 322,300 MidSouth common stock options were converted into 137,280 options to purchase shares of FFN common stock with an exercise price of $8.57 per option pursuant to the terms of the merger agreement (see Note 2). Using the Black-Scholes option valuation model, the grant date fair value was estimated to be $6.31 per converted option based on the $14.50 fair value per share of FFN common stock at July 1, 2014. No compensation expense was required related to the converted options.

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

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

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

	June 30, 2015			June 30, 2014
Risk-free interest rate		1.81	%		2.24	%
Expected term		7.5 years			7.5 years
Expected stock price volatility		25.00	%		11.04	%
Dividend yield		0.22	%		0.44	%

The weighted average fair value of options granted for the six months ended June 30, 2015 and 2014 were $6.35 and $2.44, respectively.

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A summary of the activity in the stock option plans for the six months ended June 30, 2015 follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		1,210,660		$	11.32		6.53	$	7,244
Granted		210,782			20.62
Exercised		(77,600	)		11.52
Forfeited, expired, or cancelled		(2,108	)		18.56
Outstanding at period end		1,341,734		$	12.75		6.58	$	13,077
Vested or expected to vest		1,274,647		$	12.75		6.58	$	12,423
Exercisable at period end		811,299		$	10.73		5.23	$	9,550

The Company received cash proceeds of $780 for the options exercised during the six months ended June 30, 2015. The exercised options had an aggregate intrinsic value of $639 at the date of exercise.

As of June 30, 2015, there was $1,756 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Share Award Plan: Additionally, the Company’s 2007 Omnibus Equity Incentive Plan provides for the granting of restricted share awards and other performance related incentives. During 2014, the Company awarded 87,374 restricted common shares to employees of the Company. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.

A summary of activity for non-vested restricted share awards for the six months ended June 30, 2015 is as follows:

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at beginning of year		102,710		$	13.93
Granted		31,938			20.69
Vested		(11,705	)		13.61
Forfeited		(1,243	)		16.29
Non-vested at period end		121,700		$	15.73

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 June 30, 2015, there was $1,677 of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.7 years.

NOTE 7—REGULATORY CAPITAL MATTERS

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Framework for More Resilient Banks and Banking Systems” (“Basel III”) and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective to the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes capital for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.

In addition to the new minimum capital level requirements, the rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum risk-based capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer is to be phased in beginning in

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January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company has opted out of this requirement.

Management believes, as of June 30, 2015, that the Company and Bank met all capital adequacy requirements to which they are subject and met the requirements to be considered well-capitalized. The Company’s and Bank’s actual capital amounts and ratios are presented in the following table (in thousands):

	Actual					Minimum Capital Requirement					Excess Amount
	Amount		Ratio			Amount		Ratio
June 30, 2015
Company common equity Tier 1 capital to risk-weighted assets	$	152,941		12.29	%	$	56,006		4.50	%	$	96,935
Company total capital to risk-weighted assets	$	168,019		13.50	%	$	99,566		8.00	%	$	68,453
Company Tier 1 capital to risk-weighted assets	$	160,003		12.86	%	$	74,674		6.00	%	$	85,329
Company Tier 1 capital to average assets	$	160,003		10.19	%	$	62,790		4.00	%	$	97,213
Bank common equity Tier 1 capital to risk-weighted assets	$	150,511		12.10	%	$	55,980		4.50	%	$	94,531
Bank total capital to risk-weighted assets	$	158,527		12.74	%	$	99,519		8.00	%	$	59,008
Bank Tier 1 capital to risk-weighted assets	$	150,511		12.10	%	$	74,639		6.00	%	$	75,872
Bank Tier 1 capital to average assets	$	150,511		9.59	%	$	62,785		4.00	%	$	87,726
December 31, 2014
Company total capital to risk-weighted assets	$	114,475		12.30	%	$	74,464		8.00	%	$	40,011
Company Tier 1 capital to risk-weighted assets	$	107,795		11.58	%	$	37,232		4.00	%	$	70,563
Company Tier 1 capital to average assets	$	107,795		8.57	%	$	50,291		4.00	%	$	57,504
Bank total capital to risk-weighted assets	$	113,830		12.23	%	$	74,447		8.00	%	$	39,383
Bank Tier 1 capital to risk-weighted assets	$	107,150		11.51	%	$	37,223		4.00	%	$	69,927
Tier 1 capital to average assets	$	107,150		8.52	%	$	50,279		4.00	%	$	56,871

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2015 the Bank could declare, without prior approval, dividends of approximately $13,836 plus any 2015 net profits retained to the date of declaration.

NOTE 8—FAIR VALUE

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

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

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

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and 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). 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).

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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.

Loans Held For Sale: During 2014 the Company 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.

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 June 30, 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	$	—	$	14,198	$	—
Mortgage-backed securities-residential		—		512,110		—
Mortgage-backed securities-commercial		—		20,189		—
State and political subdivisions		—		88,687		—
Total securities available for sale	$	—	$	635,184	$	—
Loans held for sale	$	—	$	16,842	$	—
Mortgage banking derivatives	$	—	$	242	$	—
Financial Liabilities
Mortgage banking derivatives	$	—	$	16	$	—

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	Fair Value Measurements at December 31, 2014 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	$	—	$	30,173	$	—
U.S. Treasury Bills		20,000		—		—
Mortgage-backed securities-residential		—		339,067		—
Mortgage-backed securities-commercial		—		6,465		—
State and political subdivisions		—		—		—
Total securities available for sale	$	20,000	$	375,705	$	—
Loans held for sale	$	—	$	18,462	$	—
Mortgage banking derivatives	$	—	$	285	$	—
Financial Liabilities
Mortgage banking derivatives	$	—	$	132	$	—

As of June 30, 2015, the unpaid principal balance of loans held for sale was $16,548 resulting in an unrealized gain of $294 included in gains on sale of loans. For the three months ended June 30, 2015 and 2014, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ($293) and $329, respectively. For the six months ended June 30, 2015 and 2014, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was ($270) and $538, respectively. None of these loans are 90 days or more past due or on nonaccrual as of June 30, 2015.

There were no transfers between level 1 and 2 during 2015 and 2014.

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

There were no collateral dependent impaired loans carried at fair value as of June 30, 2015 or December 31, 2014. For the three months ended June 30, 2015 and 2014, $0 and ($20) in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the six months ended June 30, 2015 and 2014, $0 and $46 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $206 and $715 as of June 30, 2015 and December 31, 2014, respectively. There were no properties at June 30, 2015 or 2014 that had required write-downs to fair value resulting in no write downs for the three or six months ending June 30, 2015 and 2014, respectively.

