Franklin Financial Network (FSB) 10-Q 2017 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended March 31, 2017

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

For the transition period from                    to                    

Commission file number001-36895

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

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

615-236-2265

(Registrant’s telephone number, including area code)

N/A

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☒	Smaller reporting company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).    Yes  ☐    No  ☒

The number of shares outstanding of the registrant’s common stock, no par value per share, as of April 28, 2017, was 13,092,748.

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements	1
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statement of Changes in Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	44
PART II OTHER INFORMATION
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3. Defaults Upon Senior Securities	45
Item 4. Mine Safety Disclosures	45
Item 5. Other Information	45
Item 6. Exhibits	46
SIGNATURES

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form10-Q contains “forward-looking statements” as defined under U.S. federal securities laws. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current views of future performance, results, and trends and may be identified by their use of terms such as “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those described in the forward-looking statements. Readers should not place undue reliance on forward-looking statements. Such statements are made as of the date of this Quarterly Report on Form10-Q, and we undertake no obligation to update such statements after this date.

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2016 and those described in Item 1A of Part II of this Quarterly Report on Form10-Q.

1

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

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

	March 31, 2017			December 31, 2016
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	114,664		$	90,927
Certificates of deposit at other financial institutions		2,035			1,055
Securities available for sale		1,073,293			754,755
Securities held to maturity (fair value 2017—$225,337 and 2016—$227,892)		226,056			228,894
Loans held for sale, at fair value		12,682			23,699
Loans		1,949,715			1,773,592
Allowance for loan losses		(18,105	)		(16,553	)
Net loans		1,931,610			1,757,039
Restricted equity securities, at cost		14,978			11,843
Premises and equipment, net		10,231			9,551
Accrued interest receivable		10,516			9,931
Bank owned life insurance		23,422			23,267
Deferred tax asset		15,824			15,013
Foreclosed assets		1,315			—
Servicing rights, net		3,593			3,621
Goodwill		9,124			9,124
Core deposit intangible, net		1,353			1,480
Other assets		4,092			2,990
Total assets	$	3,454,788		$	2,943,189
LIABILITIES AND EQUITY
Deposits
Non-interest bearing	$	240,105		$	233,781
Interest bearing		2,577,107			2,158,037
Total deposits		2,817,212			2,391,818
Federal Home Loan Bank advances		217,000			132,000
Federal funds purchased and repurchase agreements		70,430			83,301
Subordinated notes, net		58,381			58,337
Accrued interest payable		1,993			1,924
Other liabilities		11,262			5,448
Total liabilities		3,176,278			2,672,828
Equity
Preferred stock, no par value: 1,000,000 shares authorized; no shares outstanding at March 31, 2017 and December 31, 2016		—			—
Common stock, no par value: 20,000,000 shares authorized; 13,064,110 and 13,036,954 issued at March 31, 2017 and December 31, 2016, respectively		218,959			218,354
Retained earnings		67,320			59,386
Accumulated other comprehensive loss		(7,872	)		(7,482	)
Total shareholders’ equity		278,407			270,258
Noncontrolling interest in consolidated subsidiary		103			103
Total equity	$	278,510		$	270,361
Total liabilities and equity	$	3,454,788		$	2,943,189

See accompanying notes to consolidated financial statements.

2

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF INCOME

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

(Unaudited)

	Three Months Ended March 31,
	2017		2016
Interest income and dividends
Loans, including fees	$	22,560	$	17,742
Securities:
Taxable		5,617		3,528
Tax-Exempt		2,020		1,122
Dividends on restricted equity securities		181		103
Federal funds sold and other		163		66
Total interest income		30,541		22,561
Interest expense
Deposits		5,246		3,077
Federal funds purchased and repurchase agreements		508		109
Federal Home Loan Bank advances		70		86
Subordinated notes and other borrowings		1,074		13
Total interest expense		6,898		3,285
Net interest income		23,643		19,276
Provision for loan losses		1,855		1,136
Net interest income after provision for loan losses		21,788		18,140
Noninterest income
Service charges on deposit accounts		30		49
Other service charges and fees		752		633
Net gains on sale of loans		2,334		1,608
Wealth management		593		368
Loan servicing fees, net		107		42
Gain on sale or call of securities		—		310
Net gain on sale of foreclosed assets		3		3
Other		189		72
Total noninterest income		4,008		3,085
Noninterest expense
Salaries and employee benefits		8,033		6,517
Occupancy and equipment		2,095		1,807
FDIC assessment expense		760		413
Marketing		267		217
Professional fees		1,035		1,094
Amortization of core deposit intangible		127		149
Other		1,959		1,634
Total noninterest expense		14,276		11,831
Income before income tax expense		11,520		9,394
Income tax expense		3,586		3,161
Net income		7,934		6,233
Dividends paid on Series A preferred stock		—		(23	)
Net income available to common shareholders	$	7,934	$	6,210
Earnings per share:
Basic	$	0.61	$	0.59
Diluted		0.58		0.55

See accompanying notes to consolidated financial statements.

3

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Net income	$	7,934		$	6,233
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gain (loss) arising during the period		(641	)		11,060
Reclassification adjustment for gains included in net income		—			(310	)
Net unrealized gain (loss)		(641	)		10,750
Tax effect		251			(4,217	)
Total other comprehensive income (loss)		(390	)		6,533
Comprehensive income	$	7,545		$	12,766

See accompanying notes to consolidated financial statements.

4

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended March 31, 2017 and 2016

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

(Unaudited)

	Preferred			Common Stock						Retained			Accumulated Other Comprehensive			Noncontrolling		Total
	Stock			Shares			Amount			Earnings			Income (Loss)			Interest		Equity
Balance at December 31, 2015	$	10,000			10,571,377		$	147,784		$	31,352		$	(320	)	$	—	$	188,816
Exercise of common stock options, net		—			13,018			118			—			—			—		118
Exercise of common stock warrants		—			3,150			38			—			—			—		38
Redemption of Series A preferred stock		(10,000	)		—			—			—			—			—		(10,000	)
Dividends paid on Series A preferred stock		—			—			—			(23	)		—			—		(23	)
Stock based compensation expense, net of restricted share forfeitures		—			2,378			258			—			—			—		258
Stock issued in conjunction with 401(k) employer match, net of distributions		—			(3,331	)		(63	)		—			—			—		(63	)
Net income		—			—			—			6,233			—			—		6,233
Other comprehensive income		—			—			—			—			6,533			—		6,533
Balance at March 31, 2016	$	—			10,586,592		$	148,135		$	37,562		$	6,213			—	$	191,910
Balance at December 31, 2016	$	—			13,036,954		$	218,354		$	59,386		$	(7,482	)		103	$	270,361
Exercise of common stock options		—			20,268			177			—			—			—		177
Exercise of common stock warrants		—			11,011			132			—			—			—		132
Stock based compensation expense, net of restricted share forfeitures		—			(180	)		447			—			—			—		447
Stock issued in conjunction with 401(k) employer match, net of distributions		—			(3,943	)		(151	)		—			—			—		(151	)
Net income		—			—			—			7,934			—			—		7,934
Other comprehensive loss		—			—			—			—			(390	)		—		(390	)
Balance at March 31, 2017	$	—			13,064,110		$	218,959		$	67,320		$	(7,872	)		103	$	278,510

See accompanying notes to consolidated financial statements.

5

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities
Net income	$	7,934		$	6,233
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment		368			322
Accretion of purchase accounting adjustments		(381	)		(360	)
Net amortization of securities		2,452			1,504
Amortization of loan servicing right asset		213			251
Amortization of core deposit intangible		127			149
Amortization of debt issuance costs		44		��	—
Provision for loan losses		1,855			1,136
Deferred income tax benefit		(561	)		(2	)
Origination of loans held for sale		(65,213	)		(59,381	)
Proceeds from sale of loans held for sale		78,379			63,172
Net gain on sale of loans		(2,334	)		(1,608	)
Gain on sale of available for sale securities		—			(310	)
Income from bank owned life insurance		(155	)		(161	)
Gain on sale and write down of foreclosed assets		—			(3	)
Loss on sale of assets held for sale		—			98
Stock-based compensation		447			258
Compensation expense related to common stock issued to 401(k) plan		—			135
Deferred gain on sale of loans		(58	)		(20	)
Deferred gain on sale of foreclosed assets		(3	)		—
Net change in:
Accrued interest receivable and other assets		(1,687	)		129
Accrued interest payable and other liabilities		5,944			2,212
Net cash from operating activities		27,371			13,754
Cash flows from investing activities
Available for sale securities:
Sales		—			48,772
Purchases		(363,298	)		(70,169	)
Maturities, prepayments and calls		42,167			18,020
Held to maturity securities:
Purchases		(1,996	)		(1,245	)
Maturities, prepayments and calls		4,335			1,435
Net change in loans		(177,360	)		(117,804	)
Proceeds from sale of assets held for sale		—			1,542
Purchase of restricted equity securities		(3,135	)		(26	)
Purchases of premises and equipment, net		(1,048	)		(758	)
Increase in certificates of deposits at other financial institutions		(980	)		(815	)
Net cash from investing activities		(501,315	)		(121,048	)
Cash flows from financing activities
Increase in deposits		425,394			139,534
Decrease in federal funds purchased and repurchase agreements		(12,871	)		(51,493	)
Proceeds from Federal Home Loan Bank advances		230,000			40,000
Repayment of Federal Home Loan Bank advances		(145,000	)		(40,000	)
Proceeds from other borrowings		—			10,000
Repayment of other borrowings		—			(10,000	)
Proceeds from issuance of subordinated notes, net of issuance costs		—			38,843
Proceeds from exercise of common stock warrants		132			38
Proceeds from exercise of common stock options		177			118
Divestment of common stock issued to 401(k) plan		(151	)		(63	)
Redemption of Series A preferred stock		—			(10,000	)
Dividends paid on preferred stock		—			(23	)
Net cash from financing activities		497,681			116,954
Net change in cash and cash equivalents		23,737			9,660
Cash and cash equivalents at beginning of period		90,927			52,394
Cash and cash equivalents at end of period	$	114,664		$	62,054
Supplemental information:
Interest paid	$	6,829		$	2,993
Income taxes paid		530			1,125

See accompanying notes to consolidated financial statements.

6

FRANKLIN FINANCIAL NETWORK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form10-Q and therefore do not include all information and footnotes necessary for a 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 RegulationS-X, Rule10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report onForm 10-K filed with the SEC on March 16, 2017.

