Franklin Financial Network (FSB) 10-Q 2015 Q3 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 September 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 November 9, 2015, was 10,525,680.

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	4
Condensed Consolidated Statements 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	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	48
PART II OTHER INFORMATION
Item 1. Legal Proceedings	48
Item 1A. Risk Factors	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	49
Item 4. Mine Safety Disclosures	49
Item 5. Other Information	50
Item 6. Exhibits	50
SIGNATURES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015 and 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

September 30, 2015 and December 31, 2014

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

	September 30, 2015			December 31, 2014
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	47,658		$	49,347
Certificates of deposit at other financial institutions		250			250
Securities available for sale		624,420			395,705
Securities held to maturity (fair value 2015—$134,028 and 2014—$53,741)		132,134			53,332
Loans held for sale, at fair value		14,666			18,462
Loans		1,123,826			787,188
Allowance for loan losses		(9,744	)		(6,680	)
Net loans		1,114,082			780,508
Restricted equity securities, at cost		7,691			5,349
Premises and equipment, net		9,360			9,664
Accrued interest receivable		6,108			3,545
Bank owned life insurance		22,452			11,664
Deferred tax asset		5,980			6,780
Buildings held for sale		—			4,080
Foreclosed assets		206			715
Servicing rights, net		3,415			3,053
Goodwill		9,124			9,124
Core deposit intangible, net		2,199			2,698
Other assets		2,793			1,551
Total assets	$	2,002,538		$	1,355,827
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	177,452		$	150,337
Interest bearing		1,537,142			1,021,896
Total deposits		1,714,594			1,172,233
Federal funds purchased and repurchase agreements		37,618			39,078
Federal Home Loan Bank advances		57,000			19,000
Accrued interest payable		587			421
Other liabilities		5,129			3,296
Total liabilities		1,814,928			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 September 30, 2015 and December 31, 2014, respectively		10,000			10,000
Common stock, no par value; 20,000,000 shares authorized; 10,524,630 and 7,756,411 shares issued and outstanding at September 30, 2015 and December 31 2014, respectively		146,645			94,251
Retained earnings		26,713			15,372
Accumulated other comprehensive income		4,252			2,176
Total shareholders’ equity		187,610			121,799
Total liabilities and shareholders’ equity	$	2,002,538		$	1,355,827

See accompanying notes to condensed consolidated financial statements.

2

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest income and dividends
Loans, including fees	$	14,744		$	10,168		$	38,071		$	22,466
Securities:
Taxable		3,462			2,395			9,084			6,932
Tax-exempt		966			20			1,155			60
Dividends on restricted equity securities		100			84			250			175
Federal funds sold and other		29			25			80			57
Total interest income		19,301			12,692			48,640			29,690
Interest expense
Deposits		2,417			1,446			5,963			3,808
Federal funds purchased and repurchase agreements		69			39			232			123
Federal Home Loan Bank advances		79			80			225			189
Total interest expense		2,565			1,565			6,420			4,120
Net interest income		16,736			11,127			42,220			25,570
Provision for loan losses		1,724			664			3,154			1,489
Net interest income after provision for loan losses		15,012			10,463			39,066			24,081
Noninterest income
Service charges on deposit accounts		44			13			78			37
Other service charges and fees		679			600			1,987			1,149
Net gains on sale of loans		2,463			1,875			5,573			4,226
Loan servicing fees, net of amortization of servicing assets		84			73			187			173
Gain on sales and calls of securities		5			22			529			93
Net gain (loss) on foreclosed assets		3			(3	)		30			28
Wealth management		327			287			914			364
Other		193			407			566			1,055
Total noninterest income		3,798			3,274			9,864			7,125
Noninterest expense
Salaries and employee benefits		6,208			6,144			17,960			13,494
Occupancy and equipment		1,683			1,443			4,961			3,238
FDIC assessment expense		362			181			792			420
Marketing		277			224			695			470
Professional fees		516			961			1,382			1,594
Amortization of core deposit intangible		160			184			499			184
Indirect expenses related to public offering		—			—			314			—
Other		1,647			1,252			4,443			2,559
Total noninterest expense		10,853			10,389			31,046			21,959
Income before income tax expense		7,957			3,348			17,884			9,247
Income tax expense		2,807			1,333			6,468			3,668
Net income		5,150			2,015			11,416			5,579
Dividends paid on Series A preferred stock		(25	)		(25	)		(75	)		(75	)
Net income available to common shareholders	$	5,125		$	1,990		$	11,341		$	5,504
Earnings per share:
Basic	$	0.49		$	0.26		$	1.17		$	0.94
Diluted		0.46			0.25			1.12			0.91

See accompanying notes to condensed consolidated financial statements.

3

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	5,150		$	2,015		$	11,416		$	5,579
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities:
Unrealized holding gain (loss) arising during the period		7,871			(623	)		4,006			7,445
Reclassification adjustment for gains included in net income		(5	)		(22	)		(529	)		(93	)
Net unrealized gains (losses)		7,866			(645	)		3,477			7,352
Tax effect		(3,090	)		247			(1,401	)		(2,815	)
Total other comprehensive income (loss)		4,776			(398	)		2,076			4,537
Comprehensive income	$	9,926		$	1,617		$	13,492		$	10,116

See accompanying notes to condensed consolidated financial statements.

4

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

	Preferred		Common Stock				Retained			Accumulated Other Comprehensive			Total Shareholders’
	Stock		Shares		Amount		Earnings			Income (Loss)			Equity
Balance at December 31, 2013	$	10,000		4,862,875	$	52,638	$	7,058		$	(4,533	)	$	65,163
Exercise of common stock options		—		6,508		56		—			—			56
Dividends paid on Series A preferred stock		—		—		—		(75	)		—			(75	)
Issuance of restricted stock, net of forfeitures		—		83,725		—		—			—			—
Stock based compensation expense		—		—		457		—			—			457
Stock issued in conjunction with 401(k) employer match		—		20,345		275		—			—			275
Stock and stock options (137,280 options) issued related to MidSouth Bank acquisition, net of stock issuance costs of $514				2,766,191		40,462								40,462
Net income		—		—		—		5,579			—			5,579
Other comprehensive income		—		—		—		—			4,537			4,537
Balance at September 30, 2014	$	10,000		7,739,644	$	93,888	$	12,562		$	4		$	116,454
Balance at December 31, 2014	$	10,000		7,756,411	$	94,251	$	15,372		$	2,176		$	121,799
Exercise of common stock options		—		80,331		780		—			—			780
Exercise of common stock warrants		—		4,970		60		—			—			60
Dividends paid on Series A preferred stock		—		—		—		(75	)		—			(75	)
Issuance of restricted stock, net of forfeitures				28,229		—		—			—			—
Stock based compensation expense, net of forfeitures		—		—		619		—			—			619
Stock issued related to initial public offering, net of stock issuance costs of $5,017		—		2,640,000		50,423		—			—			50,423
Stock issued in conjunction with 401(k) employer match, net of distributions		—		14,689		365		—			—			365
Excess tax benefit from exercise of stock options		—		—		147		—			—			147
Net income		—		—		—		11,416			—			11,416
Other comprehensive income		—		—		—		—			2,076			2,076
Balance at September 30, 2015	$	10,000		10,524,630	$	146,645	$	26,713		$	4,252		$	187,610

See accompanying notes to condensed consolidated financial statements.

5

FRANKLIN FINANCIAL NETWORK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2015 and 2014