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The carrying amounts and estimated fair values of financial instruments, at June 30, 2015 and December 31, 2014 are as follows:

	Carrying Amount		Fair Value Measurements at June 30, 2015 Using:
			Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	43,163	$	43,163	$	—	$	—	$	43,163
Securities available for sale		635,184		—		635,184		—		635,184
Certificates of deposit held at other financial institutions		250		—		250		—		250
Securities held to maturity		46,815		—		46,885		—		46,885
Loans held for sale		16,842		—		16,842		—		16,842
Net loans		954,175		—		—		953,829		953,829
Restricted equity securities		7,685		n/a		n/a		n/a		n/a
Servicing rights, net		3,298		—		4,679		—		4,679
Accrued interest receivable		4,886		6		2,257		2,623		4,886
Financial liabilities
Deposits	$	1,491,986	$	940,917	$	557,906	$	—	$	1,498,823
Federal funds purchased and repurchase agreements		36,567		—		36,567		—		36,567
Federal Home Loan Bank advances		57,000		—		57,152		—		57,152
Accrued interest payable		578		47		531		—		578
	Carrying Amount		Fair Value Measurements at December 31, 2014 Using:
			Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	49,347	$	49,347	$	—	$	—	$	49,347
Securities available for sale		395,705		20,000		375,705		—		395,705
Certificates of deposit held at other financial institutions		250		—		250		—		250
Securities held to maturity		53,332		—		53,741		—		53,741
Loans held for sale		18,462		—		18,462		—		18,462
Net loans		780,508		—		—		782,745		782,745
Restricted equity securities		5,349		n/a		n/a		n/a		n/a
Servicing rights, net		3,053		—		4,180		—		4,180
Accrued interest receivable		3,545		—		1,368		2,177		3,545
Financial liabilities
Deposits	$	1,172,233	$	848,158	$	326,644	$	—	$	1,174,802
Federal funds purchased and repurchase agreements		39,078		—		39,078		—		39,078
Federal Home Loan Bank advances		19,000		—		19,146		—		19,146
Accrued interest payable		421		33		388		—		421

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

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

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

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

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

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

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

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

(i) Off-balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

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NOTE 9—EARNINGS PER SHARE

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

	Three Months Ended June 30,
	2015			2014
Basic
Net income available to common shareholders	$	3,109		$	2,010
Less: earnings allocated to participating securities		(34	)		(20	)
Net income allocated to common shareholders	$	3,075		$	1,990
Weighted average common shares outstanding including participating securities		10,490,972			4,889,873
Less: Participating securities		(116,103	)		(49,356	)
Average shares		10,374,869			4,840,517
Basic earnings per common share	$	0.30		$	0.41
Diluted
Net income allocated to common shareholders	$	3,075		$	1,990
Weighted average common shares outstanding for basic earnings per common share		10,374,869			4,840,517
Add: Dilutive effects of assumed exercises of stock options		457,613			127,848
Add: Dilutive effects of assumed exercises of stock warrants		12,785			3,542
Average shares and dilutive potential common shares		10,845,267			4,971,907
Dilutive earnings per common share	$	0.28		$	0.40
	Six Months Ended June 30,
	2015			2014
Basic
Net income available to common shareholders	$	6,216		$	3,514
Less: earnings allocated to participating securities		(73	)		(28	)
Net income allocated to common shareholders	$	6,143		$	3,486
Weighted average common shares outstanding including participating securities		9,237,574			4,876,347
Less: Participating securities		(109,183	)		(38,325	)
Average shares		9,128,391			4,838,022
Basic earnings per common share	$	0.67		$	0.72
Diluted
Net income allocated to common shareholders	$	6,143		$	3,486
Weighted average common shares outstanding for basic earnings per common share		9,128,391			4,838,022
Add: Dilutive effects of assumed exercises of stock options		445,611			124,728
Add: Dilutive effects of assumed exercises of stock warrants		12,882			3,542
Average shares and dilutive potential common shares		9,586,884			4,966,292
Dilutive earnings per common share	$	0.64		$	0.70

For the three months ended June 30, 2015 and 2014, stock options for 147,782 and 245,432 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 210,782 and 249,968 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2015 and 2014 because they were antidilutive.

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NOTE 10—CAPITAL OFFERING

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

Gross proceeds	$	55,440
Less: stock offering costs		(5,015	)
Net proceeds from issuance of common stock	$	50,425

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the accompanying unaudited financial statements, the financial statements and accompanying notes included in the Company’s Prospectus filed with the SEC on March 27, 2015, 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 condensed 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.

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. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Principles of Consolidation

The consolidated financial statements include Franklin Financial Network, Inc. and its wholly owned subsidiaries, Franklin Synergy Bank and BCG Consulting Group, Inc. (“BCG”), together referred to as “the Company.” The Company sold the assets of BCG in December 2014; therefore, only the consolidated statements of income for the three and six months ending June 30, 2014 contain income and expenses that include BCG. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Purchased Loans

The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the MidSouth acquisition, we did not establish an allowance for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the MidSouth transaction and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by MidSouth 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.

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

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

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

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

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

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

Mortgage Servicing Rights

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

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

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

Recent Accounting Pronouncements

There are currently no new accounting standards that have been issued that will have a significant impact on the Company’s financial position, results of operations or cash flows upon adoption that were not disclosed in the Company’s most recent Annual Report on Form 10-K.

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

JUNE 30, 2015 AND 2014

Overview

The Company reported net income of $3,134 and $6,266 for the three and six months ended June 30, 2015, respectively, compared to $2,035 and $3,564 for the three and six months ended June 30, 2014. After the payment of preferred dividends on the senior preferred stock issued to the Treasury pursuant to Small Business Lending Fund (“SBLF”), the Company’s net earnings available to common shareholders for the three and six months ended June 30, 2015 was $3,109 and $6,216, respectively, compared to $2,010 and $3,514 for the three and six months ended June 30, 2014. The primary reason for the increase in net earnings available to common shareholders for the three and six months ended June 30, 2015 was increased interest income on loans and investment securities compared with the same periods in 2014. The increase in loans was due to both significant organic growth and due to the acquisition of MidSouth which, after considering the effect of purchase accounting entries, added $191,416 in loans when the transaction was completed on July 1, 2014. The growth in the securities portfolio is primarily attributable to both organic growth and capital leverage programs implemented during the second quarter of 2015 to utilize proceeds received from the issuance of common stock in conjunction with the Company’s initial public stock offering on March 26, 2015. The acquisition of MidSouth also added $57,431 in securities available-for-sale, after the effect of purchase accounting entries, when the transaction was completed on July 1, 2014.

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 six months ended June 30, 2015, totaled $13,327 and $25,484, respectively, compared to $7,348 and $14,443 for the same periods in 2014, an increase of $5,979 and $11,041, or 81.4% and 76.4%, between the respective periods. For the three and six months ended June 30, 2015, interest income increased $6,714 and $12,341, or 77.2% and 72.6%, respectively, due to growth in both the loan and investment securities portfolios. For the three and six months ended June 30, 2015, interest expense increased $735 and $1,300, or 54.4% and 50.9%, respectively, as a result of increases in both interest-bearing deposits and borrowings.