These consolidated financial statements include the accounts of Franklin Financial Network, Inc. (“FFN”), and its wholly-owned subsidiaries, Franklin Synergy Bank (the “Bank”) and Franklin Synergy Risk Management, Inc. (collectively, the “Company”). Franklin Synergy Investments of Tennessee, Inc., Franklin Synergy Investments of Nevada, Inc., and Franklin Synergy Preferred Capital, Inc. are direct or indirect subsidiaries of Franklin Synergy Bank and are included in these consolidated financial statements. Significant intercompany transactions and accounts are eliminated in consolidation.

Recently Adopted Accounting Pronouncements: In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2016-09, “Compensation–StockCompensation(Topic718):ImprovementstoEmployeeShare-BasedPaymentAccounting.” UnderASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additionalpaid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additionalpaid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additionalpaid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case.ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current Generally Accepted Accounting Principle (“GAAP”)) or account for forfeitures when they occur.ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The Company elected to adoptASU 2016-09 in the fourth quarter of 2016 and elected to not account for forfeitures as they occur. The ASU required adoption effective as of the first day of the fiscal year in which the standard was adopted, and a result the adoption of this ASU impacted previously reported quarterly earnings per share in first quarter 2016 by decreasing diluted earnings per share by $0.01. There were no stock options exercised in the first quarter of 2016.

Recently Issued, Not Yet Effective Accounting Pronouncements: In May 2014, the FASB issued ASU2014-09,RevenuefromContractswithCustomers(Topic606):RevenuefromContractswithCustomers. ASU2014-09 created a new topic in the FASB ASC, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU2014-09 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU2014-09 added a new Subtopic to the ASC,OtherAssetsandDeferredCosts:ContractswithCustomers (“ASC340-40”), to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, andnon-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Since most of the Company’s revenues come from financial instruments which are not included in the scope of this ASU, adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

In February 2016, FASB issued ASU2016-02 which createsTopic842,Leases and supersedesTopic840,Leases. ASU2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a correspondingright-of-use asset. ASU2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for the Company for fiscal years beginning on or after December 15, 2018. Early adoption is permitted for all entities. At the time this ASU is adopted, the Company will recognize aright-of-use asset and a lease liability for all leases, which will initially be measured at the present value of lease payments, and a single lease cost calculated so that the costs of the leases are allocated over the terms of the Company’s leases on a generally straight-line basis. Since an asset will be recognized at the time of adoption, the Company’s regulatory capital ratios will likely be impacted. Management is evaluating the impact ASU2016-02 will have on the Company’s financial statements.

7

In June 2016, FASB issuedASU2016-13,FinancialInstruments-CreditLosses(Topic326):MeasurementofCreditLossesonFinancialInstruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering as much data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The impact of adopting ASU2016-13 is not currently known.

In August 2016, FASB issuedASU2016-15,StatementofCashFlows(Topic230):ClassificationofCertainCashReceiptsandCashPayments. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a material impact on the Company’s financial statements.

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

In March 2017, the FASB issued ASUNo. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20): Premium Amortization on Purchased Callable Debt Securities.” This Update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The Company currently amortizes the premium on callable debt securities over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASUNo. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASUNo. 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at March 31, 2017 and December 31, 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2017
U.S. government sponsored entities and agencies	$	70,099	$	—	$	(148	)	$	69,951
Mortgage-backed securities: residential		836,278		993		(9,240	)		828,031
Mortgage-backed securities: commercial		19,352		19		(100	)		19,271
State and political subdivisions		160,513		525		(4,998	)		156,040
Total	$	1,086,242	$	1,537	$	(14,486	)	$	1,073,293

8

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016
Mortgage-backed securities: residential	$	614,344	$	949	$	(8,208	)	$	607,085
Mortgage-backed securities: commercial		19,439		27		(132	)		19,334
State and political subdivisions		133,280		238		(5,182	)		128,336
Total	$	767,063	$	1,214	$	(13,522	)	$	754,755

The amortized cost and fair value of the held to maturity securities portfolio at  March 31, 2017 and December 31, 2016 and the corresponding amounts of gross unrecognized gains and losses were as follows:

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
March 31, 2017
Mortgage backed securities: residential	$	103,788	$	318	$	(2,367	)	$	101,739
State and political subdivisions		122,268		1,483		(153	)		123,598
Total	$	226,056	$	1,801	$	(2,520	)	$	225,337
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
December 31, 2016
U.S. government sponsored entities and agencies	$	203	$	6	$	—		$	209
Mortgage backed securities: residential		106,169		328		(2,343	)		104,154
State and political subdivisions		122,522		1,214		(207	)		123,529
Total	$	228,894	$	1,548	$	(2,550	)	$	227,892

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

	Three Months Ended March 31,
	2017		2016
Proceeds	$	—	$	48,772
Gross gains		—		693
Gross losses		—		(383	)

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.

	March 31, 2017
	Amortized Cost		Fair Value
Available for sale
One year or less	$	15,000	$	14,884
Over one year through five years		70,099		69,951
Over five years through ten years		4,730		4,768
Over ten years		140,783		136,388
Mortgage-backed securities: residential		836,278		828,031
Mortgage-backed securities: commercial		19,352		19,271
Total	$	1,086,242	$	1,073,293
Held to maturity
Over one year through five years	$	1,104	$	1,136
Over five years through ten years		5,198		5,277
Over ten years		115,966		117,185
Mortgage-backed securities: residential		103,788		101,739
Total	$	226,056	$	225,337

9

Securities pledged at March 31, 2017 and December 31, 2016 had a carrying amount of $1,105,158 and $808,224 and were pledged to secure public deposits and repurchase agreements.

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

The following table summarizes the securities with unrealized and unrecognized losses at March 31, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2017
Available for sale
U.S. government sponsored entities and agencies	$	69,951	$	(148	)	$	—	$	—		$	69,951	$	(148	)
Mortgage-backed securities:
residential		656,782		(8,708	)		14,544		(532	)		671,326		(9,240	)
Mortgage-backed securities:
commercial		15,715		(100	)		—		—			15,715		(100	)
State and political subdivisions		103,229		(4,998	)		—		—			103,229		(4,998	)
Total available for sale	$	845,677	$	(13,954	)	$	14,544	$	(532	)	$	860,221	$	(14,486	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
Mortgage-backed securities:
residential	$	86,722	$	(2,262	)	$	2,868	$	(105	)	$	89,590	$	(2,367	)
State and political subdivisions		16,937		(153	)		—		—			16,937		(153	)
Total held to maturity	$	103,659	$	(2,415	)	$	2,868	$	(105	)	$	106,527	$	(2,520	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2016
Available for sale
Mortgage-backed securities:
residential	$	465,416	$	(7,833	)	$	9,907	$	(375	)	$	475,323	$	(8,208	)
Mortgage-backed securities:
commercial		15,752		(132	)		—		—			15,752		(132	)
State and political subdivisions		100,020		(5,182	)		—		—			100,020		(5,182	)
Total available for sale	$	581,188	$	(13,147	)	$	9,907	$	(375	)	$	591,095	$	(13,522	)
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses			Fair Value		Unrecognized Losses
Held to maturity
Mortgage-backed securities:
residential	$	89,523	$	(2,244	)	$	3,025	$	(99	)	$	92,548	$	(2,343	)
State and political subdivisions		18,907		(207	)		—		—			18,907		(207	)
Total held to maturity	$	108,430	$	(2,451	)	$	3,025	$	(99	)	$	111,455	$	(2,550	)

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

10

NOTE 3—LOANS

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

	March 31, 2017			December 31, 2016
Loans that are not PCI loans
Construction and land development	$	499,272		$	489,562
Commercial real estate:
Nonfarm, nonresidential		509,060			458,569
Other		39,690			38,571
Residential real estate:
Closed-end1-4 family		299,439			254,474
Other		151,530			150,515
Commercial and industrial		445,398			376,476
Consumer and other		3,853			3,359
Loans before net deferred loan fees		1,948,242			1,771,526
Deferred loan fees, net		(971	)		(793	)
Total loans that are not PCI loans		1,947,271			1,770,733
Total PCI loans		2,444			2,859
Allowance for loan losses		(18,105	)		(16,553	)
Total loans, net of allowance for loan losses	$	1,931,610		$	1,757,039

The following table presents the activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2017 and 2016:

	Construction and Land Development		Commercial Real Estate		Residential Real Estate			Commercial and Industrial			Consumer and Other			Total
Three Months Ended March 31, 2017
Allowance for loan losses:
Beginning balance	$	3,776	$	4,266	$	2,398		$	6,068		$	45		$	16,553
Provision for loan losses		61		393		262			1,117			22			1,855
Loanscharged-off		—		—		—			(300	)		(23	)		(323	)
Recoveries		—		—		12			—			8			20
Total ending allowance balance	$	3,837	$	4,659	$	2,672		$	6,885		$	52		$	18,105
Three Months Ended March 31, 2016
Allowance for loan losses:
Beginning balance	$	3,186	$	3,146	$	1,861		$	3,358		$	36		$	11,587
Provision for loan losses		192		418		(89	)		582			33			1,136
Loanscharged-off		—		—		—			(65	)		(11	)		(76	)
Recoveries		—		—		28			—			1			29
Total ending allowance balance	$	3,378	$	3,564	$	1,800		$	3,875		$	59		$	12,676

11

As of March 31, 2017 and December 31, 2016, there was $1 and $0, respectively, in allowance for loan losses for PCI loans.

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 March 31, 2017 and December 31, 2016. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.