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

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities
Net income	$	11,416		$	5,579
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		996			616
Accretion of purchase accounting adjustments		(1,551	)		(831	)
Net amortization of securities		3,426			1,928
Amortization of loan servicing right asset		644			547
Amortization of core deposit intangible		499			184
Provision for loan losses		3,154			1,489
Excess tax benefit related to the exercise of stock options		(147	)		—
Origination of loans held for sale		(236,831	)		(191,142	)
Proceeds from sale of loans held for sale		245,194			186,618
Net gain on sale of loans		(5,573	)		(4,226	)
Gain on sale of available for sale securities		(380	)		(93	)
Gain on call of held to maturity securities		(149	)		—
Income from bank owned life insurance		(444	)		(203	)
(Gain) loss on sale of foreclosed assets		(22	)		(28	)
Stock-based compensation expense		619			457
Compensation expense related to common stock issued to 401(k) plan		356			294
Recognition of deferred gain on sale of loans		(27	)		(31	)
Recognition of deferred gain on sale of foreclosed assets		(8	)		(2	)
Net change in:
Accrued interest receivable and other assets		(4,406	)		101
Accrued interest payable and other liabilities		2,190			(705	)
Net cash from operating activities		18,956			552
Cash flows from investing activities
Available for sale securities:
Sales		52,064			34,087
Purchases		(467,067	)		(118,611	)
Maturities, prepayments and calls		187,222			69,465
Held to maturity securities:
Purchases		(88,550	)		(8,601	)
Maturities, prepayments and calls		9,394			8,655
Net change in loans		(335,238	)		(114,676	)
Purchase of bank owned life insurance		(10,344	)		—
Proceeds from sale of buildings held for sale		4,080			—
Purchase of restricted equity securities		(2,342	)		(745	)
Proceeds from sale of foreclosed assets		531			634
Purchases of premises and equipment, net		(692	)		(2,941	)
Net cash received from acquisition		—			12,197
Net cash from investing activities		(650,942	)		(120,536	)
Cash flows from financing activities
Increase in deposits		542,422			125,903
Increase (decrease) in federal funds purchased and repurchase agreements		(1,460	)		9,054
Proceeds from Federal Home Loan Bank advances		157,000			15,000
Repayment of Federal Home Loan Bank advances		(119,000	)		(11,000	)
Proceeds from exercise of common stock warrants		60			—
Proceeds from exercise of common stock options, including excess tax benefit		927			56
Proceeds from issuance of common stock, net of offering costs		50,423			(514	)
Dividends paid on preferred stock		(75	)		(75	)
Net cash from financing activities		630,297			138,424
Net change in cash and cash equivalents		(1,689	)		18,440
Cash and cash equivalents at beginning of period		49,347			18,217
Cash and cash equivalents at end of period	$	47,658		$	36,657
Supplemental information:
Interest paid	$	6,254		$	3,905
Income taxes paid		6,339			4,546
Non-cash supplemental information:
Transfers from loans to foreclosed assets	$	—		$	1,315
Fair value of stock and stock options issued related to MidSouth Bank acquisition	$	—		$	40,976

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. (“BCG”), together referred to as “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, which is nondeductible for tax purposes as this acquisition was a nontaxable transaction. The goodwill was calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date.

At September 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.

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 September 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

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition had 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 is being amortized utilizing an accelerated amortization method over an estimated economic life of 8.2 years. Through September 30, 2015, the Company has recorded amortization of core deposit intangibles totaling $861.

7

Pro forma information

Pro forma data for the nine-month period ended September 30, 2014 listed in the table below presents 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-month periods ended September 30, 2014 and 2015 and for the nine-month period ended September 30, 2015, there is no pro forma information for those periods.

	Nine Months Ended Sept 30, 2014
Net interest income	$	31,619
Net income available to common shareholders		6,353
Earnings per share—basic	$	0.82
Earnings per share—diluted	$	0.80

Supplemental pro forma earnings for the nine months ended September 30, 2014 were adjusted to exclude acquisition-related costs that were incurred during the nine months ended September 30, 2014 of $2,112. Supplemental pro forma earnings for the nine months ended September 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.

During the nine months ended September 30, 2014, the acquisition of MidSouth increased pro forma net interest income by approximately $6,049 and net income available to common shareholders by approximately $849.

NOTE 3—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at September 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
September 30, 2015
U.S. government sponsored entities and agencies	$	14,211	$	253	$	(46	)	$	14,418
Mortgage-backed securities: residential		508,817		6,868		(1,086	)		514,599
Mortgage-backed securities: commercial		20,169		161		—			20,330
State and political subdivisions		74,220		896		(43	)		75,073
Total	$	617,417	$	8,178	$	(1,175	)	$	624,420

	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 September 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
September 30, 2015
U.S. government sponsored entities and agencies	$	3,301	$	13	$	(42	)	$	3,272
Mortgage backed securities: residential		31,691		658		(318	)		32,031
State and political subdivisions		97,142		1,605		(22	)		98,725
Total	$	132,134	$	2,276	$	(382	)	$	134,028

8

	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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Proceeds	$	19,776		$	9,767		$	54,064		$	34,087
Gross gains		95			31			485			256
Gross losses		(90	)		(9	)		(105	)		(163	)

Calls of held to maturity securities were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Proceeds	$	—	$	—	$	2,300	$	—
Gross gains		—		—		149		—
Gross losses		—		—		—		—

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

	September 30, 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		7,761		8,009
Over ten years		80,670		81,482
Mortgage-backed securities: residential		508,817		514,599
Mortgage-backed securities: commercial		20,169		20,330
Total	$	617,417	$	624,420
Held to maturity
Three months or less	$	—	$	—
Over three months through one year		—		—
Over one year through five years		1,307		1,366
Over five years through ten years		3,024		3,091
Over ten years		96,112		97,540
Mortgage-backed securities: residential		31,691		32,031
Total	$	132,134	$	134,028

Securities pledged at September 30, 2015 and December 31, 2014 had a carrying amount of $467,080 and $366,764 and were pledged to secure public deposits and repurchase agreements.

At September 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.

9

The following table summarizes the securities with unrealized and unrecognized losses at September 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
September 30, 2015
Available for sale
U.S. government sponsored entities and agencies	$	—	$	—		$	1,654	$	(46	)	$	1,654	$	(46	)
Mortgage-backed securities: residential		77,224		(620	)		26,253		(466	)		103,477		(1,086	)
State and political subdivisions		2,981		(43	)		—		—			2,981		(43	)
Total available for sale	$	80,205	$	(663	)	$	27,907	$	(512	)	$	108,112	$	(1,175	)
	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	$	1,979	$	(21	)	$	979	$	(21	)	$	2,958	$	(42	)
Mortgage-backed securities: residential		1,800		(6	)		5,690		(312	)		7,490		(318	)
State and political subdivisions		4,671		(22	)		—		—			4,671		(22	)
Total held to maturity	$	8,450	$	(49	)	$	6,669	$	(333	)	$	15,119	$	(382	)
	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.

10

NOTE 4—LOANS

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

	September 30, 2015			December 31, 2014
Loans that are not PCI loans
Construction and land development	$	334,208		$	239,225
Commercial real estate:
Nonfarm, nonresidential		303,657			240,975
Other		9,478			5,377
Residential real estate:
Closed-end 1-4 family		144,080			130,631
Other		104,371			83,129
Commercial and industrial		219,341			76,570
Consumer and other		6,893			8,025
Loans before net deferred loan fees		1,122,028			783,932
Deferred loan fees, net		(2,115	)		(1,059	)
Total loans that are not PCI loans		1,119,913			782,873
PCI loans
Construction and land development	$	77		$	77
Commercial real estate:
Nonfarm, nonresidential		1,452			1,798
Other		—			—
Residential real estate:
Closed-end 1-4 family		707			706
Other		2			108
Commercial and industrial		1,675			1,624
Consumer and other		—			2
Total PCI loans		3,913			4,315
Allowance for loan losses		(9,744	)		(6,680	)
Total loans, net of allowance for loan losses	$	1,114,082		$	780,508

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

	Construction and Land Development		Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Three Months Ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	2,567	$	2,321		$	1,739		$	1,324		$	65		$	8,016
Provision (credit) for loan losses		461		135			(71	)		1,253			(54	)		1,724
Loans charged-off		—		—			(15	)		(15	)		(33	)		(63	)
Recoveries		—		—			6			—			61			67
Total ending allowance balance	$	3,028	$	2,456		$	1,659		$	2,562		$	39		$	9,744
Three Months Ended September 30, 2014
Allowance for loan losses:
Beginning balance	$	1,910	$	1,740		$	1,560		$	508		$	53		$	5,771
Provision (credit) for loan losses		231		173			192			72			(4	)		664
Loans charged-off		—		(540	)		(11	)		(4	)		—			(555	)
Recoveries		—		—			3			—			—			3
Total ending allowance balance	$	2,141	$	1,373		$	1,744		$	576		$	49		$	5,883

11

There was $5 in allowance for loan losses for PCI loans for the three months ended September 30, 2015. There was no allowance for loan losses for the three months ended September 30, 2014.

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2015 and 2014:

	Construction and Land Development		Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Nine Months Ended September 30, 2015
Allowance for loan losses:
Beginning balance	$	2,690	$	1,494		$	1,791		$	650		$	55		$	6,680
Provision (credit) for loan losses		338		962			(114	)		1,927			41			3,154
Loans charged-off		—		—			(32	)		(15	)		(121	)		(168	)
Recoveries		—		—			14			—			64			78
Total ending allowance balance	$	3,028	$	2,456		$	1,659		$	2,562		$	39		$	9,744
Nine Months Ended September 30, 2014
Allowance for loan losses:
Beginning balance	$	1,552	$	1,511		$	1,402		$	337		$	98		$	4,900
Provision (credit) for loan losses		589		402			304			243			(49	)		1,489
Loans charged-off		—		(540	)		(11	)		(4	)		—			(555	)
Recoveries		—		—			49			—			—			49
Total ending allowance balance	$	2,141	$	1,373		$	1,744		$	576		$	49		$	5,883

There was $5 in allowance for loan losses for PCI loans for the nine months ended September 30, 2015. There was no allowance for loan losses for the nine months ended September 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 September 30, 2015 and December 31, 2014. For purposes of this table, 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
September 30, 2015
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	80	$	—	$	80
Collectively evaluated for impairment		3,028		2,451		1,659		2,482		39		9,659
Purchased credit-impaired loans		—		5		—		—		—		5
Total ending allowance balance	$	3,028	$	2,456	$	1,659	$	2,562	$	39	$	9,744
Loans:
Individually evaluated for impairment	$	—	$	914	$	709	$	102	$	25	$	1,750
Collectively evaluated for impairment		334,208		312,221		247,742		219,239		6,868		1,120,278
Purchased credit-impaired loans		77		1,452		709		1,675		—		3,913
Total ending loans balance	$	334,285	$	314,587	$	249,160	$	221,016	$	6,893	$	1,125,941

12

	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 September 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 September 30, 2015, acquired non-PCI loans were recorded at $104,853, comprised of contractually unpaid principal totaling $107,563 net of discounts totaling $2,710. Management evaluated these loans for credit deterioration since acquisition and determined that no allowance for loan losses was necessary at September 30, 2015.