The tables below summarize average balances, yields, cost of funds, and the analysis of changes in interest income and interest expense for the three and six months ended June 30, 2015 and 2014:

Average Balances (7)—Yields & Rates

(Dollars are in thousands)

	Three Months Ended June 30,
	2015								2014
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans (1)(6)	$	909,705		$	12,173		5.37	%	$	478,133		$	6,380		5.35	%
Securities available for sale (6)		512,152			2,790		2.19	%		285,086			1,859		2.62	%
Securities held to maturity (6)		48,676			336		2.77	%		59,619			395		2.66	%
Certificates of deposit at other financial institutions		250			2		3.21	%		—			—		0.00	%
Federal funds sold and other (2)		53,299			112		0.84	%		23,898			65		1.09	%
TOTAL INTEREST EARNING ASSETS	$	1,524,082		$	15,413		4.06	%	$	846,736		$	8,699		4.12	%
Allowance for loan losses		(7,483	)							(5,467	)
All other assets		73,183								29,258
TOTAL ASSETS	$	1,589,782							$	870,527
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Interest checking	$	265,844		$	261		0.39	%	$	173,628		$	131		0.30	%
Money market		443,085			630		0.57	%		247,893			454		0.73	%
Savings		33,471			38		0.46	%		20,639			26		0.51	%
Time deposits		402,335			984		0.98	%		232,024			603		1.04	%
Federal Home Loan Bank advances		48,165			81		0.67	%		33,000			80		0.97	%
Federal funds purchased and other (3)		53,832			92		0.69	%		25,149			57		0.91	%
TOTAL INTEREST BEARING LIABILITIES	$	1,246,732		$	2,086		0.67	%	$	732,333		$	1,351		0.74	%
Demand deposits		157,511								64,923
Other liabilities		5,937								2,113
Total shareholders’ equity		179,602								71,158
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,589,782							$	870,527
NET INTEREST SPREAD (4)							3.39	%							3.38	%
NET INTEREST INCOME				$	13,327							$	7,348
NET INTEREST MARGIN (5)							3.51	%							3.48	%

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	Six Months Ended June 30,
	2015								2014
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans (1)(6)	$	877,749		$	23,327		5.36	%	$	461,948		$	12,298		5.37	%
Securities available for sale (6)		460,458			5,111		2.24	%		280,876			3,787		2.72	%
Securities held to maturity (6)		50,584			700		2.79	%		58,985			790		2.70	%
Certificates of deposit at other financial institutions		250			3		2.42	%		—			—		0.00	%
Federal funds sold and other (2)		49,154			198		0.81	%		27,077			123		0.92	%
TOTAL INTEREST EARNING ASSETS	$	1,438,195		$	29,339		4.11	%	$	828,886		$	16,998		4.14	%
Allowance for loan losses		(7,262	)							(5,265	)
All other assets		71,276								29,337
TOTAL ASSETS	$	1,502,209							$	852,958
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Interest checking	$	283,398		$	435		0.31	%	$	191,733		$	297		0.31	%
Money market		418,719			1,215		0.59	%		242,942			896		0.74	%
Savings		32,051			73		0.46	%		20,193			51		0.51	%
Time deposits		371,593			1,823		0.99	%		218,050			1,118		1.03	%
Federal Home Loan Bank advances		35,718			146		0.82	%		26,619			109		0.83	%
Federal funds purchased and other (3)		48,381			163		0.68	%		19,193			84		0.88	%
TOTAL INTEREST BEARING LIABILITIES	$	1,189,860		$	3,855		0.65	%	$	718,730		$	2,555		0.72	%
Demand deposits		153,827								62,352
Other liabilities		5,919								2,322
Total shareholders’ equity		152,603								69,554
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,502,209							$	852,958
NET INTEREST SPREAD (4)							3.46	%							3.42	%
NET INTEREST INCOME				$	25,484							$	14,443
NET INTEREST MARGIN (5)							3.57	%							3.51	%

(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 exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.

(7) Average balances are average daily balances.

Interest-earning assets averaged $1,524,082 and $1,438,195 during the three and six months ended June 30, 2015 compared to $846,736 and $828,886 for the same periods in 2014, an increase of $677,346 and $609,309, or 80.0% and 73.5%, respectively. This increase was primarily due to organic growth in both the loan and securities portfolios over the past year, increases to the securities

32

portfolio as a result of a capital leverage program that was implemented during the second quarter of 2015, and due to the acquisition of MidSouth. Average loans increased 90.3% and 90.0% and average investment securities increased 62.7% and 50.4% when comparing the three and six months ended June 30, 2015 with the same periods in 2014. When comparing the three and six months ended June 30, 2015 and 2014, the yield on average interest earning assets decreased six and three basis points to 4.06% and 4.11%, compared to 4.12% and 4.14%, for the same periods during 2014. The yield on available-for-sale securities was 2.19% and 2.24% during the three and six months ended June 30, 2015 compared to 2.62% and 2.72% for the same periods in 2014. The primary driver for the decrease in yield was due to decreases in coupon rates on securities purchased during the past 12 months. For the three and six months ended June 30, 2015, the weighted average coupon rate for available-for-sale securities was 2.99% compared to 3.29% and 3.41% for the same periods in 2014, a decrease of 30 and 42 basis points, respectively. During the six months ending June 30, 2015, the Company purchased securities with total purchased par of $305,160, weighted average yield of 2.45% and weighted average life of 7.1 years.

Interest-bearing liabilities averaged $1,246,732 and $1,189,860 during the three- and six-month periods ending June 30, 2015 compared to $732,333 and $718,730 for the same periods in 2014, an increase of $514,399 and $471,130, or 70.2% and 65.6%, respectively. Total average interest-bearing deposits grew $470,551 and $432,843, including increases in average brokered CDs of $154,452 and $111,316 and average interest-bearing public funds deposits of $86,610 and 80,988 for the three- and six-month periods ending June 30, 2015 as compared to the same periods during 2014. Rapid growth in the loan and investment portfolios also resulted in an increase in average Federal Home Loan Bank advances of $15,165 and $9,099 and average federal funds purchased of $28,683 and $29,188 for the three- and six-month periods ending June 30, 2015 as compared to the same periods during 2014. The cost of interest-bearing liabilities for the three and six months ending June 30, 2015 decreased by seven basis points each when comparing the cost of interest-bearing liabilities with the same periods of 2014, with the largest declines in interest costs being reported in money market deposits and in Federal funds purchased and other.

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

Analysis of Changes in Interest Income and Expenses

	Net change three months ended June 30, 2015 versus June 30, 2014
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	5,759		$	34		$	5,793
Securities available for sale		1,481			(550	)		931
Securities held to maturity		(73	)		14			(59	)
Certificates of deposit at other financial institutions		2			—			2
Federal funds sold and other		79			(32	)		47
TOTAL INTEREST INCOME	$	7,248		$	(534	)	$	6,714
INTEREST EXPENSE
Deposits
Interest checking	$	70		$	60		$	130
Money market accounts		357			(181	)		176
Savings		16			(4	)		12
Time deposits		443			(62	)		381
Federal Home Loan Bank advances		37			(36	)		1
Other borrowed funds		65			(30	)		35
TOTAL INTEREST EXPENSE	$	988		$	(253	)	$	735
NET INTEREST INCOME	$	6,260		$	(281	)	$	5,979