	Construction and Land Development		Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
March 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	739	$	—	$	739
Collectively evaluated for impairment		3,837		4,659		2,672		6,145		52		17,365
Purchased credit-impaired loans		—		—		—		1		—		1
Total ending allowance balance	$	3,837	$	4,659	$	2,672	$	6,885	$	52	$	18,105
Loans:
Individually evaluated for impairment	$	—	$	2,560	$	1,464	$	3,192	$	—	$	7,216
Collectively evaluated for impairment		499,272		546,190		449,505		442,206		3,853		1,941,026
Purchased credit-impaired loans		—		408		189		1,847		—		2,444
Total ending loans balance	$	499,272	$	549,158	$	451,158	$	447,245	$	3,853	$	1,950,686
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,024	$	—	$	1,024
Collectively evaluated for impairment		3,776		4,266		2,398		5,044		45		15,529
Purchased credit-impaired loans		—		—		—		—		—		—
Total ending allowance balance	$	3,776	$	4,266	$	2,398	$	6,068	$	45	$	16,553
Loans:
Individually evaluated for impairment	$	1,275	$	2,836	$	2,190	$	3,608	$	—	$	9,909
Collectively evaluated for impairment		488,287		494,304		402,799		372,868		3,359		1,761,617
Purchased credit-impaired loans		—		394		496		1,969		—		2,859
Total ending loans balance	$	489,562	$	497,534	$	405,485	$	378,445	$	3,359	$	1,774,385

12

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
March 31, 2017
With no allowance recorded:
Commercial real estate:
Nonfarm, nonresidential	$	4,146	$	2,560	$	—
Residential real estate:
Closed-end1-4 family		1,344		1,344		—
Other		120		120		—
Commercial and industrial		802		802		—
Subtotal		6,412		4,826		—
With an allowance recorded:
Commercial and industrial		2,390		2,390		739
Subtotal		2,390		2,390		739
Total	$	8,802	$	7,216	$	739
December 31, 2016
With no allowance recorded:
Construction and land development	$	1,275	$	1,275	$	—
Commercial real estate:
Nonfarm, nonresidential		4,423		2,836		—
Residential real estate:
Closed-end1-4 family		2,069		2,069		—
Other		121		121		—
Commercial and industrial		934		934		—
Subtotal		8,822		7,235		—
With an allowance recorded:
Commercial and industrial		2,864		2,674		1,024
Subtotal		2,864		2,674		1,024
Total	$	11,686	$	9,909	$	1,024

13

The following table presents the average recorded investment of impaired loans by class of loans for the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017		2016
Average Recorded Investment
With no allowance recorded:
Construction and land development	$	—	$	898
Commercial real estate:
Nonfarm, nonresidential		4,128		1,402
Residential real estate:
Closed-end1-4 family		1,799		736
Other		120		712
Commercial and industrial		—		21
Subtotal		6,047		3,769
With an allowance recorded:
Commercial and industrial	$	2,585	$	86
Subtotal		2,585		86
Total	$	8,632	$	3,855

The impact on net interest income for these loans was not material to the Company’s results of operations for the three months ended March 31, 2017 and 2016.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2017 and December 31, 2016:

	Nonaccrual		Loans Past Due Over 90 Days
March 31, 2017
Construction and land development	$	—	$	200
Commercial real estate:
Nonfarm, nonresidential		835		—
Residential real estate:
Closed-end1-4 family		—		388
Other		120		—
Commercial and industrial		2,391		102
Total	$	3,346	$	690
December 31, 2016
Construction and land development	$	—	$	1,950
Commercial real estate:
Nonfarm, nonresidential		835		—
Residential real estate:
Closed-end1-4 family		—		452
Other		121		—
Commercial and industrial		2,674		150
Total	$	3,630	$	2,552

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

14

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

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Nonaccrual		Total Past Due and Nonaccrual		Loans Not Past Due		PCI Loans		Total
March 31, 2017
Construction and land development	$	—	$	641	$	200	$	—	$	841	$	498,431	$	—	$	499,272
Commercial real estate:
Nonfarm, nonresidential		2,372		—		—		835		3,207		505,853		408		509,468
Other		—		—		—		—		—		39,690		—		39,690
Residential real estate:
Closed-end1-4 family		1,665		—		388		—		2,053		297,386		189		299,628
Other		—		—		—		120		120		151,410		—		151,530
Commercial and industrial		154		—		102		2,391		2,647		442,751		1,847		447,245
Consumer and other		7		—		—		—		7		3,846		—		3,853
	$	4,198	$	641	$	690	$	3,346	$	8,875	$	1,939,367	$	2,444	$	1,950,686
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Nonaccrual		Total Past Due		Loans Not Past Due		PCI Loans		Total
December 31, 2016
Construction and land development	$	380	$	—	$	1,950	$	—	$	2,330	$	487,232	$	—	$	489,562
Commercial real estate:
Nonfarm, nonresidential		664		—		—		835		1,499		457,070		394		458,963
Other		—		—		—		—		—		38,571		—		38,571
Residential real estate:
Closed-end1-4 family		428		10		452		—		890		253,584		496		254,970
Other		231		—		—		121		352		150,163		—		150,515
Commercial and industrial		155		39		150		2,674		3,018		373,458		1,969		378,445
Consumer and other		—		—		—				—		3,359		—		3,359
	$	1,858	$	49	$	2,552	$	3,630	$	8,089	$	1,763,437	$	2,859	$	1,774,385

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

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

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

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 March 31, 2017 and December 31, 2016:

	Pass		Special Mention		Substandard		Total
March 31, 2017
Construction and land development	$	499,272	$	—	$	—	$	499,272
Commercial real estate:
Nonfarm, nonresidential		502,021		—		7,447		509,468
Other		39,690		—		—		39,690
Residential real estate:
Closed-end1-4 family		297,995		—		1,633		299,628
Other		150,521		—		1,009		151,530
Commercial and industrial		442,567		—		4,678		447,245
Consumer and other		3,853		—		—		3,853
	$	1,935,919	$	—	$	14,767	$	1,950,686
	Pass		Special Mention		Substandard		Total
December 31, 2016
Construction and land development	$	488,287	$	—	$	1,275	$	489,562
Commercial real estate:
Nonfarm, nonresidential		449,373		1,847		7,743		458,963
Other		38,571		—		—		38,571
Residential real estate:
1-4 family		251,919		—		3,051		254,970
Other		149,504		—		1,011		150,515
Commercial and industrial		373,243		—		5,202		378,445
Consumer and other		3,359		—		—		3,359
	$	1,754,256	$	1,847	$	18,282	$	1,774,385

Troubled Debt Restructurings

As of both March 31, 2017 and December 31, 2016, the Company’s loan portfolio contains one loan for $698 that has been modified in a troubled debt restructuring.

NOTE 4—LOAN SERVICING

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

	March 31, 2017		December 31, 2016
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation	$	503,294	$	499,385
Other		2,043		2,954

The components of net loan servicing fees for the three months ended March 31, 2017 and 2016 were as follows:

	Three Months Ended March 31,
	2017			2016
Loan servicing fees, net:
Loan servicing fees	$	320		$	293
Amortization of loan servicing fees		(213	)		(251	)
Change in impairment		—			—
Total	$	107		$	42

The fair value of servicing rights was estimated by management to be approximately $5,154 at March 31, 2017. Fair value for March 31, 2017 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.5%. At December 31, 2016, the fair value of servicing rights was estimated by management to be approximately $4,635. Fair value for December 31, 2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%.

16

NOTE 5—SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

Our subsidiary bank enters into borrowing arrangements with our retail business customers and correspondent banks through agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its control as collateral against these short-term borrowing arrangements. At maturity the securities underlying the agreements are returned to the Company. At March 31, 2017 and December 31, 2016, these short-term borrowings totaled $31,339 and $36,496, respectively, and were secured by securities with carrying amounts of $41,604 and $41,136, respectively. At March 31, 2017, all of the Company’s repurchase agreements hadone-day maturities.

The following table provides additional details as of March 31, 2017:

As of March 31, 2017	U.S. Government Sponsored Entities and Agencies Securities			Mortgage- Backed Securities: Residential			State and Political Subdivisions			Total
Market value of securities pledged	$	60		$	49		$	42,011		$	42,120
Borrowings related to pledged amounts	$	—		$	—		$	31,339		$	31,339
Market value pledged as a % of borrowings		—	%		—	%		134	%		134	%

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

As of December 31, 2016	U.S. Government Sponsored Entities and Agencies Securities			Mortgage- Backed Securities: Residential			State and Political Subdivisions			Total
Market value of securities pledged	$	209		$	117		$	41,330		$	41,656
Borrowings related to pledged amounts	$	—		$	—		$	36,496		$	36,496
Market value pledged as a % of borrowings		—	%		—	%		113	%		114	%

NOTE 6—SHARE-BASED PAYMENTS

In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every twenty shares of common stock purchased. Each warrant 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 were exercisable in whole or in part up to March 30, 2017. The warrants were detachable from the common stock. There were 11,011 and 3,150 warrants exercised during the three months ended March 31, 2017 and 2016, respectively. A summary of the stock warrant activity for the three months ended March 31, 2017 and 2016 follows:

	2017		2016
Stock warrants exercised:
Intrinsic value of warrants exercised	$	291	$	61
Cash received from warrants exercised		132		38

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $447 and $258 for the three months ended March 31, 2017 and 2016, respectively. The total income tax benefit was $93 for the three months ended March 31, 2017, which is shown on the Consolidated Statements of Income as a reduction of income tax expense. Since no options were exercised in the first quarter of 2016, there was no excess tax benefit from the exercise of stock options for the three months ended March 31, 2016.

Stock Option Plan: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), as amended and shareholder-approved, provides for authorized shares up to 4,000,000. At March 31, 2017, there were 1,989,762 authorized shares available for issuance.

The 2007 Omnibus Equity Incentive Plan provides that no options intended to be ISOs may be granted after April 9, 2017. As a result, FFN’s board of directors has determined that it is in the best interests of FFN and its shareholders to adopt a new equity incentive plan, the 2017 Omnibus Equity Incentive Plan. The terms of the 2017 Omnibus Equity Incentive Plan are substantially similar to the terms of the 2007 Omnibus Equity Incentive Plan. If FFN’s shareholders approve the 2017 Omnibus Equity Incentive Plan at the 2017 annual meeting scheduled to be held on May 25, 2017, FFN’s board of directors will freeze the 2007 Omnibus Equity Incentive Plan and cease issuing any awards under the 2007 Omnibus Equity Incentive Plan.

17

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

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

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

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

	March 31, 2017			March 31, 2016
Risk-free interest rate		2.28	%		1.99	%
Expected term		7.4 years			7.5 years
Expected stock price volatility		34.20	%		29.14	%
Dividend yield		0.04	%		0.24	%

The weighted average fair value of options granted for the three months ended March 31, 2017 and 2016 were $17.25 and $10.45, respectively.

A summary of the activity in the stock option plans for the three months ended March 31, 2017 follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		1,395,016		$	16.70		6.39	$	35,090
Granted		25,500			41.85
Exercised		(21,581	)		10.64
Forfeited, expired, or cancelled		(430	)		25.30
Outstanding at period end		1,398,505		$	17.25		6.25	$	30,074
Vested or expected to vest		1,328,580		$	17.25		6.25	$	29,584
Exercisable at period end		726,927		$	11.77		4.46	$	19,790

	For the three months ended March 31,
	2017		2016
Stock options exercised:
Intrinsic value of options exercised	$	610	$	242
Cash received from options exercised		177		118
Tax benefit realized from option exercises		93		—

As of March 31, 2017, there was $3,826 of total unrecognized compensation cost related tonon-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.8 years.