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
September 30, 2015
With no allowance recorded:
Commercial real estate:
Nonfarm, nonresidential	$	2,501	$	914	$	—
Residential real estate:
Other		709		709		—
Commercial and industrial		22		22		—
Consumer and other		25		25		—
Subtotal		3,257		1,670		—
With an allowance recorded:
Commercial and industrial		80		80		80
Subtotal		80		80		80
Total	$	3,337	$	1,750	$	80
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

13

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

	Three Months Ended September 30,				Nine Months Ended September 30,
Average Recorded Investment	2015		2014		2015		2014
With no allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential		918		211		873		71
Residential real estate:
Closed-end 1-4 family		33		—		188		—
Other		712		—		317		—
Commercial and industrial		23		—		77		—
Consumer and other		25		—		8		—
Subtotal		1,711		211		1,463		71
With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Commercial real estate:
Nonfarm, nonresidential		—		1,194		—		837
Residential real estate:
1-4 family		—		—		—		476
Commercial and industrial		90		64		50		65
Consumer and other		16		—		10		—
Subtotal		106		1,258		60		1,378
Total	$	1,817	$	1,469	$	1,523	$	1,449

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and nine months ended September 30, 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 September 30, 2015 and December 31, 2014:

	Nonaccrual		Loans Past Due Over 90 Days
September 30, 2015
Commercial real estate:
Nonfarm, nonresidential	$	835	$	—
Total	$	835	$	—
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.

14

The following table presents the aging of the recorded investment in past due loans as of September 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
September 30, 2015
Construction and land development	$	1,358	$	—	$	—	$	1,358	$	332,850	$	77	$	334,285
Commercial real estate:
Nonfarm, nonresidential		—		—		835		835		302,822		1,452		305,109
Other		—		—		—		—		9,478		—		9,478
Residential real estate:
Closed-end 1-4 family		839		—		—		839		143,241		707		144,787
Other		—		—		—		—		104,371		2		104,373
Commercial and industrial		123		—		—		123		219,218		1,675		221,016
Consumer and other		1		—		—		1		6,892		—		6,893
	$	2,321	$	—	$	835	$	3,156	$	1,118,872	$	3,913	$	1,125,941
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.

15

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table includes PCI loans, which are included in the “Substandard” column. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of September 30, 2015 and December 31, 2014:

	Pass		Special Mention		Substandard		Total
September 30, 2015
Construction and land development	$	334,208	$	—	$	77	$	334,285
Commercial real estate:
Nonfarm, nonresidential		302,387		—		2,722		305,109
Other		9,478		—		—		9,478
Residential real estate:
Closed-end 1-4 family		143,564		—		1,223		144,787
Other		103,663		—		710		104,373
Commercial and industrial		219,522		—		1,494		221,016
Consumer and other		6,868		—		25		6,893
	$	1,119,690	$	—	$	6,251	$	1,125,941
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:
Closed-end 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 September 30, 2015 and December 31, 2014. Contractually required principal and interest payments have been adjusted for estimated prepayments.

	Sept 30, 2015			Dec 31, 2014
Contractually required principal and interest	$	5,872		$	6,532
Non-accretable difference		(307	)		(1,270	)
Cash flows expected to be collected		5,565			5,262
Accretable yield		(1,652	)		(947	)
Carrying value of acquired loans		3,913			4,315
Allowance for loan losses		(5	)		—
Carrying value less allowance for loan losses	$	3,908		$	4,315

16

Management adjusted estimates of future expected losses, cash flows and renewal assumptions during the nine months ended September 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 nine-month periods ended September 30, 2015.

Activity during the three-month period ended September 30, 2015	Jun 30, 2015			Effect of Acquisitions		Income Accretion		All other Adjustments			Sept 30, 2015
Contractually required principal and interest	$	6,000		$	—	$	—	$	(128	)	$	5,872
Non-accretable difference		(973	)		—		839		(173	)		(307	)
Cash flows expected to be collected		5,027			—		839		(301	)		5,565
Accretable yield		(749	)		—		447		(1,350	)		(1,652	)
Carrying value of acquired loans	$	4,278		$	—	$	1,286	$	(1,651	)	$	3,913
Activity during the nine-month period ended September 30, 2015	Dec 31, 2014			Effect of Acquisitions		Income Accretion		All other Adjustments			Sept 30, 2015
Contractually required principal and interest	$	6,532		$	—	$	—	$	(660	)	$	5,872
Non-accretable difference		(1,270	)		—		839		124			(307	)
Cash flows expected to be collected		5,262			—		839		(536	)		5,565
Accretable yield		(947	)		—		637		(1,342	)		(1,652	)
Carrying value of acquired loans	$	4,315		$	—	$	1,476	$	(1,878	)	$	3,913

Troubled Debt Restructurings

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

NOTE 5—LOAN SERVICING

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

	September 30, 2015		December 31, 2014
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	461,121	$	414,222
Other		3,613		3,986

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Loan servicing fees, net:
Loan servicing fees	$	287		$	253		$	831		$	720
Amortization of loan servicing fees		(203	)		(180	)		(644	)		(547	)
Change in impairment		—			—			—			—
Total	$	84		$	73		$	187		$	173

The fair value of servicing rights was estimated by management to be approximately $4,264 at September 30, 2015. Fair value for September 30, 2015 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 11.5%. 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%.

17

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

2015	$	782
2016		552
2017		552

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 4,970 warrants exercised during the nine months ended September 30, 2015, for which the Company received cash proceeds of $60. The exercised warrants had an aggregate intrinsic value of $46 at the date of exercise. No warrants were exercised during the nine months ended September 30, 2014. At September 30, 2015, there were 26,907 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 September 30, 2015, there were 2,364,492 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.

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.

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

	September 30, 2015			September 30, 2014
Risk-free interest rate		1.84	%		1.81	%
Expected term		7.5 years			5.9 years
Expected stock price volatility		25.00	%		10.85	%
Dividend yield		0.22	%		0.23	%

The weighted average fair value of options granted for the nine months ended September 30, 2015 and 2014 were $6.41 and $4.12, respectively.

A summary of the activity in the stock option plans for the nine months ended September 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		226,782			20.78
Exercised		(93,754	)		11.53
Forfeited, expired, or cancelled		(4,417	)		19.02
Outstanding at period end		1,339,271		$	12.88		6.39	$	12,685
Vested or expected to vest		1,272,307		$	12.88		6.39	$	12,051
Exercisable at period end		829,072		$	10.76		5.06	$	9,606

The Company received cash proceeds of $780 for the options exercised during the nine months ended September 30, 2015. The exercised options had an aggregate intrinsic value of $839 at the date of exercise.

As of September 30, 2015, there was $1,733 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 1.7 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 nine months ended September 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		(25,075	)		14.08
Forfeited		(3,709	)		15.99
Non-vested at period end		105,864		$	15.89

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of September 30, 2015, there was $1,524 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 3.5 years.

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NOTE 7—REGULATORY CAPITAL MATTERS

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amended 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 Wall Street Reform and Consumer Protection Act.

Under these rules, the leverage and risk-based capital ratios of financial 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 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 September 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					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2015
Company common equity Tier 1 capital to risk-weighted assets	$	161,721		11.03	%	$	65,479		4.50	%	$	87,937		6.00	%
Company Total Capital to risk weighted assets	$	178,516		12.18	%	$	116,407		8.00	%	$	146,562		10.00	%
Company Tier 1 (Core) Capital to risk weighted assets	$	168,771		11.52	%	$	58,204		6.00	%	$	117,249		8.00	%
Company Tier 1 (Core) Capital to average assets	$	168,771		8.90	%	$	75,824		4.00	%	$	94,781		5.00	%
Bank common equity Tier 1 capital to risk-weighted assets	$	166,116		11.34	%	$	65,947		4.50	%	$	87,930		6.00	%
Bank Total Capital to risk weighted assets	$	175,860		12.00	%	$	117,239		8.00	%	$	146,549		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	166,116		11.34	%	$	87,930		6.00	%	$	117,239		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	166,116		8.76	%	$	75,824		4.00	%	$	94,781		5.00	%
December 31, 2014
Company Total Capital to risk weighted assets	$	114,475		12.30	%	$	74,464		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	107,795		11.58	%	$	37,232		4.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	107,795		8.57	%	$	50,291		4.00	%		N/A		N/A
Bank Total Capital to risk weighted assets	$	113,830		12.23	%	$	74,447		8.00	%	$	93,059		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	107,150		11.51	%	$	37,223		4.00	%	$	55,835		6.00	%
Bank Tier 1 (Core) Capital to average assets	$	107,150		8.52	%	$	50,279		4.00	%	$	62,849		5.00	%

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.