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	Net change six months ended June 30, 2015 versus June 30, 2014
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	11,071		$	(42	)	$	11,029
Securities available for sale		2,421			(1,097	)		1,324
Securities held to maturity		(113	)		23			(90	)
Certificates of deposit at other financial institutions		3			—			3
Federal funds sold and other		100			(25	)		75
TOTAL INTEREST INCOME	$	13,482		$	(1,141	)	$	12,341
INTEREST EXPENSE
Deposits
Interest checking	$	142		$	(4	)	$	138
Money market accounts		648			(329	)		319
Savings		30			(8	)		22
Time deposits		787			(82	)		705
Federal Home Loan Bank advances		37			—			37
Other borrowed funds		128			(49	)		79
TOTAL INTEREST EXPENSE	$	1,772		$	(472	)	$	1,300
NET INTEREST INCOME	$	11,710		$	(669	)	$	11,041

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in our 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 $805 and $440 for the three months ended June 30, 2015 and 2014, respectively, and $1,430 and $825 for the six months ended June 30, 2015 and 2014, respectively. The higher provision for the six months ended June 30, 2015 compared to the same period in 2014 is due primarily to the Company’s loan growth during the three and six months ended June 30, 2015, compared to the same periods in 2014. Nonperforming loans at June 30, 2015 totaled $947 compared to $1,151 at December 31, 2014, representing 0.1% of total loans at both dates.

Non-Interest Income

Non-interest income for the three and six months ended June 30, 2015 was $2,851 and $6,066 compared to $2,430 and $3,851 for the same periods in 2014. The following is a summary of the components of non-interest income (in thousands):

	Three Months Ended June 30,					$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Service charges on deposit accounts	$	18	$	12		$	6			50.0	%
Other service charges and fees		690		313			377			120.4	%
Net gains on sale of loans		1,463		1,567			(104	)		(6.6	%)
Investment services		301		35			266			760.0	%
Loan servicing fees, net		60		88			(28	)		(31.8	%)
Gain on sales and calls of investment securities, net		109		63			46			73.0	%
Net gain (loss) on foreclosed assets		21		(2	)		23			1,150.0	%
Other		189		354			(165	)		(46.6	%)
Total non-interest income	$	2,851	$	2,430		$	421			17.3	%

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	Six Months Ended June 30,				$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Service charges on deposit accounts	$	34	$	24	$	10			41.7	%
Other service charges and fees		1,308		549		759			138.3	%
Net gains on sale of loans		3,110		2,351		759			32.3	%
Investment services		587		77		510			662.3	%
Loan servicing fees, net		103		100		3			3.0	%
Gain on sales and calls of investment securities, net		524		71		453			638.0	%
Net gain (loss) on foreclosed assets		27		31		(4	)		(12.9	%)
Other		373		648		(275	)		(42.4	%)
Total non-interest income	$	6,066	$	3,851	$	2,215			57.5	%

Other service charges and fees for the three and six months ending June 30, 2015 increased $377 and $759, or 120.4% and 138.3%, respectively, from the same periods in 2014. The increases for both periods were due to: (1) the MidSouth acquisition, which contributed to an increase in electronic banking fee income; (2) mortgage origination fee income, which increased due to the volume of loans originated during the periods; and (3) nonsufficient funds and overdraft fees, which have increased due to the number of accounts that were added in the MidSouth acquisition.

Net gains on the sale of loans include net gains realized from the sales of mortgage loans and Small Business Administration (“SBA”) loans. Net gains on the sale of mortgage loans are based, in part, on differences between the carrying value of loans being sold to third-party investors and the selling price. Also included are changes in the fair value of mortgage banking derivatives entered into by the Company to hedge the change in interest rates on loan commitments prior to their sale in the secondary market. Fluctuations in mortgage interest rates, changes in the demand for certain loans by investors, and whether servicing rights associated with the loans being sold are retained or released all affect the net gains on mortgage loan sales. Net gains for the three months ending June 30, 2015 were $1,463, a decrease of $104, or 6.6%, from the same period during 2014. The decrease was primarily due to less favorable differences between the selling price and the carrying value of the sold loans and due to a decrease in the fair value of mortgage banking derivatives. Net gains for the six months ending June 30, 2015 were $3,110, an increase of $759, or 32.3%, from the same period in 2014. The increase was primarily due to more favorable differences between the selling price and the carrying value of the sold loans and due to an increase in the fair value of mortgage banking derivatives when comparing the six months ending June 30, 2015 with the same period in 2014.

Investment services income for the three and six months ending June 30, 2015 increased $266 and $510, or 760.0% and 662.3%, respectively, in comparison with the same periods in 2014. The increases in both comparative periods were primarily due to the acquisition of MidSouth, which brought an established wealth management division and its existing client base into the Company when the acquisition was completed on July 1, 2014.

Loan servicing fees are fees earned for servicing residential mortgages and SBA loans offset by the amortization of the respective servicing rights. These servicing rights are initially recorded at fair value and then amortized in proportion to, and over the period of, the estimated life of the underlying loans. In addition, impairment to the servicing rights may be recognized through a valuation allowance, and adjustments to the allowance can affect the net loan servicing fees. For the three and six months ending June 30, 2015, net loan servicing fees were $60 and $103 compared to $88 and $100 for the three and six months ending June 30, 2014. The decrease in loan servicing fees when comparing the three months ending June 30, 2015 with the same period in 2014 was primarily related to an increase in amortization of mortgage servicing rights.

Net gain on sale of investment securities increased during the three and six months ending June 30, 2015 increased 73.0% and 638.0%, respectively when compared with the same periods in 2014. The significant increase for the six months ending June 30, 2015 is attributable to the sales and calls of securities during 2015, $291 of which was related to securities called during the first quarter of 2015.

Other non-interest income decreased by $165, or 46.6%, when comparing second quarter 2015 with second quarter 2014; however, it decreased by $275, or 42.4%, when comparing the six months ended June 30, 2015 with the same period in 2014. The decrease is attributed to the compliance consulting fees that were recorded in 2014 by the Company’s subsidiary, BCG, the assets of which the Company sold at the end of 2014. The Company has had no compliance consulting fee income in 2015 due to the sale of BCG.

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Non-interest Expense

Non-interest expense for the three and six months ended June 30, 2015 was $10,572 and $20,193, compared to $6,078 and $11,570 compared to the same periods in 2014. These increases were the result of the following components listed in the table below:

	Three Months Ended June 30,				$ Increase (Decrease)		% Increase (Decrease)
	2015		2014
Salaries and employee benefits	$	6,071	$	3,805	$	2,266		59.6	%
Occupancy and equipment		1,699		1,009		690		68.4	%
FDIC assessment expense		216		120		96		80.0	%
Marketing		198		135		63		46.7	%
Professional fees		507		279		228		81.7	%
Amortization of core deposit intangible		167		—		167		NM
Indirect expenses related to public offering		309		—		309		NM
Other		1,405		730		675		92.5	%
Total non-interest expense	$	10,572	$	6,078	$	4,494		73.9	%
	Six Months Ended June 30,				$ Increase (Decrease)		% Increase (Decrease)
	2015		2014
Salaries and employee benefits	$	11,752	$	7,350	$	4,402		59.9	%
Occupancy and equipment		3,278		1,795		1,483		82.6	%
FDIC assessment expense		430		239		191		79.9	%
Marketing		418		246		172		69.9	%
Professional fees		866		633		233		36.8	%
Amortization of core deposit intangible		339		—		339		NM
Indirect expenses related to public offering		326		—		326		NM
Other		2,784		1,307		1,477		113.0	%
Total non-interest expense	$	20,193	$	11,570	$	8,623		74.5	%

The increase in non-interest expense noted in the table above is indicative of the Company’s overall growth over the past 12 months. Two primary increases for the three and six months ending June 30, 2015, were in salaries and occupancy expenses, which were primarily attributed to: 1) the acquisition of MidSouth, which added the MidSouth employee base and five branch locations to the Bank’s branch network; and 2) the expansion of the Company’s headquarters in downtown Franklin, Tennessee. Also, staffing increased from 136 full-time equivalent employees as of June 30, 2014, to 221 as of June 30, 2015. The increased staffing is due to the retention of the majority of the MidSouth employees to continue to support the branches as well as the addition of key lenders and operational staff needed to facilitate the Company’s growth.