Restricted Share Award Plan: Additionally, the Company’s 2007 Omnibus Equity Incentive Plan provides for the granting of restricted share awards and other performance related incentives. 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.

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A summary of activity fornon-vested restricted share awards for the three months ended March 31, 2017 is as follows:

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2016		106,458		$	19.81
Granted		—			—
Vested		—			—
Forfeited		(180	)		25.67
Non-vested at March 31, 2017		106,278		$	19.80

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 March 31, 2017, there was $1,524 of total unrecognized compensation cost related tonon-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.28 years. There were no shares that vested during the three months ended March 31, 2017 or 2016.

NOTE 7—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certainoff-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2016 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.

The Basel III rules additionally provide for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III rules, banks must maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain discretionary bonuses. This new capital conservation buffer requirement was phased in beginning January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented at 2.5% in January 2019. The capital conservation buffer in effect for 2017 is 1.25%.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Management believes that, as of March 31, 2017, the Company and Bank met all capital adequacy requirements to which they are subject. There are no conditions or events since that notification that management believes have changed the institution’s category.

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Actual and required capital amounts and ratios are presented below as of March 31, 2017 and December 31, 2016 for the Company and Bank:

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Company common equity Tier 1 capital to risk-weighted assets	$	272,242		11.32	%	$	108,178		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	348,821		14.51	%	$	192,316		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	272,242		11.32	%	$	144,237		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	272,242		8.36	%	$	130,289		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	327,134		13.58	%	$	108,376		4.50	%	$	156,544		6.50	%
Bank Total Capital to risk weighted assets	$	345,332		14.34	%	$	192,669		8.00	%	$	240,836		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	327,134		13.58	%	$	144,502		6.00	%	$	192,669		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	327,134		10.05	%	$	130,201		4.00	%	$	162,751		5.00	%
December 31, 2016
Company common equity Tier 1 capital to risk-weighted assets	$	263,693		11.75	%	$	101,022		4.50	%		N/A		N/A
Company Total Capital to risk weighted assets	$	338,675		15.09	%	$	179,595		8.00	%		N/A		N/A
Company Tier 1 (Core) Capital to risk weighted assets	$	263,693		11.75	%	$	134,696		6.00	%		N/A		N/A
Company Tier 1 (Core) Capital to average assets	$	263,693		9.28	%	$	113,697		4.00	%		N/A		N/A
Bank common equity Tier 1 capital to risk-weighted assets	$	319,005		14.18	%	$	101,216		4.50	%	$	146,201		6.50	%
Bank Total Capital to risk weighted assets	$	335,650		14.92	%	$	179,939		8.00	%	$	224,924		10.00	%
Bank Tier 1 (Core) Capital to risk weighted assets	$	319,005		14.18	%	$	134,954		6.00	%	$	179,939		8.00	%
Bank Tier 1 (Core) Capital to average assets	$	319,005		11.22	%	$	113,697		4.00	%	$	142,122		5.00	%

Note: Minimum ratios presented exclude the capital conservation buffer

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Neither the Company nor the Bank may currently pay dividends without prior written approval from its primary regulatory agencies.

NOTE 8—FAIR VALUE

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

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

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

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

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

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

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

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

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been review and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

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

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 March 31, 2017 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
U.S. government sponsored entities and agencies	$	—	$	69,951	$	—
Mortgage-backed securities-residential		—		828,031		—
Mortgage-backed securities-commercial		—		19,271		—
State and political subdivisions		—		156,040		—
Total securities available for sale	$	—	$	1,073,293	$	—
Loans held for sale	$	—	$	12,682	$	—
Mortgage banking derivatives	$	—	$	926	$	—
Financial Liabilities
Mortgage banking derivatives	$	—	$	149	$	—

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	Fair Value Measurements at December 31, 2016 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Securities available for sale
Mortgage-backed securities-residential	$	—	$	607,085	$	—
Mortgage-backed securities-commercial		—		19,334		—
State and political subdivisions		—		128,336		—
Total securities available for sale	$	—	$	754,755	$	—
Loans held for sale	$	—	$	23,699	$	—
Mortgage banking derivatives	$	—	$	229	$	—
Financial Liabilities
Mortgage banking derivatives	$	—	$	66	$	—

As of March 31, 2017, the unpaid principal balance of loans held for sale was $12,327 resulting in an unrealized gain of $355 included in gains on sale of loans. As of December 31, 2016, the unpaid principal balance of loans held for sale was $23,457, resulting in an unrealized gain of $242 included in gains on sale of loans. For the three months ended March 31, 2017 and 2016, the change in fair value related to loans held for sale, which is included in gain on sale of loans, was $113 and $38, respectively. None of these loans were 90 days or more past due or on nonaccrual as of March 31, 2017 and December 31, 2016.

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

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

There was one collateral dependent impaired commercial and industrial loan carried at fair value of $1,650 as of both March 31, 2017 and December 31, 2016. For the three months ended March 31, 2017 and 2016, no additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $1,315 and $0 as of March 31, 2017 and December 31, 2016. There were no properties at March 31, 2017 or 2016 that had required write-downs to fair value; therefore, there were no write downs recorded for the three months ended March 31, 2017 and 2016, respectively. The foreclosed asset at March 31, 2017 is one piece of residential property on which the Company foreclosed during the first quarter of 2017 related to a residential construction loan.

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

	Carrying		Fair Value Measurements at March 31, 2017 Using:
	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	114,657	$	114,657	$	—	$	—	$	114,657
Certificates of deposit held at other financial institutions		2,035		—		2,035		—		2,035
Securities available for sale		1,073,293		—		1,073,293		—		1,073,293
Securities held to maturity		226,056		—		225,337		—		225,337
Loans held for sale		12,682		—		12,682		—		12,682
Net loans		1,931,610		—		—		1,899,549		1,899,549
Restricted equity securities		14,978		n/a		n/a		n/a		n/a
Servicing rights, net		3,593		—		5,154		—		5,154
Accrued interest receivable		10,516		—		5,589		4,927		10,516
Financial liabilities
Deposits	$	2,817,212	$	1,608,606	$	1,180,303	$	—	$	2,788,909
Federal funds purchased and repurchase agreements		70,430		—		70,430		—		70,430
Federal Home Loan Bank advances		217,000		—		215,371		—		215,371
Subordinated notes, net		58,381		—		—		62,181		62,181
Accrued interest payable		1,993		33		1,610		350		1,993
	Carrying		Fair Value Measurements at December 31, 2016 Using:
	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	90,927	$	90,927	$	—	$	—	$	90,927
Certificates of deposit held at other financial institutions		1,055		—		1,055		—		1,055
Securities available for sale		754,755		—		754,755		—		754,755
Securities held to maturity		228,894		—		227,892		—		227,892
Loans held for sale		23,699		—		23,699		—		23,699
Net loans		1,757,039		—		—		1,727,188		1,727,188
Restricted equity securities		11,843		n/a		n/a		n/a		n/a
Servicing rights, net		3,621		—		5,015		—		5,015
Accrued interest receivable		9,931		—		5,172		4,759		9,931
Financial liabilities
Deposits	$	2,391,818	$	1,551,461	$	836,444	$	—	$	2,387,905
Federal funds purchased and repurchase agreements		83,301		—		83,301		—		83,301
Federal Home Loan Bank advances		132,000		—		131,098		—		131,098
Subordinated notes, net		58,337		—		—		61,762		61,762
Accrued interest payable		1,924		154		1,075		695		1,924

The methods and assumptions not previously described used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents:The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans:Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

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

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

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

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

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

(h) Subordinated Notes:The fair values of the Company’s subordinated notes are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(i) Accrued Interest Receivable/Payable:The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the asset/liability with which they are associated.

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

NOTE 9—EARNINGS PER SHARE

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

	Three Months Ended March 31,
	2017			2016
Basic
Net income available to common shareholders	$	7,934		$	6,210
Less: earnings allocated to participating securities		(65	)		(64	)
Net income allocated to common shareholders	$	7,869		$	6,146
Weighted average common shares outstanding including participating securities		13,049,012			10,580,304
Less: Participating securities		(106,323	)		(109,064	)
Average shares		12,942,689			10,471,240
Basic earnings per common share	$	0.61		$	0.59
	Three Months Ended March 31,
	2017			2016
Diluted
Net income allocated to common shareholders	$	7,869		$	6,146
Weighted average common shares outstanding for basic earnings per common share		12,942,689			10,471,240
Add: Dilutive effects of assumed exercises of stock options		708,694			622,743
Add: Dilutive effects of assumed exercises of stock warrants		5,974			12,426
Average shares and dilutive potential common shares		13,657,357			11,106,409
Dilutive earnings per common share	$	0.58		$	0.55

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Stock options for 108,000 and 62,167 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2017 and 2016 because they were antidilutive.

NOTE 10—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled $58,381 and $58,337 at March 31, 2017 and at December 31, 2016, respectively. For regulatory capital purposes, the subordinated notes are treated as Tier 2 capital, subject to certain limitations, and are included in total regulatory capital when calculating the Company’s total capital to risk weighted assets ratio as indicated in Note 7 of these consolidated financial statements.

The Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016, $40,000 of 6.875%fixed-to-floating rate subordinated notes were issued in a public offering to accredited institutional investors, and in June 2016, $20,000 of 7.00%fixed-to-floating rate subordinated notes were issued to certain accredited institutional investors in a private offering. The subordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral securing such debt. The subordinated notes will be subordinated in right of payment to all of our existing and future senior indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the subordinated notes may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or similar proceeding.

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

	March 2016 Subordinated Notes	June 2016 Subordinated Notes
Principal amount issued	$40,000	$20,000
Maturity date	March 30, 2026	July 1, 2026
Initial fixed interest rate	6.875%	7.00%
Initial interest rate period	5 years	5 years
First interest rate change date	March 30, 2021	July 1, 2021
Interest payment frequency through year five*	Semiannually	Semiannually
Interest payment frequency after five years*	Quarterly	Quarterly
Interest repricing index and margin	3-month LIBOR plus 5.636%	3-month LIBOR plus 6.04%
Repricing frequency after five years	Quarterly	Quarterly

* The Company currently may not make interest payments on either series of subordinated notes without prior written approval from its primary regulatory agencies. Through March 31, 2017 all interest payments have been made in accordance with the terms of the agreements.

The issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over theten-year term of the March 2016 Subordinated Notes. The issuance costs related to the June 2016 Subordinated Notes were $404 and are being amortized as interest expense over theten-year term of the June 2016 Notes.