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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).

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.

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

	Fair Value Measurements at September 30, 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	$	—	$	14,418	$	—
Mortgage-backed securities-residential		—		514,599		—
Mortgage-backed securities-commercial		—		20,330		—
State and political subdivisions		—		75,073		—
Total securities available for sale	$	—	$	624,420	$	—
Loans held for sale	$	—	$	14,666	$	—
Mortgage banking derivatives	$	—	$	559	$	—
Financial Liabilities
Mortgage banking derivatives	$	—	$	131	$	—
	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 September 30, 2015, the unpaid principal balance of loans held for sale was $14,124 resulting in an unrealized gain of $542 included in gains on sale of loans. For the three months ended September 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 $248 and $217, respectively. For the nine months ended September 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 ($22) and $755, respectively. None of these loans are 90 days or more past due or on nonaccrual as of September 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 September 30, 2015 or December 31, 2014. For the three months ended September 30, 2015 and 2014, $0 and ($7), respectively, in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the nine months ended September 30, 2015 and 2014, $0 and $39, respectively, in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

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

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

follows:

	Carrying		Fair Value Measurements at September 30, 2015 Using:
	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	47,658	$	47,658	$	—	$	—	$	47,658
Securities available for sale		624,420		—		624,420		—		624,420
Certificates of deposit held at other financial institutions		250		—		250		—		250
Securities held to maturity		132,134		—		134,028		—		134,028
Loans held for sale		14,666		—		14,666		—		14,666
Net loans		1,114,082		—		—		1,112,007		1,112,007
Restricted equity securities		7,691		n/a		n/a		n/a		n/a
Servicing rights, net		3,415		—		4,264		—		4,264
Accrued interest receivable		6,108		7		3,032		3,069		6,108
Financial liabilities
Deposits	$	1,714,594	$	956,892	$	764,467	$	—	$	1,721,359
Federal funds purchased and repurchase agreements		37,618		—		37,618		—		37,618
Federal Home Loan Bank advances		57,000		—		57,123		—		57,123
Accrued interest payable		587		79		508		—		587
	Carrying		Fair Value Measurements at December 31, 2014 Using:
	Amount		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.

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

(e) Deposits:The fair values disclosed for demand deposits (e.g., interest and non-interest checking, 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.

NOTE 9—SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

Our subsidiary bank enters into borrowing arrangements with our retail business customers through agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its control as collateral against these one-day borrowing arrangements. At September 30, 2015 and December 31, 2014, these short-term borrowings totaled $37,618 and $22,253, respectively.

The following table provides additional details as of September 30, 2015:

As of September 30, 2015	U.S. Government Sponsored Entities and Agencies Securities			Mortgage- Backed Securities: Residential			Mortgage- Backed Securities: Commercial			Total
Market value of securities pledged	$	6,039		$	33,542		$	3,471		$	43,052
Borrowings related to pledged amounts	$	4,734		$	29,623		$	3,261		$	37,618
Market value pledged as a % of borrowings		128	%		113	%		106	%		114	%

Any risks related to these arrangements, primarily from market value changes, are minimized due to the overnight (one day) maturity and the additional collateral pledged over the borrowed amounts.

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NOTE 10—EARNINGS PER SHARE

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

	Three Months Ended September 30,
	2015			2014
Basic
Net income available to common shareholders	$	5,125		$	1,990
Less: earnings allocated to participating securities		(52	)		(27	)
Net income allocated to common shareholders	$	5,073		$	1,963
Weighted average common shares outstanding including participating securities		10,516,290			7,737,710
Less: Participating securities		(107,502	)		(105,129	)
Average shares		10,408,788			7,632,581
Basic earnings per common share	$	0.49		$	0.26
Diluted
Net income allocated to common shareholders	$	5,073		$	1,963
Weighted average common shares outstanding for basic earnings per common share		10,408,788			7,632,581
Add: Dilutive effects of assumed exercises of stock options		534,148			272,634
Add: Dilutive effects of assumed exercises of stock warrants		13,265			7,559
Average shares and dilutive potential common shares		10,956,201			7,912,774
Dilutive earnings per common share	$	0.46		$	0.25
	Nine Months Ended September 30,
	2015			2014
Basic
Net income available to common shareholders	$	11,341		$	5,504
Less: earnings allocated to participating securities		(127	)		(57	)
Net income allocated to common shareholders	$	11,214		$	5,447
Weighted average common shares outstanding including participating securities		9,668,497			5,840,620
Less: Participating securities		(108,617	)		(60,840	)
Average shares		9,559,880			5,779,780
Basic earnings per common share	$	1.17		$	0.94
Diluted
Net income allocated to common shareholders	$	11,214		$	5,447
Weighted average common shares outstanding for basic earnings per common share		9,559,880			5,779,780
Add: Dilutive effects of assumed exercises of stock options		466,955			170,470
Add: Dilutive effects of assumed exercises of stock warrants		13,257			5,033
Average shares and dilutive potential common shares		10,040,092			5,955,283
Dilutive earnings per common share	$	1.12		$	0.91

For the three months ended September 30, 2015, stock options for 226,040 shares of common stock were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 228,691 and 274,132 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2015 and 2014 because they were antidilutive.

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NOTE 11—CAPITAL OFFERING

The Company commenced its initial public 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		(5,017	)
Net proceeds from issuance of common stock	$	50,423

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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 nine months ended September 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.

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

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

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

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

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

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

Mortgage Servicing Rights

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

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

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

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 NINE MONTHS ENDED

SEPTEMBER 30, 2015 AND 2014

Overview

The Company reported net income of $5,150 and $11,416 for the three and nine months ended September 30, 2015, respectively, compared to $2,015 and $5,579 for the three and nine months ended September 30, 2014, respectively. 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 nine months ended September 30, 2015 was $5,125 and $11,341, respectively, compared to $1,990 and $5,504, respectively, for the three and nine months ended September 30, 2014. The primary reason for the increase in net earnings available to common shareholders for the three and nine months ended September 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 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 the capital leverage program that was 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. Through the execution of the leverage program, the Company purchased $394,142 in securities during the second and third quarters of 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 nine months ended September 30, 2015, totaled $16,736 and $42,220, respectively, compared to $11,127 and $25,570, respectively, for the same periods in 2014, an increase of $5,609 and $16,650, or 50.4% and 65.1%, between the respective periods. For the three and nine months ended September 30, 2015, interest income increased $6,609 and $18,950, or 52.1% and 63.8%, respectively, due to growth in both the loan and investment securities portfolios. In addition, the Company received a full payoff during the third quarter of 2015 on a purchase credit-impaired loan relationship that resulted in an increase in loan interest income for $1,155 for the three and nine months ended September 30, 2015, of which $785 was a reallocation of unaccretable difference related to the portion of the relationship that had been charged off prior to the Company’s purchase of the relationship. For the three and nine months ended September 30, 2015, interest expense increased $1,000 and $2,300, or 63.9% and 55.8%, respectively, primarily as a result of increases in volumes of both interest-bearing deposits and borrowings.

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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 nine months ended September 30, 2015 and 2014:

Average Balances⁽⁷⁾—Yields & Rates

(Dollars are in thousands)

	Three Months Ended September 30,
	2015								2014
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans(1)(6)	$	1,044,520		$	14,763		5.61	%	$	719,155		$	10,168		5.61	%
Securities available for sale(6)		674,991			4,422		2.60	%		324,574			2,007		2.45	%
Securities held to maturity(6)		74,332			632		3.37	%		57,611			407		2.80	%
Certificates of deposit at other financial institutions		250			2		3.17	%		250			1		1.59	%
Federal funds sold and other(2)		52,279			127		0.96	%		41,811			109		1.03	%
TOTAL INTEREST EARNING ASSETS	$	1,846,372		$	19,946		4.29	%	$	1,143,401		$	12,692		4.40	%
Allowance for loan losses		(8,576	)							(5,862	)
All other assets		74,570								60,508
TOTAL ASSETS	$	1,912,366							$	1,198,047
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Interest checking	$	246,584		$	170		0.27	%	$	190,294		$	111		0.23	%
Money market		514,669			703		0.54	%		355,488			567		0.63	%
Savings		37,888			44		0.46	%		27,253			32		0.47	%
Time deposits		648,605			1,500		0.92	%		322,329			736		0.91	%
Federal Home Loan Bank advances		57,000			79		0.55	%		33,065			80		0.96	%
Federal funds purchased and other(3)		45,261			69		0.60	%		24,442			39		0.63	%
TOTAL INTEREST BEARING LIABILITIES	$	1,550,007		$	2,565		0.66	%	$	952,871		$	1,565		0.65	%
Demand deposits		169,451								128,982
Other liabilities		11,368								2,290
Total shareholders’ equity		181,540								113,904
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,912,366							$	1,198,047
NET INTEREST SPREAD(4)(6)							3.63	%							3.75	%
NET INTEREST INCOME(6)				$	17,381							$	11,127
NET INTEREST MARGIN(5)(6)							3.73	%							3.86	%

⁽¹⁾  Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.