The increase in amortization expense for the core deposit intangible for the three and six months ending June 30, 2015 is directly attributable to the acquisition of MidSouth, which brought a core deposit intangible asset that is being amortized over a period of eight years and two months.

The increase in indirect expenses related to public offering for the three and six months ending June 30, 2015 is attributable to expenses incurred from management’s nationwide “roadshow” marketing campaign related to the Company’s initial public offering (“IPO”).

For the three and six months ended June 30, 2015, other non-interest expenses increased $675 and $1,477, or 92.5% and 113.0%, respectively from the same periods in 2014. Of the increases for the three and six months ending June 30, 2015, $151 and $325 is attributed to the increase in electronic banking expenses associated with the Company’s customers’ increased usage of technology-based services, such as ATM/debit card transactions, internet banking transactions, and other types of automated transactions. Much of the electronic banking expense increase was attributable to the MidSouth acquisition, which added more consumers to the Company’s customer base. Expenses related to the Company’s lending activities, including mortgage lending, accounted for $194 and $273 of the increase for the three and six months ending June 30, 2015, when compared with the same periods in 2014. The remaining increases of $330 and $879 were due to a variety of expense items that include, but are not limited to, deposit account expense, insurance expense, postage and freight, franchise taxes, meals and entertainment, travel, communications expenses, etc.

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Income Tax Expense

The Company recognized income tax expense for the three and six months ended June 30, 2015, of $1,667 and $3,661, respectively, compared to $1,225 and $2,335, respectively, for the three and six months ended June 30, 2014. The Company’s year-to-date income tax expense for the period ended June 30, 2015 reflects an effective income tax rate of 36.9% compared to 39.6% for the same period in 2014. The decrease in the effective tax rate resulted from unfavorable permanent differences incurred during the six months ended June 30, 2014, from expenses associated with the acquisition of MidSouth and from stock based compensation expense incurred from the vesting of incentive stock options as a result of employee retirement.

COMPARISON OF BALANCE SHEETS AT JUNE 30, 2015 AND DECEMBER 31, 2014

Overview

The Company’s total assets increased by $410,925, or 30.3%, from December 31, 2014 to June 30, 2015. The increase in total assets has primarily been the result of organic growth in the loan and investment securities portfolios.

Loans

Lending-related income is the most important component of the Company’s net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and therefore generates the largest portion of revenues. 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 June 30, 2015 and December 31, 2014 were $962,191 and $787,188, respectively, an increase of $175,003, or 22.2%. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. In addition, the Company added a new health care lending team in the second quarter of 2015 that will be focused on commercial and industrial lending, with emphasis on lending within the health care industry, thereby adding more diversification to the Company’s loans. During the second quarter, this team closed nearly $25 million in loans with a number of approved loans in their pipeline to be closed during the third quarter of 2015.

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

Types of Loans	June 30, 2015						December 31, 2014
	Amount			% of Total Loans			Amount			% of Total Loans
Total loans, excluding PCI loans
Real estate:
Residential	$	234,107			24.3	%	$	213,760			27.1	%
Construction and land development		293,629			30.5	%		239,225			30.4	%
Commercial		279,591			29.0	%		246,352			31.3	%
Commercial and industrial		144,735			15.0	%		76,570			9.7	%
Consumer and other		7,527			0.8	%		8,025			1.0	%
Total loans—gross, excluding PCI loans		959,589			99.6	%		783,932			99.5	%
Total PCI loans (note 1)
Real estate:
Residential	$	810			NM		$	814			0.1	%
Construction and land development		77			NM			77			NM
Commercial		1,752			0.2	%		1,798			0.2	%
Commercial and industrial		1,639			0.2	%		1,624			0.2	%
Consumer and other		—			—	%		2			NM
Total loans—gross PCI loans		4,278			0.4	%		4,315			0.5	%
Total gross loans		963,867			100.0	%		788,247			100.0	%
Less: deferred loan fees, net		(1,676	)					(1,059	)
Allowance for loan losses		(8,016	)					(6,680	)
Total loans, net allowance for loan losses	$	954,175						780,508

Note 1: PCI accounted for pursuant to ASC Topic 310-30.

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As presented in the above table, gross loans increased 22.3% during the first six months of 2015, primarily due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of 15.4% with the majority of the growth occurring in the construction and land development (22.7%) segment. The Company also experienced strong growth of 87.2% in the commercial and industrial segment during the first six months of 2015 due to the second quarter addition of a group of lenders that is focused on commercial and health care lending.

Real estate loans comprised 84.0% of the loan portfolio at June 30, 2015. The following chart displays the Company’s real estate loan portfolio as of June 30, 2015, broken down into the various segments or types of real estate loans that the Company produces and stated as a percentage of total real estate loans:

The largest portion of the real estate loan segments as of June 30, 2015, was construction and land development loans, which totaled 36.3% of real estate loans and was broken down into three sub-segments: residential construction (27.5% of real estate loans), commercial construction (5.2% of real estate loans), and acquisition and development (3.6% of real estate loans). Construction and land development loans totaled $293,706 and made up 30.5% of the total loan portfolio at June 30, 2015. 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 $281,343 at June 30, 2015, and comprised 34.7% of real estate loans and 29.2% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market. Residential real estate loans totaled $234,917 and increased 9.5% during the first six months of 2015 and comprised 29.0% of real estate loans and 24.4% of total loans at June 30, 2015.

Commercial and industrial loans totaled $146,374 at June 30, 2015 and grew 87.2% during the first six months of 2015. Loans in this classification comprised 15.2% of total loans at June 30, 2015, as compared to 9.9% as of December 31, 2014. The commercial and industrial classification primarily consists of commercial loans to small-to-medium sized businesses, but with the addition of the health care lending team during the second quarter of 2015, the composition of that portfolio segment will likely change to reflect the addition of health care and other types of commercial loans.

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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 June 30, 2015, excluding unearned net fees and costs.