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

Company Overview

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

Critical Accounting Policies

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

The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements in the Company’s Form10-K that was filed with the SEC on March 16, 2017. The critical accounting policies require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Allowance for Loan Losses

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

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

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

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

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

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

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

Mortgage Servicing Rights

When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of loans. Fair value is based on market prices for comparable servicing contracts. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized intonon-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

In May 2014, the FASB issued ASU2014-09,Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers. ASU2014-09 created a new topic in the FASB ASC, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASU2014-09 established a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU2014-09 added a new Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers (“ASC340-40”), to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, andnon-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Since most of the Company’s revenues come from financial instruments which are not included in the scope of this ASU, adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU2016-02 which creates “Topic 842, Leases” and supersedes “Topic 840, Leases.” ASU2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their balance sheet as lease liabilities with a correspondingright-of-use asset. ASU2016-02 maintains the dual model for lease accounting, requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new guidance will be effective for the Company for fiscal years beginning on or after December 15, 2018. Early adoption is permitted for all entities. At the time this ASU is adopted, the Company will recognize aright-of-use asset, and a lease liability for all leases, which will initially be measured at the present value of lease payments, and a single lease cost calculated so that the costs of the leases are allocated over the terms of the Company’s leases on a generally straight-line basis. Since an asset will be recognized at the time of adoption, the Company’s regulatory capital ratios will likely be impacted. Management is evaluating the impact ASU2016-02 will have on the Company’s financial statements.

In June 2016, FASB issued ASU2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other

27

organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses onavailable-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering as much data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The impact of adopting ASU2016-13 is not currently known.

In August 2016, FASB issued ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a material impact on the Company’s financial statements.

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

In March 2017, the FASB issued ASUNo. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20):Premium Amortization on Purchased Callable Debt Securities.” This Update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The Company currently amortizes the premium on callable debt securities over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASUNo. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASUNo. 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

MARCH 31, 2017 AND 2016

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $7,934 and $6,233 for the three months ended March 31, 2017 and 2016, respectively. After the payment of preferred dividends on the Series A 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 months ended March 31, 2016 was $6,210. The primary reasons for the increase in net earnings available to common shareholders for the three months ended March 31, 2017 was increased interest income on loans and investment securities due to significant organic growth in each of these portfolios over the same period in 2016.

Net Interest Income/Margin

Net interest income consists of interest income generated by earning assets, less interest expense. Net interest income for the three months ended March 31, 2017 and 2016 totaled $23,643 and $19,276, respectively, an increase of $4,367, or 22.7%, between the respective periods. For the three months ended March 31, 2017 and 2016, interest income was $30,541 and $22,561, respectively, an increase of 35.4%, due to growth in both the loan and investment securities portfolios. For the three months ended March 31, 2017 and 2016, interest expense was $6,898 and $3,285, respectively, an increase of 110.0%, which is a result of increases in subordinated debt, interest-bearing deposits and Federal Home Loan Bank advances.

Interest-earning assets averaged $3,184,516 and $2,177,905 during the three months ended March 31, 2017 and 2016, respectively, an increase of $1,006,611, or 46.2%. This increase was due to organic growth in both the loan portfolio and the securities portfolio over the past year. Average loans increased 37.0%, and average investment securities increased 63.3%, when comparing the three months ended March 31, 2017 with the same period in 2016.

When comparing the three months ended March 31, 2017 and 2016, the yield on average interest earning assets, adjusted fortax-equivalent yield, decreased 24 basis points to 4.06%, compared to 4.30% for the same period during 2016. When comparing the first quarter of 2017 with the same period in 2016, thetax-equivalent yield on loans decreased by 33 basis points. The decrease is related to a decrease in net loan fees and is also due to competitive rate pressures in our local markets. The decrease in net loan fees is attributable to the increase in deferred costs allocated to loans based on a cost study performed by management during first quarter 2016.

For the three months ended March 31, 2017, thetax-equivalent yield on available for sale securities was 2.69%, and for the three months ended March 31, 2016, thetax-equivalent yield on available for sale securities was 2.56%. For the three months ended March 31, 2017, thetax-equivalent yield on held to maturity securities was 4.20%, and for the three months ended March 31, 2016, thetax-equivalent yield on held to maturity securities was 4.15%. The primary driver for the yield increases in both available for sale securities and held to maturity securities was the increase in volume oftax-exempt securities that have been purchased.

Interest-bearing liabilities averaged $2,750,555 during the three months ended March 31, 2017, compared to $1,865,564 for the same period in 2016, an increase of $884,991, or 47.4%. Total average interest-bearing deposits grew $697,523, including increases in average brokered deposits of $67,358 and average interest-bearing public funds deposits of $353,092 for the three-month period ended March 31, 2017, as compared to the same period during 2016. Rapid growth in the loan portfolio also resulted in increases in average Federal Home Loan Bank advances of $139,556 and subordinated notes and other borrowings of $57,253, when comparing the first three months of 2017 with the same period in 2016.

For the three month periods ended March 31, 2017 and 2016, the cost of average interest-bearing liabilities increased 31 basis points to 1.02% from 0.71%. The increase was primarily due to an increase in subordinated notes, but it also included rate increases in interest-bearing checking, money market deposits, time deposits, and Federal Home Loan Bank advances when comparing the first quarter of 2017 with the first quarter of 2016.

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The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three-months ended March 31, 2017 and 2016:

Average Balances—Yields & Rates(7)

(Dollars are in thousands)

	Three Months Ended March 31,
	2017								2016
	Average Balance(7)			Interest Inc / Exp		Average Yield / Rate			Average Balance(7)			Interest Inc / Exp		Average Yield / Rate
ASSETS:
Loans(1)(6)	$	1,868,678		$	22,583		4.90	%	$	1,364,467		$	17,759		5.23	%
Securities available for sale(6)		991,679			6,584		2.69	%		588,885			3,745		2.56	%
Securities held to maturity(6)		227,662			2,355		4.20	%		157,839			1,628		4.15	%
Restricted equity securities		13,695			181		5.36	%		8,009			103		5.17	%
Certificates of deposit at other financial institutions		1,820			7		1.56	%		1,044			3		1.16	%
Federal funds sold and other(2)		80,982			156		0.78	%		57,661			63		0.44	%
TOTAL INTEREST EARNING ASSETS	$	3,184,516		$	31,866		4.06	%	$	2,177,905		$	23,301		4.30	%
Allowance for loan losses		(17,162	)							(11,967	)
All other assets		96,018								80,544
TOTAL ASSETS	$	3,263,372							$	2,246,482
LIABILITIES & EQUITY
Deposits:
Interest checking	$	701,983		$	1,062		0.61	%	$	334,065		$	326		0.39	%
Money market		613,574			1,228		0.81	%		569,084			869		0.61	%
Savings		55,613			42		0.31	%		45,810			42		0.37	%
Time deposits		1,080,031			2,914		1.09	%		804,719			1,840		0.92	%
Federal Home Loan Bank advances		196,556			508		1.05	%		57,000			109		0.77	%
Federal funds purchased and other(3)		44,446			70		0.64	%		53,787			86		0.64	%
Subordinated notes and other borrowings		58,352			1,074		7.46	%		1,099			13		4.76	%
TOTAL INTEREST BEARING LIABILITIES	$	2,750,555		$	6,898		1.02	%	$	1,865,564		$	3,285		0.71	%
Demand deposits		230,494								177,449
Other liabilities		9,610								9,086
Total equity		272,713								194,383
TOTAL LIABILITIES AND EQUITY	$	3,263,372							$	2,246,482
NET INTEREST SPREAD(4)							3.04	%							3.59	%
NET INTEREST INCOME				$	24,968							$	20,016
NET INTEREST MARGIN(5)							3.18	%							3.70	%

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

⁽²⁾  Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and at other financial institutions.

⁽³⁾  Includes repurchase agreements.

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

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

⁽⁶⁾  Interest income and rates include the effects oftax-equivalent adjustments to adjusttax-exempt interest income ontax-exempt loans and investment securities to a fully taxable basis.

⁽⁷⁾  Average balances are average daily balances.

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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 March 31, 2017 versus March 31, 2016
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	6,345		$	(1,521	)	$	4,824
Securities available for sale		2,521			318			2,839
Securities held to maturity		699			28			727
Restricted equity securities		72			6			78
Certificates of deposit at other financial institutions		2			2			4
Federal funds sold and other		25			68			93
TOTAL INTEREST INCOME	$	9,664		$	(1,099	)	$	8,565
INTEREST EXPENSE
Deposits
Interest checking	$	355		$	381		$	736
Money market accounts		56			303			359
Savings		8			(8	)		—
Time deposits		621			453			1,074
Federal funds purchased and repurchase agreements		(19	)		3			(16	)
Federal Home Loan Bank advances		288			111			399
Subordinated notes and other borrowings		673			388			1,061
TOTAL INTEREST EXPENSE	$	1,982		$	1,631		$	3,613
NET INTEREST INCOME	$	7,682		$	(2,730	)	$	4,952

Provision for Loan Losses

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

The provision for loan losses was $1,855 and $1,136 for the three months ended March 31, 2017 and 2016, respectively. The increase in loan loss provision is due primarily to the Company’s loan growth. Nonperforming loans at March 31, 2017 totaled $4,036 compared to $6,182 at December 31, 2016, representing 0.2% and 0.3% of total loans, respectively.

Non-Interest Income

Non-interest income for the three months ended March 31, 2017 and 2016 was $4,008 and $3,085, respectively. The following is a summary of the components ofnon-interest income (in thousands):

	Three Months Ended March 31,				$ Increase (Decrease)			% Increase (Decrease)
	2017		2016
Service charges on deposit accounts	$	30	$	49	$	(19	)		(38.8	%)
Other service charges and fees		752		633		119			18.8	%
Net gains on sale of loans		2,334		1,608		726			45.1	%
Wealth management		593		368		225			61.1	%
Loan servicing fees, net		107		42		65			154.8	%
Gain on sale of investment securities, net		—		310		(310	)		(100.0	%)
Net gain on sale of foreclosed assets		3		3		—			—	%
Other		189		72		117			162.5	%
Totalnon-interest income	$	4,008	$	3,085	$	923			29.9	%

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Service charges on deposit accounts for the three months ended March 31, 2017 decreased $19, or 38.8%, from the same period in 2016 due to the Company’s waiver of service charges for all checking, money market and savings accounts in March 2017, which was done to facilitate the Company’s conversion to a new core processing system.