⁽²⁾  Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank and the Federal Home Loan Bank.

⁽³⁾  Includes repurchase agreements.

⁽⁴⁾  Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

⁽⁵⁾  Represents net interest income (annualized) divided by total average earning assets.

⁽⁶⁾  Interest income and rates for 2015 include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates for 2014 exclude the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾  Averages balances are average daily balances.

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	Nine Months Ended September 30,
	2015								2014
	Average Balance			Interest Inc / Exp		Average Yield / Rate			Average Balance			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans(1)(6)	$	933,950		$	38,127		5.46	%	$	552,157		$	22,466		5.44	%
Securities available for sale(6)		532,754			9,628		2.42	%		295,602			5,793		2.62	%
Securities held to maturity(6)		58,587			1,358		3.10	%		58,522			1,199		2.74	%
Certificates of deposit at other financial institutions		250			5		2.67	%		84			2		3.18	%
Federal funds sold and other(2)		50,207			325		0.87	%		32,041			230		0.96	%
TOTAL INTEREST EARNING ASSETS	$	1,575,748		$	49,443		4.20	%	$	938,406		$	29,690		4.23	%
Allowance for loan losses		(7,705	)							(5,466	)
All other assets		72,387								39,574
TOTAL ASSETS	$	1,640,430							$	972,514
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Interest checking	$	270,992		$	605		0.30	%	$	191,248		$	408		0.29	%
Money market		451,054			1,918		0.57	%		280,870			1,465		0.70	%
Savings		34,018			117		0.46	%		22,572			83		0.49	%
Time deposits		464,945			3,323		0.96	%		253,191			1,852		0.98	%
Federal Home Loan Bank advances		42,890			225		0.70	%		28,791			189		0.88	%
Federal funds purchased and other(3)		47,330			232		0.66	%		20,962			123		0.78	%
TOTAL INTEREST BEARING LIABILITIES	$	1,311,229		$	6,420		0.65	%	$	797,635		$	4,120		0.69	%
Demand deposits		159,093								84,908
Other liabilities		7,753								4,905
Total shareholders’ equity		162,355								85,066
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,640,430							$	972,514
NET INTEREST SPREAD(4)(6)							3.55	%							3.54	%
NET INTEREST INCOME(6)				$	43,023							$	25,570
NET INTEREST MARGIN(5)(6)							3.65	%							3.64	%

⁽¹⁾  Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and costs. Non-accrual loans are included in total loan balances.

⁽²⁾  Includes federal funds sold, capital stock in the Federal Reserve Bank and Federal Home Loan Bank, and interest-bearing deposits at the Federal Reserve Bank and the Federal Home Loan Bank.

⁽³⁾  Includes repurchase agreements.

⁽⁴⁾  Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

⁽⁵⁾  Represents net interest income (annualized) divided by total average earning assets.

⁽⁶⁾  Interest income and rates for 2015 include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates for 2014 exclude the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾  Averages balances are average daily balances.

Interest-earning assets averaged $1,846,372 and $1,575,748, respectively, during the three and nine months ended September 30, 2015 compared to $1,143,401 and $938,406, respectively, for the same periods in 2014, an increase of $702,971 and $637,342, or 61.5% and 67.9%, respectively. This increase was primarily due to organic growth in both the loan and securities portfolios over the past year, increases to the securities 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 45.2% and 69.1% and average investment securities increased 96.1% and 67.0%, respectively, when comparing the three and nine months ended September 30, 2015 with the same periods in 2014. When comparing the three and nine months ended September 30, 2015 and 2014, the yield on average interest earning assets decreased 11 basis points and three basis points to 4.29% and 4.20%, respectively, compared to 4.40% and 4.23%, for the same periods during 2014.

The tax-equivalent yield on available-for-sale securities was 2.60% and 2.42%, respectively, during the three and nine months ended September 30, 2015 compared to 2.45% and 2.62%, respectively, for the same periods in 2014. The primary driver for the increase in yield during the three months ended September 30, 2015 compared with the same period in 2014 was due to the volume of tax-exempt securities purchased during the second and third quarters of 2015, which increased the yields by 28 basis points when considering tax equivalent adjustments. The primary driver for the decrease in yield during the nine months ended September 30, 2015 compared with the same period in 2014 was due to decreases in the weighted coupon rate, which decreased by 24 basis points between the two periods.

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Interest-bearing liabilities averaged $1,550,007 and $1,311,229, respectively, during the three- and nine-month periods ended September 30, 2015 compared to $952,871 and $797,635, respectively, for the same periods in 2014, an increase of $597,136 and $513,594, or 62.7% and 64.4%, respectively. Total average interest-bearing deposits grew $552,382 and $473,127, including increases in average brokered deposits of $461,131 and $229,202 and average interest-bearing public funds deposits of $23,313 and $61,552 for the three- and nine-month periods ended September 30, 2015, respectively, as compared to the same periods during 2014. The increases in brokered deposits were directly attributable to the Company’s leverage program that began in the second quarter of 2015 and the rapid growth in the loan and portfolio. That growth also resulted in increases in average Federal Home Loan Bank advances of $23,935 and $14,099, respectively, and average other borrowed funds of $20,819 and $26,368, respectively, for the three- and nine-month periods ended September 30, 2015 as compared to the same periods during 2014. The cost of interest-bearing liabilities for the three months ended September 30, 2015 increased by one basis point when comparing the cost of interest-bearing liabilities with the same period of 2014. The cost of interest-bearing liabilities for the nine months ended September 30, 2015 decreased by four basis points when comparing the cost of interest-bearing liabilities with the same period of 2014, with the largest declines in interest costs being reported in money market deposits, in Federal Home Loan Bank advances and in other borrowed funds.

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 September 30, 2015 versus September 30, 2014
	Volume		Rate			Net Change
INTEREST INCOME
Loans	$	4,595	$	—		$	4,595
Securities available for sale		2,165		250			2,415
Securities held to maturity		119		106			225
Certificates of deposit at other financial institutions		—		1			1
Federal funds sold and other		28		(10	)		18
TOTAL INTEREST INCOME	$	6,907	$	347		$	7,254
INTEREST EXPENSE
Deposits
Interest checking	$	35	$	24		$	59
Money market accounts		256		(120	)		136
Savings		13		(1	)		12
Time deposits		741		23			764
Federal Home Loan Bank advances		58		(59	)		(1	)
Other borrowed funds		34		(4	)		30
TOTAL INTEREST EXPENSE	$	1,137	$	(137	)	$	1,000
NET INTEREST INCOME	$	5,770	$	484		$	6,254

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	Net change nine months ended September 30, 2015 versus September 30, 2014
	Volume		Rate			Net Change
INTEREST INCOME
Loans	$	15,521	$	140		$	15,661
Securities available for sale		4,633		(798	)		3,835
Securities held to maturity		1		158			159
Certificates of deposit at other financial institutions		—		3			3
Federal funds sold and other		129		(34	)		95
TOTAL INTEREST INCOME	$	20,284	$	(531	)	$	19,753
INTEREST EXPENSE
Deposits
Interest checking	$	167	$	30		$	197
Money market accounts		883		(430	)		453
Savings		42		(8	)		34
Time deposits		1,533		(62	)		1,471
Federal Home Loan Bank advances		93		(57	)		36
Other borrowed funds		153		(44	)		109
TOTAL INTEREST EXPENSE	$	2,871	$	(571	)	$	2,300
NET INTEREST INCOME	$	17,413	$	40		$	17,453

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 $1,724 and $664 for the three months ended September 30, 2015 and 2014, respectively, and $3,154 and $1,489 for the nine months ended September 30, 2015 and 2014, respectively. The higher provision for the nine months ended September 30, 2015 compared to the same period in 2014 is due primarily to the Company’s loan growth during the three and nine months ended September 30, 2015, compared to the same periods in 2014. The Company’s provision related to commercial and industrial loans increased from $243 for the nine months ended September 30, 2014 to $1,927 for the nine months ended September 30, 2015 due to the growth in commercial and industrial loans, which includes growth produced by the Company’s healthcare lending team over the past two quarters. Nonperforming loans at September 30, 2015 totaled $835 compared to $1,151 at December 31, 2014, representing 0.05% and 0.14% of total loans, respectively.