Loan Maturity Schedule

	June 30, 2015
	One year or less		Over one year to five years		Over five years		Total
Real estate:
Residential	$	21,336	$	95,414	$	118,167	$	234,917
Construction and land development		154,346		111,043		28,317		293,706
Commercial		19,506		108,524		153,313		281,343
Commercial and industrial		40,820		73,668		31,886		146,374
Consumer and other		2,496		4,500		531		7,527
Total	$	238,504	$	393,149	$	332,214		963,867
Fixed interest rate	$	134,612	$	292,362	$	152,833	$	579,807
Variable interest rate		103,892		100,787		179,381		384,060
Total	$	238,504	$	393,149	$	332,214		963,867

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 covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group over the past three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

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

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In the table below, the components, as discussed above, of the allowance for loan losses are shown at June 30, 2015 and December 31, 2014.

	June 30, 2015							December 31, 2014							Increase (Decrease)
	Loan Balance		ALLL Balance		%			Loan Balance		ALLL Balance		%			Loan Balance			ALLL Balance		Change
Non impaired loans	$	846,273	$	7,897		0.93	%	$	626,180	$	6,662		1.06	%	$	220,093		$	1,235		-13 bps
MidSouth loans (Note 1)		111,284		—		—	%		156,806		—		—	%		(45,522	)		—		—
Impaired loans		2,032		119		5.86	%		946		18		1.90	%		1,086			101		396 bps
Non-PCI loans		959,589		8,016		0.84	%		783,932		6,680		0.85	%		175,657			1,336		-1 bps
PCI loans		4,278		—		—	%		4,315		—		—	%		(37	)		—		—
Total loans	$	963,867	$	8,016		0.83	%	$	788,247	$	6,680		0.85	%	$	175,620		$	1,346		-2 bps

Note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstanding non-PCI loan balances acquired, and the remaining fair value adjustment at June 30, 2015 was $2,875 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. Because these loans were recorded at estimated fair value on July 1, 2014, no allowance for loan loss was recorded at June 30, 2015 related to the acquired loans.

At June 30, 2015, the allowance for loan losses was $8,016, compared to $6,680 at December 31, 2014. The allowance for loan losses as a percentage of total loans was 0.83% and 0.85% at June 30, 2015 and December 31, 2014, respectively. Loan growth during this period 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.

	Six Months Ended June 30, 2015			Six Months Ended June 30, 2014
Beginning balance	$	6,680		$	4,900
Loans charged-off:
Residential real estate		17			—
Construction & land development		—			—
Commercial real estate		—			—
Commercial & industrial		—			—
Consumer and other		88			—
Total loans charged-off		105			—
Recoveries on loans previously charged-off:
Residential real estate		8			46
Construction & land development		—			—
Commercial real estate		—			—
Commercial & industrial		—			—
Consumer and other		3			—
Total loan recoveries		11			46
Net (charge-offs) recoveries		(94	)		46
Provision for loan losses charged to expense		1,430			825
Total allowance at end of period	$	8,016		$	5,771
Total loans, gross, at end of period(1)	$	963,867		$	486,350
Average gross loans(1)	$	862,071		$	453,699
Allowance to total loans		0.83	%		1.19	%
Net charge-offs (recoveries) to average loans, annualized		0.02	%		(0.02	%)

⁽¹⁾ Loan balances exclude loans held for sale

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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.

	June 30, 2015								December 31, 2014
	Amount		% of Allowance to Total			% of Loan Type to Total Loans			Amount		% of Allowance to Total			% of Loan Type to Total Loans
Real estate loans:
Residential	$	1,739		21.7	%		24.4	%	$	1,791		26.8	%		27.2	%
Construction and land development		2,567		32.0	%		30.4	%		2,690		40.3	%		30.4	%
Commercial		2,321		29.0	%		29.2	%		1,494		22.4	%		31.5	%
Total real estate		6,627		82.7	%		84.0	%		5,975		89.5	%		89.1	%
Commercial and industrial		1,324		16.5	%		15.2	%		650		9.7	%		9.9	%
Consumer and other		65		0.8	%		0.8	%		55		0.8	%		1.0	%

Nonperforming Assets

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

The primary component of non-performing loans is non-accrual loans, which as of June 30, 2015 totaled $947. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection. There were outstanding no loans that were past due 90 days or more and still accruing interest at June 30, 2015.

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

	June 30, 2015			December 31, 2014
Non-accrual loans	$	947		$	835
Past due loans 90 days or more and still accruing interest		—			316
Total nonperforming loans		947			1,151
Foreclosed real estate (“OREO”)		206			715
Total nonperforming assets		1,153			1,866
Total nonperforming loans as a percentage of total loans		0.1	%		0.1	%
Total nonperforming assets as a percentage of total assets		0.1	%		0.1	%
Allowance for loan losses as a percentage of non-performing loans		846	%		580	%

As of June 30, 2015, there were three loans on non-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
Residential real estate	$	96		10.1	%		1
Construction & land development		—		—	%		—
Commercial real estate		835		88.2	%		1
Commercial & industrial		16		1.7	%		1
Consumer		—		—	%		—
Total non-accrual loans	$	947		100.0	%		3

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Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were $635,184 at June 30, 2015, compared to $395,705 at December 31, 2014, an increase of $239,479 or 60.5%. The increase in available-for-sale securities was primarily attributed to the securities purchased during the second quarter as part of the Company’s capital leverage program, which was designed to deploy the capital that was raised at the end of the first quarter of 2015.

The held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $46,815 at June 30, 2015, compared to $53,332 at December 31, 2014, a decrease of $6,517, or 12.2%. The decrease is attributable to securities that were called or matured during the first six months of 2015.

The combined portfolios represented 38.6% and 33.1% of total assets at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of $7,685 and $5,349 at June 30, 2015 and December 31, 2014, 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. The increase from December 31, 2014 to June 30, 2015 was due to the Bank’s growth in capital at the end of the first quarter of 2015, which required the Bank to purchase additional Federal Reserve Bank stock based on the Federal Reserve Bank’s requirements for state member banks.

Bank Premises and Equipment

Bank premises and equipment totaled $9,584 at June 30, 2015 compared to $9,664 at December 31, 2014, a decrease of $80, or 0.8%.

Buildings Held for Sale

At June 30, 2015, the balance in buildings held for sale was zero, compared with the balance of $4,080 at December 31, 2014. Three of the former MidSouth branch properties were reclassified at December 31, 2014 as held for sale, since they had been identified to be sold, and the sale of the properties was probable at that time. These properties were sold to related parties of the Company and were subsequently leased by the Company upon completion of the sale. The sale of these properties settled during the first quarter of 2015, and a gain of $15 was realized as a result of the sale.