Other service charges and fees increased, $119, or 18.8%, due to increases of $42 in unused commitment fees, $25 in ATM surcharge fees, $21 in nonsufficient funds fees, and $25 in loan-related fees.

Net gains on the sale of loans include net gains realized from the sales of mortgage loans and from the fair value adjustments related to mortgage loan derivatives. Net gains on the sale of mortgage loans are based, in part, on differences between the carrying value of loans being sold to third-party investors and the selling price. Also included are changes in the fair value of mortgage banking derivatives entered into by the Company to hedge the change in interest rates on loan commitments prior to their sale in the secondary market. Fluctuations in mortgage interest rates, changes in the demand for certain loans by investors, and whether servicing rights associated with the loans being sold are retained or released all affect the net gains on mortgage loan sales. Net gains for the three months ending March 31, 2017 were $2,334, an increase of $726, or 45.1%, from $1,608 for the three months ended March 31, 2016. The increase was due to the volume of mortgage loans originated, the sales related to those loans, and more favorable market rates in first quarter 2017, which resulted in more favorable fair value adjustments on mortgage derivatives.

Wealth management income for the three months ended March 31, 2017 increased $225, or 61.1%, in comparison with the same period in 2016. The increase was primarily due to the growth in the client base and the assets under management in the wealth management division.

Loan servicing fees increased $65, or 154.8%, when comparing first quarter 2017 with first quarter of 2016 due to a decrease of $57 in amortization of mortgage servicing rights, an increase of $30 in mortgage servicing fees, offset by a $19 increase in amortization of Small Business Administration servicing rights.

Net gain on sale of investment securities decreased $310, or 100.0%, when comparing the three months ended March 31, 2017 to same period in 2016, since the Company did not sell any of its securities in the first quarter of 2017.

Othernon-interest income increased $117, or 162.5%, when comparing first quarter 2017 with first quarter 2016. The increase in first quarter 2017 is primarily attributed to the loss of $98 on the sale of the Company’s real estate in downtown Murfreesboro, Tennessee that was recorded during first quarter 2016.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2017 and 2016 was $14,276 and $11,831, respectively, an increase of $2,445, or 20.7%. This increase was the result of the following components listed in the table below (in thousands):

	Three Months Ended March 31,				$ Increase (Decrease)			% Increase (Decrease)
	2017		2016
Salaries and employee benefits	$	8,033	$	6,517	$	1,516			23.3	%
Occupancy and equipment		2,095		1,807		288			15.9	%
FDIC assessment expense		760		413		347			84.0	%
Marketing		267		217		50			23.0	%
Professional fees		1,035		1,094		(59	)		(5.4	%)
Amortization of core deposit intangible		127		149		(22	)		(14.8	%)
Other		1,959		1,634		325			19.9	%
Totalnon-interest expense	$	14,276	$	11,831	$	2,445			20.7	%

The increase innon-interest expense noted in the table above is indicative of the Company’s overall growth. The Company’s biggest variances for the three months ended March 31, 2017, in comparison with the same period of 2016, were in salaries and benefits, occupancy and equipment, FDIC assessment expense, and othernon-interest expense.

Salaries and employee benefits increased $1,516, or 23.3%, when comparing the three months ended March 31, 2017 with the same period in 2016, primarily due to the Company’s staffing growth from 236 full-time equivalent employees as of March 31, 2016, to 274 as of March 31, 2017. The Company added several lending professionals and lending support personnel, additional compliance professionals, additional credit administration professionals and other operational staff, to support the Company’s growth and to provide enhanced corporate governance. The Company also experienced growth in incentive expenses related to the Company’s overall financial performance and in commissions related to mortgage loan volumes and growth in the Company’s wealth management division.

Occupancy and equipment expense increased $288, or 15.9%, when comparing the three months ended March 31, 2017 with the same period in 2016. This variance is attributable to increases in building rent expense ($184), software maintenance fees ($46), leasehold improvement depreciation ($38), equipment maintenance ($13) and other furniture, fixture and equipment expense ($13).

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The Company’s FDIC assessment expense increased $347, or 84.0%, when comparing the three months ended March 31, 2017 with the same period in 2016. The increase is primarily due to the year-over-year growth of the Company, on which FDIC assessments are calculated, combined with the change in the methodology used in calculating FDIC insurance assessments that became effective in the third quarter of 2016.

The $59, or 5.4%, decrease in professional fees, when comparing the three months ended March 31, 2017 with the same period in 2016, is attributable to decreases in merger-related expenses ($158), legal fees ($136), and SEC filing expense ($37), which were offset by increases in other professional fees ($131), compliance fees ($57) brokerage settlement expenses ($45), loan review fees ($22) and accounting/audit fees ($13).

For the three months ended March 31, 2017, othernon-interest expenses increased $325, or 19.9%, from the same period during 2016. The rise in othernon-interest expense is attributed to larger increases in the following expense types: loan-related expenses ($79); foreclosed property expenses ($74); insurance expense ($52); franchise taxes ($38); and electronic banking ($33).

Income Tax Expense

The Company recognized an income tax expense for the three months ended March 31, 2017 and 2016, of $3,586 and $3,161, respectively. The Company’syear-to-date income tax expense for the period ended March 31, 2017 reflects an effective income tax rate of 31.1%, compared to 33.6% for the same period in 2016. The decrease in the effective tax rate for the three months ended March 31, 2017 primarily resulted from the Company’s increased investments intax-exempt municipal securities and from othertax-related strategies.

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2017 AND DECEMBER 31, 2016

Overview

The Company’s total assets increased by $511,599, or 17.4%, from December 31, 2016 to March 31, 2017. 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. For purposes of the discussion in this section, the term “loans” refers to loans, excluding loans held for sale, unless otherwise noted.

The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at March 31, 2017 and December 31, 2016 were $1,949,715 and $1,773,592, respectively, an increase of $176,123, or 9.9%. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy.

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

	March 31, 2017						December 31, 2016
Types of Loans	Amount			% of Total Loans			Amount			% of Total Loans
Total loans, excluding PCI loans
Real estate:
Construction and land development	$	499,272			25.6	%	$	489,562			27.6	%
Commercial		548,750			28.1	%		497,140			28.0	%
Residential		450,969			23.1	%		404,989			22.8	%
Commercial and industrial		445,398			22.9	%		376,476			21.2	%
Consumer and other		3,853			0.2	%		3,359			0.2	%
Total loans—gross, excluding PCI loans		1,948,242			99.9	%		1,771,526			99.8	%
Total PCI loans		2,444			0.1	%		2,859			0.2	%
Total gross loans		1,950,686			100.0	%		1,774,385			100.0	%
Less: deferred loan fees, net		(971	)					(793	)
Allowance for loan losses		(18,105	)					(16,553	)
Total loans, net allowance for loan losses	$	1,931,610					$	1,757,039

As presented in the above table, gross loans increased 9.9% during the first three months of 2017, primarily due to organic growth as a result of continued market penetration and the strength of the local economies. During this period, the Company experienced growth in real estate loans of 7.7% with the majority of the growth occurring in the commercial real estate (10.4%) and residential real estate (11.4%) segments. The Company also experienced growth of 18.3% in the commercial and industrial segment during the first three months of 2017.

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Real estate loans comprised 76.8% of the loan portfolio at March 31, 2017. The largest portion of the real estate segments as of March 31, 2017, was commercial real estate loans, which totaled 36.6% of real estate loans. Commercial real estate loans comprised 28.1% of the total loan portfolio. The commercial real estate loan classification primarily includes commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential properties.

The residential real estate classification primarily includes1-4 family residential loans which are typically conventional first-lien home mortgages, not including loansheld-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled $450,969 at March 31, 2017 and comprised 30.1% of real estate loans and 23.1% of total loans.

Construction and land development loans totaled $499,272 at March 31, 2017, and comprised 33.3% of total real estate loans and 25.6% of the total loan portfolio. Loans in this classification provide financing for the construction and development of residential properties and commercial income properties, multi-family residential development, and land designated for future development.

Commercial and industrial loans totaled $445,398 at March 31, 2017 and grew 18.3% during the first three months of 2017. Loans in this classification comprised 22.8% of total loans at March 31, 2017. The commercial and industrial classification consists of commercial loans tosmall-to-medium sized businesses, shared national credits, and healthcare loans.

The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing within specific intervals at March 31, 2017, excluding unearned net fees and costs.

Loan Maturity Schedule

	March 31, 2017
	One year or less		Over one year to five years		Over five years		Total
Real estate:
Construction and land development	$	265,378	$	182,580	$	51,314	$	499,272
Commercial		19,763		142,789		386,606		549,158
Residential		25,067		120,867		305,224		451,158
Commercial and industrial		57,834		322,189		67,222		447,245
Consumer and other		1,460		1,910		483		3,853
Total	$	369,502	$	770,335	$	810,849	$	1,950,686
Fixed interest rate	$	227,217	$	359,606	$	318,829	$	905,652
Variable interest rate		142,285		410,729		492,020		1,045,034
Total	$	369,502	$	770,335	$	810,849	$	1,950,686

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

Allowance for Loan Losses

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

• past loan experience;

• the nature and volume of the portfolio;

• risks known about specific borrowers;

• underlying estimated values of collateral securing loans;

• current and anticipated economic conditions; and

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

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

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

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

	March 31, 2017							December 31, 2016							Increase (Decrease)
	Loan Balance		ALLL Balance		%			Loan Balance		ALLL Balance		%			Loan Balance			ALLL Balance
Non impaired loans	$	1,874,059	$	17,345		0.93	%	$	1,687,244	$	15,506		0.92	%	$	186,815		$	1,839		1 bps
Non-PCI acquired loans (Note 1)		66,967		20		0.03	%		74,373		23		0.03	%		(7,406	)		(3	)	—
Impaired loans		7,216		739		10.24	%		9,909		1,024		10.33	%		(2,693	)		(285	)	-9 bps
Non-PCI loans		1,948,242		18,104		0.93	%		1,771,526		16,553		0.93	%		176,716			1,551		—
PCI loans		2,444		1		0.04	%		2,859		—		—	%		(415	)		1		-4 bps
Total loans	$	1,950,686	$	18,105		0.93	%	$	1,774,385	$	16,553		0.93	%	$	176,301		$	1,552		—

Note 1: Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth Bank (“MidSouth”) that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $5,014 of the outstandingnon-PCI loan balances acquired. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Based on the analysis performed by management as of March 31, 2017, $20 in allowance for loan loss was recorded at March 31, 2017 related to the loans acquired from MidSouth.