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Non-Interest Income

Non-interest income for the three and nine months ended September 30, 2015 was $3,798 and $9,864, respectively, compared to $3,274 and $7,125, respectively, for the same periods in 2014. The following is a summary of the components of non-interest income (in thousands):

	Three Months Ended September 30,					$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Service charges on deposit accounts	$	44	$	13		$	31			238.5	%
Other service charges and fees		679		600			79			13.2	%
Net gains on sale of loans		2,463		1,875			588			31.4	%
Loan servicing fees, net of amortization of servicing assets		84		73			11			15.1	%
Gain on sales and calls of investment securities, net		5		22			(17	)		(77.3	%)
Net gain (loss) on foreclosed assets		3		(3	)		6			200.0	%
Wealth management		327		287			40			13.9	%
Other		193		407			(214	)		(52.6	%)
Total non-interest income	$	3,798	$	3,274		$	524			16.0	%

	Nine Months Ended September 30,				$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Service charges on deposit accounts	$	78	$	37	$	41			110.8	%
Other service charges and fees		1,987		1,149		838			72.9	%
Net gains on sale of loans		5,573		4,226		1,347			31.9	%
Loan servicing fees, net of amortization of servicing assets		187		173		14			8.1	%
Gain on sales and calls of investment securities, net		529		93		436			468.8	%
Net gain (loss) on foreclosed assets		30		28		2			7.1	%
Wealth management		914		364		550			151.1	%
Other		566		1,055		(489	)		(46.4	%)
Total non-interest income	$	9,864	$	7,125	$	2,739			38.4	%

Other service charges and fees for the three and nine months ended September 30, 2015 increased $79 and $838, or 13.2% and 72.9%, 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 ended September 30, 2015 were $2,463, an increase of $588, or 31.4%, from the same period during 2014. The increase was primarily due to 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. Net gains for the nine months ended September 30, 2015 were $5,573, an increase of $1,347, or 31.9%, from the same period in 2014. The increase was due to increased mortgage loan origination volume and 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 nine months ended September 30, 2015 with the same period in 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 nine months ended September 30, 2015, net loan servicing fees were $84 and $187, respectively, compared to $73 and $173, respectively, for the three and nine months ended September 30, 2014. The increase in loan servicing fees when comparing the three and nine months ended September 30, 2015 with the same period in 2014 was primarily related to an increase in the volume of mortgage loans and originated and servicing premiums retained.

34

Net gain on sale of investment securities decreased $17, or 77.3%, during the three months ended September 30, 2015 when compared with the same period in 2014. For the nine months ended September 30, 2015 net gain on sale of investment securities increased 468.8% when compared with the same period in 2014. The significant increase for the nine months ended September 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.

Wealth management income for the three and nine months ended September 30, 2015 increased $40 and $550, or 13.9% and 151.1%, respectively, in comparison with the same periods in 2014. The increase in the three-month comparative periods was due to the increase in accounts under management. The increase in the nine-month comparative periods was 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. There have been a full nine months of earnings recorded in 2015 that included the MidSouth wealth management team’s client versus only three months of earnings in 2014.

Other non-interest income decreased by $214, or 52.6%, when comparing third quarter 2015 with third quarter 2014, and it decreased by $489, or 46.4%, when comparing the nine months ended September 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 had no compliance consulting fee income in 2015 due to the sale of BCG.

Non-interest Expense

Non-interest expense for the three and nine months ended September 30, 2015 was $10,853 and $31,046, respectively, compared to $10,389 and $21,959 compared to the same periods in 2014. These increases were the result of the following components listed in the table below:

	Three Months Ended September 30,				$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Salaries and employee benefits	$	6,208	$	6,144	$	64			1.0	%
Occupancy and equipment		1,683		1,443		240			16.6	%
FDIC assessment expense		362		181		181			100.0	%
Marketing		277		224		53			23.7	%
Professional fees		516		961		(445	)		(46.3	%)
Amortization of core deposit intangible		160		184		(24	)		(13.0	%)
Indirect expenses related to public offering		—		—		—			NM
Other		1,647		1,252		395			31.5	%
Total non-interest expense	$	10,853	$	10,389	$	464			4.5	%

	Nine Months Ended September 30,				$ Increase (Decrease)			% Increase (Decrease)
	2015		2014
Salaries and employee benefits	$	17,960	$	13,494	$	4,466			33.1	%
Occupancy and equipment		4,961		3,238		1,723			53.2	%
FDIC assessment expense		792		420		372			88.6	%
Marketing		695		470		225			47.9	%
Professional fees		1,382		1,594		(212	)		(13.3	%)
Amortization of core deposit intangible		499		184		315			171.2	%
Indirect expenses related to public offering		314		—		314			NM
Other		4,443		2,559		1,884			73.6	%
Total non-interest expense	$	31,046	$	21,959	$	9,087			41.4	%

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 nine months ended September 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, while the number of full-time equivalent employees has been stable when comparing September 30, 2015 and

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2014, the composition of the Bank’s personnel has changed with the addition of several experienced lenders during 2015. When comparing the nine months ended September 30, 2015 and 2014, there were nine months of expenses in 2015 related to the MidSouth acquisition compared to only three months of expenses in 2014 related to the acquisition.

The decrease in professional fees for the three- and nine-month periods ended September 30, 2015 is attributable to the expenses that were incurred in 2014 relative to the Company’s acquisition of MidSouth.

The increase in amortization expense for the core deposit intangible for the nine months ended September 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. Only three months of amortization was recognized during the nine months ended September 30, 2014, as compared with amortization expense that was recognized for a full nine months during 2015.

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

For the three and nine months ended September 30, 2015, other non-interest expenses increased $395 and $1,884, or 31.5% and 73.6%, respectively from the same periods in 2014. Of the increases for the three and nine months ended September 30, 2015, $192 and $351, respectively, is attributed to the increase in lending-related expenses associated with the Company’s growing lending portfolio. Customers’ increased usage of technology-based services, such as ATM/debit card transactions, internet banking transactions, and other types of automated transactions accounted for $325 of the increase for the nine months ended September 30, 2015 when compared with the same period of 2014. Much of the electronic banking expense increase was attributable to the MidSouth acquisition, which added more consumers to the Company’s customer base. The remaining increases of $203 and $1,208, respectively, 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.

Income Tax Expense

The Company recognized income tax expense for the three and nine months ended September 30, 2015, of $2,807 and $6,468, respectively, compared to $1,333 and $3,668, respectively, for the three and nine months ended September 30, 2014. The Company’s year-to-date income tax expense for the period ended September 30, 2015 reflects an effective income tax rate of 36.2% compared to 39.7% for the same period in 2014. The decrease in the effective tax rate resulted from several factors, as follows: increased tax-exempt investment income during the nine months ended September 30, 2015, unfavorable permanent differences incurred during the nine months ended September 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 SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

Overview

The Company’s total assets increased by $646,711, or 47.7%, from December 31, 2014 to September 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 September 30, 2015 and December 31, 2014 were $1,123,826 and $787,188, respectively, an increase of $336,638, or 42.8%. 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 has been focused on commercial and industrial lending, with emphasis on lending within the health care industry, thereby helping to diversify the Company’s loan mix. During the third quarter, this team added over $64 million in loans with a number of approved loans in their pipeline to be closed during the fourth quarter of 2015.

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

Types of Loans	September 30, 2015						December 31, 2014
	Amount			% of Total Loans			Amount			% of Total Loans
Total loans, excluding PCI loans
Real estate:
Construction and land development	$	334,208			29.7	%	$	239,225			30.4	%
Commercial		313,135			27.8	%		246,352			31.3	%
Residential		248,451			22.1	%		213,760			27.1	%
Commercial and industrial		219,341			19.5	%		76,570			9.7	%
Consumer and other		6,893			0.6	%		8,025			1.0	%
Total loans—gross, excluding PCI loans		1,122,028			99.7	%		783,932			99.5	%
Total PCI loans (note 1)
Real estate:
Construction and land development	$	77			NM		$	77			NM
Commercial		1,452			0.1	%		1,798			0.2	%
Residential		709			0.1	%		814			0.1	%
Commercial and industrial		1,675			0.1	%		1,624			0.2	%
Consumer and other		—			—	%		2			NM
Total loans—gross PCI loans		3,913			0.3	%		4,315			0.5	%
Total gross loans		1,125,941			100.0	%		788,247			100.0	%
Less: deferred loan fees, net		(2,115	)					(1,059	)
Allowance for loan losses		(9,744	)					(6,680	)
Total loans, net allowance for loan losses	$	1,114,082						780,508

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

As presented in the previous table, gross loans increased 42.8% during the first nine months of 2015, primarily due to organic growth as a result of continued market penetration and the strength of the local economies the Company serves. During this period, the Company experienced growth in real estate loans of 27.9% with the majority of the growth occurring in the construction and land development category, which increased 39.7% during the first nine months of 2015. The Company also experienced strong growth of 182.7% in the commercial and industrial segment during the first nine 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 79.8% of the loan portfolio at September 30, 2015. The following chart displays the composition of the Company’s loan portfolio as of September 30, 2015 and December 31, 2014, broken down into the three major segments or types of loans that the Company produces and stated as a percentage of total loans:

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The largest portion of the real estate loan segments as of September 30, 2015, was construction and land development loans, which totaled 37.2% of real estate loans and was broken down into three sub-segments: residential construction (27.6% of real estate loans), commercial construction (5.6% of real estate loans), and acquisition and development (4.0% of real estate loans). Construction and land development loans totaled $334,285 and made up 29.7% of the total loan portfolio at September 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 $314,587 at September 30, 2015, and comprised 35.0% of real estate loans and 28.0% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

The residential real estate classification primarily 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 $249,160 and comprised 27.7% of real estate loans and 22.1% of total loans at September 30, 2015.