Deposits

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

At June 30, 2015, total deposits were $1,491,986, compared to $1,172,233 at December 31, 2014, an increase of $319,753, or 27.3%. The growth in deposits is primarily attributable to growth in brokered deposits, which is an integral part of the Company’s funding plan. The Company’s deposits are broken out in the table below:

	Jun 30, 2015		Dec 31, 2014		Change ($)			Change (%)
Deposits:
Non-interest bearing deposits	$	167,749	$	150,337	$	17,412			11.6	%
Interest checking deposits:
Public funds deposits		168,532		210,587		(42,055	)		(20.0	)
Non-public funds deposits		94,222		87,930		6,292			7.2
Brokered deposits		992		1,301		(309	)		(23.8	)
Total interest checking		263,746		299,818		(36,072	)		(12.0	)
Money market deposits:
Public funds deposits		163,762		131,592		32,170			24.4
Non-public funds deposits		205,666		207,600		(1,934	)		(0.9	)
Brokered deposits		106,031		32,017		74,014			231.2
Total money market checking		475,459		371,209		104,250			28.1
Savings deposits		33,963		29,675		4,288			14.4
Time deposits:
Non-brokered time deposits		274,274		268,101		6,173			2.3
Brokered time deposits†		276,795		53,093		223,702			421.3
Total time deposits		551,069		321,194		229,875			71.6
Total deposits	$	1,491,986	$	1,172,233	$	319,753			27.3	%

^† Brokered time deposits included public funds time deposits of $33,133 and $8,133 at June 30, 2015 and December 31, 2014, respectively, which were part of the Company’s participation in the Certificate of Deposit Account Registry Service (CDARS) program.

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Total brokered deposits increased from $86,411 at December 31, 2014 to $383,818 at June 30, 2015, primarily due to brokered deposits that were added as part of the Company’s capital leverage program that was initiated during the second quarter of 2015, the funding from which was used to purchase investment securities to earn an interest rate spread over the brokered deposits, thereby increasing the Company’s net interest income.

Public funds deposits in the form of county deposits are also a part of the Company’s funding strategy and are cyclical in nature, with the highest period of growth being during the first quarter of each calendar year. At June 30, 2015, public funds totaled $365,427, compared with $350,312 at December 31, 2014, an increase of $15,115, or 4.3%.

Time deposits excluding brokered deposits as of June 30, 2015, amounted to $274,274, compared to $268,101 as of December 31, 2014, an increase of $6,173, or 2.3%. Noninterest-bearing checking deposits grew $17,412, or 11.6%, and non-public funds interest checking accounts grew $6,292, or 7.2%, respectively when comparing deposit balances from June 30, 2015 with balances at December 31, 2014.

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

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

	June 30, 2015
Three months or less	$	40,272
Three through six months		28,869
Six through twelve months		21,267
Over twelve months		85,633
Total	$	176,041

Federal Funds Purchased and Repurchase Agreements

As of June 30, 2015, the Company had no federal funds purchased from correspondent banks compared to $16,825 outstanding as of December 31, 2014. Securities sold under agreements to repurchase had an outstanding balance of $36,567 as of June 30, 2015, compared to $22,253 as of December 31, 2014. Securities sold under agreements to repurchase are financing arrangements that mature daily. 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 (“FHLB”) which is secured by a blanket pledge of 1-4 family residential mortgages. At June 30, 2015 these advances totaled $57,000, compared with advances of $19,000 at December 31, 2014. The growth in the FHLB advances is attributable to the capital leverage program that management initiated in the second quarter of 2015, the funding for which was initially used to purchase investment securities to earn a spread over the borrowing costs.

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At June 30, 2015, the scheduled maturities of these and advances and interest rates were as follows:

Scheduled Maturities	Amount		Weighted Average Rates
2015	$	40,000		0.16	%
2016		—		—	%
2017		10,000		1.27	%
2018		7,000		1.61	%
Total	$	57,000		0.53	%

Liquidity

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

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

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered deposits. As of June 30, 2015, $635,184 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another $46,815 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $479,240 of the total $681,999 investment securities portfolio on hand at June 30, 2015, 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

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

Gross proceeds	$	55,440
Less: stock offering costs		(4,436	)
Net proceeds from issuance of common stock	$	51,004

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

Effects of Inflation and Changing Prices

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

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At June 30, 2015, the Company had unfunded loan commitments outstanding of $56,734, unused lines of credit of $272,704, and outstanding standby letters of credit of $10,504.

44

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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

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

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

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

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

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

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

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

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

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

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

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

45

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

	As of or for the Three Months Ended
(Amounts in thousands, except share/ per share data and percentages)	Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sept 30, 2014			Jun 30, 2014
Total shareholders’ equity	$	177,081		$	178,541		$	121,799		$	116,454		$	74,199
Less: Preferred stock		10,000			10,000			10,000			10,000			10,000
Total common shareholders’ equity		167,081			168,541			111,799			106,454			64,199
Less: Goodwill and other intangibles		11,538			11,709			11,886			12,074			240
Tangible common shareholders’ equity	$	155,543		$	156,832		$	99,913		$	94,380		$	63,959
Common shares outstanding		10,502,671			10,465,930			7,756,411			7,739,644			4,915,907
Tangible book value per share	$	14.81		$	14.99		$	12.88		$	12.19		$	13.01
Net income available to common shareholders	$	3,109		$	3,107		$	2,810		$	1,990		$	2,010
Average tangible common equity		157,959			103,475			97,630			96,310			60,915
Return on average tangible common equity		7.89	%		12.18	%		11.42	%		8.20	%		13.23	%
Efficiency Ratio:
Net interest income	$	13,327		$	12,157		$	12,123		$	11,127		$	7,348
Noninterest income		2,851			3,215			2,926			3,274			2,430
Operating revenue		16,178			15,372			15,049			14,401			9,778
Expense
Total noninterest expense		10,572			9,621			9,863			10,389			6,078
Efficiency ratio		65.35	%		62.59	%		65.54	%		72.14	%		62.16	%
Reported yield on loans		5.37	%		5.35	%		5.67	%		5.92	%		5.77	%
Effect of accretion income on acquired loans		(0.32	%)		(0.28	%)		(0.36	%)		(0.43	%)		0.00	%
Adjusted yield on loans		5.05	%		5.07	%		5.31	%		5.49	%		5.77	%
Reported net interest margin		3.51	%		3.65	%		3.97	%		3.86	%		3.48	%
Effect of accretion income on acquired loans		(0.19	%)		(0.18	%)		(0.23	%)		(0.27	%)		0.00	%
Effect of premium amortization of acquired deposits		(0.01	%)		(0.01	%)		(0.02	%)		(0.02	%)		0.00	%
Adjusted net interest margin		3.31	%		3.46	%		3.72	%		3.57	%		3.48	%