At March 31, 2017, the allowance for loan losses was $18,105, compared to $16,553 at December 31, 2016. The allowance for loan losses as a percentage of total loans was 0.93% at both March 31, 2017 and December 31, 2016. Loan growth during the first quarter of 2017 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.

	Three Months Ended March 31, 2017			Three Months Ended March 31, 2016
Beginning balance	$	16,553		$	11,587
Loanscharged-off:
Construction & land development		—			—
Commercial real estate		—			—
Residential real estate		—			—
Commercial & industrial		300			65
Consumer & other		23			11
Total loanscharged-off		323			76
Recoveries on loans previouslycharged-off:
Construction & land development		—			—
Commercial real estate		—			—
Residential real estate		12			28
Commercial & industrial		—			—
Consumer & other		8			1
Total loan recoveries		20			29
Net recoveries (charge-offs)		(303	)		(47	)
Provision for loan losses charged to expense		1,855			1,136
Total allowance at end of period	$	18,105		$	12,676
Total loans, gross, at end of period (1)	$	1,950,686		$	1,423,539
Average gross loans (1)	$	1,860,081		$	1,355,965
Allowance to total loans		0.93	%		0.89	%
Net charge-offs (recoveries) to average loans, annualized		0.07	%		0.01	%

(1) Loan balances exclude loans held for sale

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

	March 31, 2017					December 31, 2016
	Amount		% of Allowance to Total			Amount		% of Allowance to Total
Real estate loans:
Construction and land development	$	3,837		21.2	%	$	3,776		22.8	%
Commercial		4,659		25.7	%		4,266		25.8	%
Residential		2,672		14.8	%		2,398		14.5	%
Total real estate		11,168		61.7	%		10,440		63.1	%
Commercial and industrial		6,885		38.0	%		6,068		36.6	%
Consumer and other		52		0.3	%		45		0.3	%
	$	18,105		100.0	%	$	16,553		100.0	%

Nonperforming Assets

Non-performing loans consist ofnon-accrual loans and loans that are past due 90 days or more and still accruing interest.Non-performing assets consist ofnon-performing loans plus other real estate owned (“OREO”), i.e., real estate acquired through foreclosure or deed in lieu of foreclosure. Loans are placed onnon-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 onnon-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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The primary component ofnon-performing loans isnon-accrual loans, which as of March 31, 2017 totaled $3,346. The other component ofnon-performing loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than 90 days are placed onnon-accrual status, unless they are both well-secured and in the process of collection. There were outstanding loans totaling $690 that were past due 90 days or more and still accruing interest at March 31, 2017.

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

	March 31, 2017			December 31, 2016
Non-accrual loans	$	3,346		$	3,630
Past due loans 90 days or more and still accruing interest		690			2,552
Totalnon-performing loans		4,036			6,182
Foreclosed real estate (“OREO”)		1,315			—
Totalnon-performing assets		5,351			6,182
Totalnon-performing loans as a percentage of total loans		0.2	%		0.3	%
Totalnon-performing assets as a percentage of total assets		0.2	%		0.2	%
Allowance for loan losses as a percentage ofnon-performing loans		449	%		268	%

As of March 31, 2017, there were five loans onnon-accrual status. The amount and number are further delineated by collateral category and number of loans in the table below.

	Total Amount		Percentage of Total Non-Accrual Loans			Number of Non-Accrual Loans
Construction & land development	$	—		—	%		—
Commercial real estate		835		25.0	%		1
Residential real estate		120		3.5	%		1
Commercial & industrial		2,391		71.5	%		3
Consumer		—		—	%		—
Totalnon-accrual loans	$	3,346		100.0	%		5

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 asavailable-for-sale and securities classified asheld-to-maturity. Allavailable-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securitiesavailable-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, were $1,073,293 at March 31, 2017, compared to $754,755 at December 31, 2016, an increase of $318,538, or 42.2%. The increase inavailable-for-sale securities was primarily attributed to the volume of securities purchased during the first quarter of 2017.

Theheld-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled $226,056 at March 31, 2017, compared to $228,894 at December 31, 2016, a decrease of $2,838, or 1.2%. The decrease is attributable to securities that matured during the first quarter of 2017.

The combined portfolios represented 37.6% and 33.4% of total assets at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, the Company had no securities that were classified as having Other Than Temporary Impairment.

The Company also had other investments of $14,978 and $11,843 at March 31, 2017 and December 31, 2016, respectively, consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

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Bank Premises and Equipment

Bank premises and equipment totaled $10,231 at March 31, 2017 compared to $9,551 at December 31, 2016, an increase of $680, or 7.1%. This increase was the result of adding leasehold improvements and furniture and equipment as needed in the normal course of business and related to the build-out of a new leased bank office building in Murfreesboro, Tennessee.

Deposits

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

At March 31, 2017, total deposits were $2,817,212, an increase of $425,394, or 17.8%, compared to $2,391,818 at December 31, 2016. The growth in deposits is attributable to growth in public funds deposits, money market deposits, noninterest-bearing deposits, and interest checking deposits.

Included in the Company’s funding strategy are brokered deposits. Total brokered deposits increased from $472,515 at December 31, 2016 to $709,290 at March 31, 2017, due to the increased need for funding for the Bank’s loan growth and due to the fluctuation in certain brokered deposits that are interest-bearing checking and money market accounts that can fluctuate daily.

Public funds deposits in the form of county deposits are a part of the Company’s funding strategy and are cyclical in nature, with the peak of those deposit balances occurring during the middle of the first quarter of each calendar year. Public funds declined $17,409, or 2.5%, from $697,081 at December 31, 2016 to $679,672 at March 31, 2017.

Time deposits excluding brokered deposits as of March 31, 2017, amounted to $717,294, compared to $555,732 as of December 31, 2016, an increase of $161,562, or 29.1%, primarily due to an increase in Local Government Investment Pool (LGIP) deposits of $155,000 during the first quarter of 2017.Non-public funds money market accounts, excluding brokered deposits, increased $20,398, or 7.7%, from December 31, 2016 to March 31, 2017. Noninterest-bearing checking deposits grew $6,557, or 2.8%, andnon-public funds interest checking accounts, excluding brokered deposits, grew $10,161, or 8.9%, respectively, when comparing deposit balances from March 31, 2017 with balances at December 31, 2016.

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

Maturity ofnon-brokered time deposits of $100 or more

	March 31, 2017
Three months or less	$	324,859
Three through six months		30,404
Six through twelve months		50,037
Over twelve months		149,671
Total	$	554,971

Federal Funds Purchased and Repurchase Agreements

As of March 31, 2017, the Company had $39,091 in federal funds purchased from correspondent banks compared to $46,805 outstanding as of December 31, 2016. Securities sold under agreements to repurchase had an outstanding balance of $31,339 as of March 31, 2017, compared to $36,496 as of December 31, 2016. Securities sold under agreements to repurchase are financing arrangements that mature daily or within a short period of time. At maturity, the securities underlying the agreements are returned to the Company.

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Federal Home Loan Bank Advances

The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of1-4 family residential mortgages. At March 31, 2017 and at December 31, 2016, advances totaled $217,000 and $132,000, respectively.

At March 31, 2017, the scheduled maturities and interest rates of these advances were as follows:

Scheduled Maturities	Amount		Weighted Average Rates
2017		25,000		1.03	%
2018		157,000		1.19	%
2019		35,000		1.30	%
Total	$	217,000		1.19	%

Subordinated Notes

At March 31, 2017, the Company’s subordinated notes, net of issuance costs, totaled $58,381, compared with $58,337 at December 31, 2016. For more information related to the subordinated notes and the related issuance costs, please see Note 10 of the consolidated financial statements.

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. Our source of funds to pay interest on our subordinated notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash balances held by the Company. Under the terms of the informal agreement with the Reserve Bank, described in “Other Events” in Management’s Discussion and Analysis and in “ITEM 1A. RISK FACTORS,” in the Company’s Annual Report on Form10-K for the year ended December 31, 2016, the Bank is required to receive prior written approval from its regulatory agencies to pay dividends to the Company.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified asavailable-for-sale, and sales of brokered deposits. As of March 31, 2017, $1,073,293 of the investment securities portfolio was classified asavailable-for-sale and is reported at fair value on the consolidated balance sheet. Another $226,056 of the portfolio was classified asheld-to-maturity and is reported at amortized cost. Approximately $1,105,158 of the total $1,299,349 investment securities portfolio on hand at March 31, 2017, was pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal funds purchased, and borrowings from the Federal Home Loan Bank.

Equity

As of March 31, 2017, the Company’s equity was $278,510, as compared with $270,361 as of December 31, 2016. The increase in equity was due to the Company’s earnings of $7,934 in the first quarter of 2017 and the increase in common stock of $605 during the first quarter, offset by a $390 reduction in other comprehensive income from the reduced valuation of available for sale securities.

Effects of Inflation and Changing Prices

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

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Off Balance Sheet Arrangements

The Company generally does not have anyoff-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At March 31, 2017, the Company had unfunded loan commitments outstanding of $63,187, unused lines of credit of $496,491, and outstanding standby letters of credit of $32,866.