Commercial and industrial loans totaled $221,016 at September 30, 2015 and grew 182.7% during the first nine months of 2015. As indicated in the chart above, loans in this classification comprised 19.6% of total loans at September 30, 2015, as compared to 9.9% as of December 31, 2014. This change reflects the Company’s specific actions that were taken to diversify the loan portfolio. The commercial and industrial classification primarily consists of commercial loans to healthcare companies and small-to-medium sized businesses. With the addition of the healthcare lending team during the second quarter of 2015, the composition of that portfolio segment has changed and will likely continue to change to reflect the addition of healthcare and other types of commercial loans. Since becoming part of the Company, the healthcare lending team has produced $89,000 in loan volume.

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at September 30, 2015, excluding unearned net fees and costs.

Loan Maturity Schedule

	September 30, 2015
	One year or less		Over one year to five years		Over five years		Total
Real estate:
Construction and land development	$	173,194	$	122,132	$	38,959	$	334,285
Commercial		19,328		129,130		166,129		314,587
Residential		18,824		94,105		136,231		249,160
Commercial and industrial		48,441		132,889		39,686		221,016
Consumer and other		2,159		3,782		952		6,893
Total	$	261,946	$	482,038	$	381,957		1,125,941
Fixed interest rate	$	155,680	$	310,399	$	170,868	$	636,947
Variable interest rate		106,266		171,639		211,089		488,994
Total	$	261,946	$	482,038	$	381,957		1,125,941

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.

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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.

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

	September 30, 2015							December 31, 2014							Increase (Decrease)
	Loan Balance		ALLL Balance		%			Loan Balance		ALLL Balance		%			Loan Balance			ALLL Balance		Change
Non impaired loans	$	1,015,425	$	9,659		0.95	%	$	626,180	$	6,662		1.06	%	$	389,245		$	2,997		-11 bps
MidSouth loans (Note 1)		104,853		—		—	%		156,806		—		—	%		(51,953	)		—		—
Impaired loans		1,750		80		4.57	%		946		18		1.90	%		804			62		267 bps
Non-PCI loans		1,122,028		9,739		0.87	%		783,932		6,680		0.85	%		338,096			3,059		2 bps
PCI loans		3,913		5		0.13	%		4,315		—		—	%		(402	)		5		13bps
Total loans	$	1,125,941	$	9,744		0.87	%	$	788,247	$	6,680		0.85	%	$	337,694		$	3,064		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 September 30, 2015 was $2,710 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 September 30, 2015 related to the acquired loans.

At September 30, 2015, the allowance for loan losses was $9,744, compared to $6,680 at December 31, 2014. The allowance for loan losses as a percentage of total loans was 0.87% and 0.85% at September 30, 2015 and December 31, 2014, respectively. Loan growth during this period is the primary reason for the increase in the allowance amount.

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

	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
Beginning balance	$	6,680		$	4,900
Loans charged-off:
Residential real estate		32			11
Construction & land development		—			—
Commercial real estate		—			540
Commercial & industrial		15			4
Consumer and other		121			—
Total loans charged-off		168			555
Recoveries on loans previously charged-off:
Residential real estate		14			49
Construction & land development		—			—
Commercial real estate		—			—
Commercial & industrial		—			—
Consumer and other		64			—
Total loan recoveries		78			49
Net (charge-offs) recoveries		(90	)		(506	)
Provision for loan losses charged to expense		3,154			1,489
Total allowance at end of period	$	9,744		$	5,883
Total loans, gross, at end of period(1)	$	1,125,941		$	720,148
Average gross loans(1)	$	919,865		$	541,105
Allowance to total loans		0.87	%		0.82	%
Net charge-offs (recoveries) to average loans, annualized		0.01	%		0.13	%

⁽¹⁾ Loan balances exclude loans held for sale

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

	September 30, 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:
Construction and land development	$	3,028		31.1	%		29.7	%	$	2,690		40.3	%		30.4	%
Commercial		2,456		25.2	%		28.0	%		1,494		22.4	%		31.5	%
Residential		1,659		17.0	%		22.1	%		1,791		26.8	%		27.2	%
Total real estate		7,143		73.3	%		79.8	%		5,975		89.5	%		89.1	%
Commercial and industrial		2,562		26.3	%		19.6	%		650		9.7	%		9.9	%
Consumer and other		39		0.4	%		0.6	%		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.

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The primary component of non-performing loans is non-accrual loans, which as of September 30, 2015 totaled $835. 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 September 30, 2015.

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

	September 30, 2015			December 31, 2014
Non-accrual loans	$	835		$	835
Past due loans 90 days or more and still accruing interest		—			316
Total nonperforming loans		835			1,151
Foreclosed real estate (“OREO”)		206			715
Total nonperforming assets		1,041			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		936	%		580	%

As of September 30, 2015, there was one loan 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	$	—		—	%		—
Construction & land development		—		—	%		—
Commercial real estate		835		100.0	%		1
Commercial & industrial		—		—	%		—
Consumer		—		—	%		—
Total non-accrual loans	$	835		100.0	%		1

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 and municipal securities, were $624,420 at September 30, 2015, compared to $395,705 at December 31, 2014, an increase of $228,715 or 57.8%.

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 $132,134 at September 30, 2015, compared to $53,332 at December 31, 2014, an increase of $78,802, or 147.8%.

The increase in investment securities was primarily attributed to the securities purchased during the second and third quarters of 2015 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 combined portfolios represented 37.8% and 33.1% of total assets at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of $7,691 and $5,349 at September 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 September 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.

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Bank Premises and Equipment

Bank premises and equipment totaled $9,360 at September 30, 2015 compared to $9,664 at December 31, 2014, a decrease of $304, or 3.1%.

Buildings Held for Sale

At September 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 September 30, 2015, total deposits were $1,714,594, compared to $1,172,233 at December 31, 2014, an increase of $542,361, or 46.3%. The growth in deposits is primarily attributable to growth in brokered deposits, which was an integral part of the Company’s funding plan in the capital leverage program initiated during the second quarter of 2015. The Company’s deposits are broken out in the table below:

	Sept 30, 2015		Dec 31, 2014		Change ($)			Change (%)
Deposits:
Non-interest bearing deposits	$	177,452	$	150,337	$	27,115			18.0	%
Interest checking deposits:
Public funds deposits		126,767		210,587		(83,820	)		(39.8	)
Non-public funds deposits		101,219		87,930		13,289			15.1
Brokered deposits		1,652		1,301		351			27.0
Total interest checking		229,638		299,818		(70,180	)		(23.4	)
Money market deposits:
Public funds deposits		116,518		131,592		(15,074	)		(11.5	)
Non-public funds deposits		199,583		207,600		(8,017	)		(3.9	)
Brokered deposits		195,036		32,017		163,019			509.2
Total money market deposits		511,137		371,209		139,928			37.7
Savings deposits		38,665		29,675		8,990			30.3
Time deposits:
Non-brokered time deposits		288,898		268,101		20,797			7.8
Brokered time deposits†		468,804		53,093		415,711			783.0
Total time deposits		757,702		321,194		436,508			135.9
Total deposits	$	1,714,594	$	1,172,233	$	542,361			46.3	%

^†  Brokered time deposits included public funds time deposits of $52,011 and $8,133 at September 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.

Total brokered deposits increased from $86,411 at December 31, 2014 to $665,492 at September 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 and fund loan growth to earn an interest rate spread over the brokered deposits, thereby increasing the Company’s net interest income.

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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 September 30, 2015, non-brokered public funds totaled $243,285, compared with $342,179 at December 31, 2014, a decrease of $98,894, or 28.9%.

Time deposits excluding brokered deposits as of September 30, 2015, amounted to $288,898, compared to $268,101 as of December 31, 2014, an increase of $20,797, or 7.8%. Noninterest-bearing checking deposits grew $27,115, or 18.0%, and non-public funds interest checking accounts grew $13,289, or 15.1%, respectively when comparing deposit balances from September 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

	September 30, 2015
Three months or less	$	29,292
Three through six months		12,209
Six through twelve months		57,478
Over twelve months		98,768
Total	$	197,747

Federal Funds Purchased and Repurchase Agreements

As of September 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 $37,618 as of September 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 September 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.