46

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
	Jun 30, 2015		Mar 31, 2015		Dec 31, 2014		Sept 30, 2014		Jun 30, 2014
Income Statement Data ($):
Interest income		15,413		13,926		13,742		12,692		8,699
Interest expense		2,086		1,769		1,619		1,565		1,351
Net interest income		13,327		12,157		12,123		11,127		7,348
Provision for loan losses		805		625		885		664		440
Noninterest income		2,851		3,215		2,926		3,274		2,430
Noninterest expense		10,572		9,621		9,863		10,389		6,078
Net income before taxes		4,801		5,126		4,301		3,348		3,260
Income tax expense		1,667		1,994		1,466		1,333		1,225
Net income		3,134		3,132		2,835		2,015		2,035
Net income available to common shareholders		3,109		3,107		2,810		1,990		2,010
Earnings per share, basic		0.30		0.39		0.36		0.26		0.41
Earnings per share, diluted		0.28		0.37		0.34		0.25		0.40
Profitability (%)
Return on average assets		0.79		0.90		0.88		0.67		0.94
Return on average equity		7.00		10.14		9.40		7.02		11.47
Return on average tangible common equity		7.89		12.18		11.42		8.20		13.23
Efficiency ratio		65.35		62.59		65.54		72.14		62.16
Net interest margin		3.51		3.65		3.97		3.86		3.48
Balance Sheet Data ($):
Loans (including HFS)		979,033		897,001		805,650		744,927		501,664
Allowance for loan losses		8,016		7,308		6,680		5,883		5,771
Cash		43,413		48,580		49,347		36,657		26,054
Securities		681,999		507,170		449,037		403,043		322,607
Goodwill		9,124		9,124		9,124		9,121		157
Intangible assets		2,414		2,585		2,762		2,953		83
Assets		1,766,752		1,509,430		1,355,827		1,238,579		872,142
Deposits		1,491,986		1,271,602		1,172,233		1,051,558		747,324
Liabilities		1,589,671		1,330,889		1,234,028		1,122,125		797,943
Total equity		177,081		178,541		121,799		116,454		74,199
Common equity		167,081		168,541		111,799		106,454		64,199
Tangible common equity		155,543		156,832		99,913		94,380		63,959
Asset Quality (%)
Nonperforming loans / total loans		0.10		0.14		0.15		0.47		0.34
Nonperforming assets / total loans + OREO		0.12		0.19		0.24		0.70		0.58
Loan loss reserve / loans (excluding HFS)		0.83		0.84		0.85		0.82		1.19
Net charge-offs / average loans		0.04		0.00		0.04		0.30		(0.02	)
Capital (%)
Tangible common equity to tangible assets		8.86		10.47		7.43		7.70		7.34
Leverage ratio		10.19		11.41		8.57		8.83		8.39
Tier 1 common ratio		12.29		14.01		10.51		11.17		11.10
Tier 1 risk-based capital ratio		12.86		14.95		11.58		12.35		12.86
Total risk-based capital ratio		13.50		15.64		12.30		13.05		13.88

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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 the Company’s Form S-4 filed with the SEC on May 14, 2014 in connection with the Company’s acquisition of MidSouth, which registered the Company’s common stock issued in the acquisition of MidSouth under the Securities Act, and resulted in the Company becoming an SEC reporting company under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (2) the last day of the fiscal year in which we have more than $1.0 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 in non-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 to non-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.

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 a 12-month time period ending June 30, 2015, net interest income was estimated to increase 0.96% and 0.91% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to decrease 4.58% and 17.69% 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.

48

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of June 30, 2015.

Projected Interest Rate Change	Net Interest Income		Net Interest Income $ Change from Base		% Change from Base
-200		44,611		-9,588		-17.69	%
-100		51,718		-2,481		-4.58	%
Base		54,199		—		0.00	%
+100		54,721		522		0.96	%
+200		54,693		494		0.91	%
+300		55,093		894		1.65	%
+400		54,877		678		1.25	%

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.

(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 Rule 13a-15(e) under the Exchange Act) as of June 30, 2015, the end of the fiscal quarter covered by this Quarterly Report on Form 10-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 Form 10-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.

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

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 11, 2015 other than the additional disclosure of the risk factors listed below.

An active, liquid market for our common stock may not develop or be sustained, which may impair the ability of our shareholders to sell their shares.

Before the listing of our common stock on the New York Stock Exchange (the “NYSE”) on March 26, 2015, our common stock had very little liquidity, with only limited trading of our common stock on the OTCQB of the OTC Markets Group. Even though our common stock is now listed on the NYSE under the symbol “FSB”, there is limited trading volume and an active, liquid trading market for our common stock may not develop or be sustained. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. If an active, liquid trading market for our common stock does not develop, shareholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock. The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future.

49

Shares of our common stock are subject to dilution and the market price of our common stock could decline due to the number of outstanding shares of our common stock eligible for future sale, including shares that will be available for sale following the expiration of lock-up periods.

Actual or anticipated issuances or sales of additional amounts of our common stock in the future could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would dilute the percentage ownership interest held by shareholders prior to such issuance. As of May 10, 2015, we had 10,501,462 shares of common stock issued and outstanding. Of the outstanding shares of common stock, all of the 2,640,000 shares that were sold in our initial public offering are freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act), may be sold publicly only in compliance with certain limitations. In addition, 2,766,191 shares of our outstanding common stock were issued pursuant to a registration statement on Form S-4 in connection with the acquisition of MidSouth and are freely tradable. Other than certain of the restricted shares we previously issued under our 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), and subject in certain cases to lock-up restrictions with respect to our directors and executive officers that restrict their ability, with certain exceptions, to transfer shares of our common stock held by them for a period of 180 days following the IPO, the remaining 4,084,234 outstanding shares of our common stock may be sold in the market over time in accordance with Rule 144 under the Securities Act or otherwise in future public offerings. We plan to file a registration statement on Form S-8 under the Securities Act to register an aggregate of 4,000,000 shares of our common stock for issuance under our 2007 Plan. Subject to certain exceptions, approximately 1,224,003 shares of our common stock will become eligible for sale upon expiration of the 180-day lock-up period. Accordingly, the market price of our common stock could be adversely affected by actual of anticipated sales of a significant number of shares of our common stock in the future.

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

Shares of the Company’s common stock were issued during the second quarter of 2015 pursuant to the exercise of warrants and options issued by the Company, as follows:

Date of Sale	Number of Shares of Common Stock Sold		Type of Issuance	Price Per Share		Aggregate Price
04/02/2015		314	Options Exercised	$	11.75	$	(1)0.00
		649	Options Exercised	$	10.00	$	(1)0.00
		208	Options Exercised	$	10.50	$	(1)0.00
		239	Options Exercised	$	12.00	$	(1)0.00
		34	Options Exercised	$	13.00	$	(1)0.00
04/26/2015		250	Warrants Exercised	$	12.00	$	3,000.00
05/05/2015		1,250	Options Exercised	$	12.00	$	15,000.00
		125	Options Exercised	$	12.00	$	1,500.00
		25	Options Exercised	$	12.00	$	300.00
05/06/2015		500	Options Exercised	$	12.00	$	6,000.00
05/15/2015		125	Options Exercised	$	12.00	$	1,500.00
		125	Options Exercised	$	12.00	$	1,500.00
		150	Options Exercised	$	12.00	$	1,800.00
05/21/2015		125	Options Exercised	$	12.00	$	1,500.00
		425	Options Exercised	$	12.00	$	5,100.00
06/18/2015		175	Options Exercised	$	12.00	$	2,100.00
		125	Options Exercised	$	12.00	$	1,500.00

⁽¹⁾  These option exercises were cashless exercises.

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.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

50

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

Exhibit No.	Description
10.1	Triple Net Office Lease Agreement, by and between Columbia Avenue Partners, LLC and Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 12, 2015).
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.

51

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.
August 13, 2015	By:	/s/ Sally P. Kimble
		Sally P. Kimble
		On behalf of the registrant and as Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.	Description
10.1	Triple Net Office Lease Agreement, by and between Columbia Avenue Partners, LLC and Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 12, 2015).
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.