GAAP Reconciliation and Management Explanation ofNon-GAAP Financial Measures

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

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

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

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

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

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

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

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

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

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

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

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

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

	As of or for the Three Months Ended
(Amounts in thousands, except share/ per share data and percentages)	Mar 31, 2017		Dec 31, 2016		Sept 30, 2016		Jun 30, 2016		Mar 31, 2016
Total shareholders’ equity	$	278,407	$	270,258	$	209,644	$	204,276	$	191,910
Less: Preferred stock		—		—		—		—		—
Total common shareholders’ equity		278,407		270,258		209,644		204,276		191,910
Common shares outstanding		13,064,110		13,036,954		10,757,483		10,689,481		10,586,592
Book value per share	$	21.31	$	20.73	$	19.49	$	19.11	$	18.13
Total common shareholders’ equity		278,407		270,258		209,644		204,276		191,910
Less: Goodwill and other intangible assets		10,477		10,633		10,774		10,916		11,070
Tangible common shareholders’ equity	$	267,930	$	259,625	$	198,870	$	193,360	$	180,840
Common shares outstanding		13,064,110		13,036,954		10,757,483		10,689,481		10,586,592
Tangible book value per share	$	20.51	$	19.91	$	18.49	$	18.09	$	17.08

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	As of or for the Three Months Ended
(Amounts in thousands, except share/ per share data and percentages)	Mar 31, 2017			Dec 31, 2016			Sept 30, 2016			Jun 30, 2016			Mar 31, 2016
Average total shareholders’ equity	$	272,713		$	235,984		$	206,009		$	194,385		$	194,383
Less: Average Preferred stock		—			—			—			—			9,231
Less: Average Goodwill and other intangible assets		10,565			10,719			10,855			11,006			11,165
Average tangible common shareholders’ equity	$	262,148		$	225,265		$	195,154		$	183,379		$	173,987
Net income available to common shareholders	$	7,934		$	7,179		$	7,137		$	7,508		$	6,210
Average tangible common equity		262,148			225,265			195,154			183,379			173,987
Return on average tangible common equity		12.27	%		12.68	%		14.55	%		16.47	%		14.36	%
Efficiency Ratio:
Net interest income	$	23,643		$	21,699		$	20,675		$	19,934		$	19,276
Noninterest income		4,008			2,553			4,876			4,626			3,085
Operating revenue		27,651			24,252			25,551			24,560			22,361
Expense
Total noninterest expense		14,276			13,229			13,708			12,913			11,831
Efficiency ratio		51.63	%		54.55	%		53.65	%		52.58	%		52.91	%
Annualized interest and fees from loans	$	91,493		$	85,023		$	80,329		$	76,136		$	71,358
Average loans		1,868,678			1,714,638			1,620,347			1,497,556			1,364,467
Reported yield on loans(1)		4.90	%		4.96	%		4.96	%		5.08	%		5.23	%
Annualized accretion income on acquired loans	$	1,547		$	1,306		$	841		$	1,108		$	1,447
Less: Effect of accretion income on acquired loans		(0.08	%)		(0.08	%)		(0.05	%)		(0.07	%)		(0.11	%)
Adjusted yield on loans		4.82	%		4.88	%		4.91	%		5.01	%		5.12	%
Annualized net interest income	$	95,886		$	86,324		$	82,251		$	80,174		$	77,528
Average earning assets		3,160,738			2,783,473			2,576,294			2,404,060			2,177,905
Reported net interest margin(1)		3.01	%		3.10	%		3.19	%		3.33	%		3.56	%
Annualized accretion income on acquired loans	$	1,547		$	1,306		$	841		$	1,108		$	1,447
Effect of accretion income on acquired loans		(0.05	%)		(0.05	%)		(0.03	%)		(0.05	%)		(0.07	%)
Net interest margin adjusted for purchase accounting adjustments		2.96	%		3.05	%		3.16	%		3.28	%		3.49	%

⁽¹⁾  The yields and margins reported in the table above do not include anytax-equivalent adjustments.

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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
	Mar 31, 2017		Dec 31, 2016		Sept 30, 2016		Jun 30, 2016		Mar 31, 2016
Income Statement Data ($):
Interest income		30,541		27,336		25,724		24,286		22,561
Interest expense		6,898		5,637		5,049		4,352		3,285
Net interest income		23,643		21,699		20,675		19,934		19,276
Provision for loan losses		1,855		1,145		1,392		1,567		1,136
Noninterest income		4,008		2,553		4,876		4,626		3,085
Noninterest expense		14,276		13,229		13,708		12,913		11,831
Net income before taxes		11,520		9,878		10,451		10,080		9,394
Income tax expense(1)		3,586		2,699		3,314		2,572		3,161
Net income(1)		7,934		7,179		7,137		7,508		6,233
Earnings before interest and taxes		18,418		15,515		15,500		14,432		12,679
Net income available to common shareholders(1)		7,934		7,179		7,137		7,508		6,210
Weighted average diluted common shares(1)		13,657,357		12,473,725		11,415,422		11,320,705		11,215,473
Earnings per share, basic		0.61		0.61		0.67		0.70		0.59
Earnings per share, diluted(1)		0.58		0.58		0.63		0.66		0.55
Profitability (%)
Return on average assets		0.99		1.00		1.07		1.22		1.12
Return on average equity		11.80		12.10		13.78		15.53		12.90
Return on average tangible common equity(4)		12.28		12.68		15.48		16.47		14.36
Efficiency ratio(4)		51.63		54.55		53.65		52.58		52.91
Net interest margin		3.18		3.27		3.34		3.47		3.70
Balance Sheet Data ($):
Loans (including HFS)		1,962,397		1,797,291		1,680,877		1,567,537		1,433,623
Loan loss reserve		18,105		16,553		15,590		14,253		12,676
Cash		114,664		90,927		56,804		72,050		62,054
Securities		1,299,349		983,649		905,806		909,531		746,781
Goodwill		9,124		9,124		9,124		9,124		9,124
Intangible assets (Sum of core deposit intangible and SBA servicing rights)		1,353		1,509		1,650		1,792		1,946
Assets		3,454,788		2,943,189		2,703,195		2,607,101		2,300,094
Deposits		2,817,212		2,391,818		2,217,954		2,249,735		1,953,573
Liabilities		3,176,278		2,672,828		2,493,551		2,402,825		2,108,184
Total equity		278,510		270,361		209,644		204,276		191,910
Common equity		278,407		270,258		209,644		204,276		191,910
Tangible common equity		267,930		259,625		198,870		193,360		180,840
Asset Quality (%)
Nonperforming loans/ total loans(2)		0.21		0.35		0.10		0.10		0.12
Nonperforming assets / (total loans(2) + foreclosed assets)		0.27		0.35		0.10		0.12		0.14
Loan loss reserve / total loans(2)		0.93		0.93		0.94		0.92		0.89
Net charge-offs / average loans		0.07		0.04		0.01		0.00		0.01
Capital (%)
Tangible common equity to tangible assets		7.78		8.85		7.39		7.45		7.90
Common Equity Tier 1 ratio(3)		11.32		11.75		9.09		9.22		9.60
Leverage ratio(3)		8.36		9.28		7.15		7.33		7.69
Tier 1 risk-based capital ratio(3)		11.32		11.75		9.09		9.22		9.60
Total risk-based capital ratio(3)		14.51		15.09		12.66		12.93		12.49

⁽¹⁾  This item reflects the retrospective adoption of Accounting Standard Update2016-09 during fourth quarter 2016, which impacted previously reported quarterly earnings and/or earnings per share (“EPS”) in 2016, as follows: (1) first quarter 2016 – no tax benefit was recorded; decreased diluted EPS by $0.01; (2) second quarter 2016 – decreased income tax expense by $509 and increased diluted EPS by $0.04; and (3) third quarter 2016 – decreased income tax expense by $107 and increased diluted EPS by $0.01.

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

⁽³⁾  Capital ratios are from the Company’s regulatory filings with the Board of Governors of the Federal Reserve System, and for March 31, 2017 the ratios are estimates since the Company’s quarterly regulatory reports have not yet been filed.

⁽⁴⁾  SeeNon-GAAP table preceding this table.

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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 our FormS-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have more than $1.07 billion in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act; or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion innon-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

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

Other Events

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

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

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.

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Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a12-month time period ended March 31, 2018, net interest income was estimated to decrease 7.79% and 16.23% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to increase 4.51% and decrease 5.33% 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, with the exception of the 200 basis point increase, which is just outside the Company’s 15% guideline.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of March 31, 2017.

Projected Interest Rate Change	Net Interest Income	Net Interest Income $ Change from Base	% Change from Base
-200	85,673	-4,826	-5.33%
-100	94,582	4,083	4.51%
Base	90,499	—	0.00%
+100	83,448	-7,051	-7.79%
+200	75,813	-14,686	-16.23%
+300	68,664	-21,835	-24.13%
+400	60,581	-29,918	-33.06%

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 Rule13a-15(e) under the Exchange Act) as of March 31, 2017, the end of the fiscal quarter covered by this Quarterly Report on Form10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.

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

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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 Form10-K filed with the SEC on March 16, 2017.

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

Shares of the Company’s common stock were issued during the first quarter of 2017 pursuant to the exercise of warrants and options issued by the Company, as follows:

Date of Sale	Number of Shares Exercised		Type of Issuance	Price Per Share		Aggregate Price
01/26/2017		395	Warrants Exercised	$	12.00	$	4,740.00
		639	Options Exercised	$	10.00	$	6,390.00
		1,128	Options Exercised	$	10.50	$	11,844.00
		1,067	Options Exercised	$	11.75	$	12,537.25
		3,643	Options Exercised	$	12.00	$	43,716.00
		659	Options Exercised	$	13.00	$	8,567.00
		440	Options Exercised	$	13.50	$	5,940.00
01/31/2017		3,549	Options Exercised	$	8.57	$	30,414.93
02/03/2017		2,125	Warrants Exercised	$	12.00	$	25,500.00
02/08/2017		5,000	Options Exercised	$	10.00	$	50,000.00
02/10/2017		900	Options Exercised	$	10.50	$	9,450.00
02/13/2017		250	Warrants Exercised	$	12.00	$	3,000.00
02/21/2017		875	Warrants Exercised	$	12.00	$	10,500.00
		400	Options Exercised	$	8.57	$	3,428.00
02/22/2017		1,800	Options Exercised	$	10.00	$	18,000.00
		1,600	Options Exercised	$	11.75	$	18,800.00
02/23/2017		500	Warrants Exercised	$	12.00	$	6,000.00
03/02/2017		250	Warrants Exercised	$	12.00	$	3,000.00
03/09/2017		600	Options Exercised	$	13.00	$	7,800.00
		62	Options Exercised	$	13.50	$	837.00
		94	Options Exercised	$	20.69	$	1,944.86
03/20/2017		809	Warrants Exercised	$	12.00	$	9,708.00
03/21/2017		250	Warrants Exercised	$	12.00	$	3,000.00
03/24/2017		255	Warrants Exercised	$	12.00	$	3,060.00
03/29/2017		1,875	Warrants Exercised	$	12.00	$	22,500.00
03/30/2017		3,427	Warrants Exercised	$	12.00	$	41,124.00

Neither the exercises of the warrant 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(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.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS

Exhibit No.	Description
2.1	Amendment No. 2 to the Agreement and Plan of Reorganization and Bank Merger (incorporated by reference to Exhibit2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2017).
31.1	Certification of Chief Executive Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
31.2	Certification of Chief Financial Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101	Interactive Data Files.

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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.
May 10, 2017	By:	/s/ Sarah Meyerrose
		Sarah Meyerrose
		On behalf of the registrant and as Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.	Description
2.1	Amendment No. 2 to the Agreement and Plan of Reorganization and Bank Merger (incorporated by reference to Exhibit2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2017).
31.1	Certification of Chief Executive Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
31.2	Certification of Chief Financial Officer Pursuant to Rule13a-14(a) (Section 302 Certification).
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).
101	Interactive Data Files.