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

Scheduled Maturities	Amount		Weighted Average Rates
2015	$	40,000		0.22	%
2016		—		—	%
2017		10,000		1.27	%
2018		7,000		1.61	%
Total	$	57,000		0.57	%

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 September 30, 2015, $624,420 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another $132,134 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $467,080 of the total $756,554 investment securities portfolio on hand at September 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.

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Shareholders’ Equity

On March 26, 2015, The Company launched an initial public offering of the Company’s common stock 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		(5,017	)
Net proceeds from issuance of common stock	$	50,423

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 September 30, 2015, the Company had commitments to make loans of $42,041, unused lines of credit of $371,643, and outstanding standby letters of credit of $10,595.

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;

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

• “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.

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

(Amounts in thousands, except share/per share data and percentages)	As of or for the Three Months Ended
	Sept 30, 2015			Jun 30, 2015			Mar 31, 2015			Dec 31, 2014			Sept 30, 2014
Total shareholders’ equity	$	187,610		$	177,081		$	178,541		$	121,799		$	116,454
Less: Preferred stock		10,000			10,000			10,000			10,000			10,000
Total common shareholders’ equity		177,610			167,081			168,541			111,799			106,454
Less: Goodwill and other intangible assets		11,373			11,538			11,709			11,886			12,074
Tangible common shareholders’ equity	$	166,237		$	155,543		$	156,832		$	99,913		$	94,380
Common shares outstanding		10,524,630			10,502,671			10,465,930			7,756,411			7,739,644
Tangible book value per share	$	15.80		$	14.81		$	14.99		$	12.88		$	12.19
Net income available to common shareholders	$	5,125		$	3,109		$	3,107		$	2,810		$	1,990
Average tangible common equity		160,071			157,959			103,475			97,630			96,310
Return on average tangible common equity		12.70	%		7.89	%		12.18	%		11.42	%		8.20	%
Efficiency Ratio:
Net interest income	$	16,736		$	13,327		$	12,157		$	12,123		$	11,127
Noninterest income		3,798			2,851			3,215			2,926			3,274
Operating revenue		20,534			16,178			15,372			15,049			14,401
Expense
Total noninterest expense		10,853			10,572			9,621			9,863			10,389
Efficiency ratio		52.85	%		65.35	%		62.59	%		65.54	%		72.14	%
Reported yield on loans(1)		5.60	%		5.37	%		5.35	%		5.67	%		5.92	%
Effect of accretion income on acquired loans		(0.42	%)		(0.32	%)		(0.28	%)		(0.36	%)		(0.43	%)
Adjusted yield on loans		5.18	%		5.05	%		5.07	%		5.31	%		5.49	%
Reported net interest margin(1)		3.60	%		3.51	%		3.65	%		3.97	%		3.86	%
Effect of accretion income on acquired loans		(0.24	%)		(0.19	%)		(0.18	%)		(0.23	%)		(0.27	%)
Effect of premium amortization of acquired deposits		(0.00	%)		(0.01	%)		(0.01	%)		(0.02	%)		(0.02	%)
Adjusted net interest margin		3.36	%		3.31	%		3.46	%		3.72	%		3.57	%

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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
	Sept 30, 2015		Jun 30, 2015		Mar 31, 2015		Dec 31, 2014		Sept 30, 2014
Income Statement Data ($):
Interest income		19,301		15,413		13,926		13,742		12,692
Interest expense		2,565		2,086		1,769		1,619		1,565
Net interest income		16,736		13,327		12,157		12,123		11,127
Provision for loan losses		1,724		805		625		885		664
Noninterest income		3,798		2,851		3,215		2,926		3,274
Noninterest expense		10,853		10,572		9,621		9,863		10,389
Net Income before taxes		7,957		4,801		5,126		4,301		3,348
Income tax expense		2,807		1,667		1,994		1,466		1,333
Net income		5,150		3,134		3,132		2,835		2,015
Net income available to common shareholders		5,125		3,109		3,107		2,810		1,990
Earnings per share, basic		0.49		0.30		0.39		0.36		0.26
Earnings per share, diluted		0.46		0.28		0.37		0.34		0.25
Profitability (%)
Return on average assets		1.07		0.79		0.90		0.88		0.67
Return on average equity		11.25		7.00		10.14		9.40		7.02
Return on average tangible common equity		12.70		7.89		12.18		11.42		8.20
Efficiency ratio		52.85		65.35		62.59		65.54		72.14
Net Interest margin(1)		3.60		3.51		3.65		3.97		3.86
Balance Sheet Data ($):
Loans (including HFS)		1,138,492		979,033		897,001		805,650		744,927
Loan loss reserve		9,744		8,016		7,308		6,680		5,883
Cash		47,658		43,413		48,580		49,347		36,657
Securities		756,554		681,999		507,170		449,037		403,043
Goodwill		9,124		9,124		9,124		9,124		9,121
Intangible assets		2,249		2,414		2,585		2,762		2,953
Assets		2,002,538		1,766,752		1,509,430		1,355,827		1,238,579
Deposits		1,714,594		1,491,986		1,271,602		1,172,233		1,051,558
Liabilities		1,814,928		1,589,671		1,330,889		1,234,028		1,122,125
Total equity		187,610		177,081		178,541		121,799		116,454
Common equity		177,610		167,081		168,541		111,799		106,454
Tangible Common equity		166,237		155,543		156,832		99,913		94,380
Asset Quality (%)
Nonperforming loans/ total loans(2)		0.07		0.10		0.14		0.15		0.47
Nonperforming assets / total loans(2) + OREO		0.09		0.12		0.19		0.24		0.70
Loan loss reserve / total loans(2)		0.87		0.83		0.84		0.85		0.82
Net charge-offs / average total loans(2)		0.00		0.04		0.00		0.04		0.30
Capital (%)
Tangible common equity to tangible assets		8.35		8.86		10.47		7.43		7.70
Leverage ratio		8.90		10.19		11.41		8.57		8.83
Tier 1 common ratio		11.03		12.29		14.01		10.51		11.17
Tier 1 risk-based capital ratio		11.52		12.86		14.95		11.58		12.35
Total risk-based capital ratio		12.18		13.50		15.64		12.30		13.05

⁽¹⁾  Net interest margins shown in the table above do not include tax-equivalent adjustments.

⁽²⁾  Total loans in this ratio exclude loans held for sale.

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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 ended September 30, 2015, net interest income was estimated to increase 0.95% and 0.92% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to decrease 4.72% and 18.17% 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.

47

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

Projected Interest Rate Change	Net Interest Income		Net Interest Income $ Change from Base		% Change from Base
-200		50,130		-11,134		-18.17	%
-100		58,374		-2,891		-4.72	%
Base		61,264		—		0.00	%
+100		61,846		581		0.95	%
+200		61,826		562		0.92	%
+300		62,020		756		1.23	%
+400		62,795		1,530		2.50	%

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 September 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.

48

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.

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 September 30, 2015, we had 10,524,630 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. On October 28, 2015, we filed 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 Omnibus Equity Incentive Plan (the “Plan”). The remaining 1,118,439 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. Accordingly, the market price of our common stock could be adversely affected by actual or 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 third 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
07/02/2015		200	Warrants Exercised	$	12.00	$	2,400.00
		250	Warrants Exercised	$	12.00	$	3,000.00
		25	Warrants Exercised	$	12.00	$	300.00
07/10/2015		125	Warrants Exercised	$	12.00	$	1,500.00
		250	Warrants Exercised	$	12.00	$	3,000.00
08/17/2015		30	Warrants Exercised	$	12.00	$	360.00
		30	Warrants Exercised	$	12.00	$	360.00
08/24/2015		3,563	Options Exercised	$	10.00	$	35,630.00
		703	Options Exercised	$	10.00	$	7,030.00
		3,673	Options Exercised	$	11.75	$	43,157.75
		1,257	Options Exercised	$	10.00	$	12,570.00
		1,805	Options Exercised	$	10.50	$	18,952.50
		2,985	Options Exercised	$	12.00	$	35,820.00
		752	Options Exercised	$	13.00	$	9,776.00
		782	Options Exercised	$	13.50	$	10,557.00
		634	Options Exercised	$	20.69	$	13,117.46
09/02/2015		185	Warrants Exercised	$	12.00	$	2,220.00
		150	Warrants Exercised	$	12.00	$	1,800.00
09/10/2015		125	Warrants Exercised	$	12.00	$	1,500.00

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

49

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS

Exhibit No.	Description
10.1	Lease Agreement, by and between The Grandview Eight, L.L.C. 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 July 29, 2015).
10.2	Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 29, 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.

50

SIGNATURES

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

	FRANKLIN FINANCIAL NETWORK, INC.
November 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	Lease Agreement, by and between The Grandview Eight, L.L.C. 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 July 29, 2015).
10.2	Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on September 29, 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.