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Franklin Financial Network (FSB)

Filed: 9 May 19, 8:53am

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

or

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

For the transition period from                     to                     

Commission file number 001-36895

 

FRANKLIN FINANCIAL NETWORK, INC.

(Exact name of registrant as specified in its charter)

 

Tennessee

20-8839445

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

722 Columbia Avenue

Franklin, Tennessee

37064

(Address of principal executive offices)

(Zip Code)

615-236-2265

(Registrant’s telephone number, including area code)

N/A

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

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

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

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

 

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

FSB

New York Stock Exchange

 

The number of shares outstanding of the registrant’s common stock, no par value per share, as of May 3, 2019, was 14,729,001.

 

 

 


TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

 

 

Cautionary Note Regarding Forward-Looking Statements

1

Item 1. Consolidated Financial Statements (unaudited)

2

Consolidated Balance Sheets

2

Consolidated Statements of Income

3

Consolidated Statements of Comprehensive Income

4

Consolidated Statement of Changes in Shareholders’ Equity

5

Consolidated Statements of Cash Flows

6

Notes to Consolidated Financial Statements

7

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item  3. Quantitative and Qualitative Disclosures About Market Risk

47

Item  4. Controls and Procedures

47

 

 

PART II OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

48

Item 1A. Risk Factors

48

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

48

Item 3. Defaults Upon Senior Securities

48

Item 4. Mine Safety Disclosures

48

Item 5. Other Information

48

Item 6. Exhibits

49

 

 

SIGNATURES

 

 


 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Risks and uncertainties that could cause our actual results to differ materially from those described in forward-looking statements include those discussed in our filings with the Securities and Exchange Commission (“SEC”), including those described in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.

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,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

300,113

 

 

$

280,212

 

Certificates of deposit at other financial institutions

 

 

3,595

 

 

 

3,594

 

Securities available for sale

 

 

799,301

 

 

 

1,030,668

 

Securities held to maturity (fair value 2019—$118,866 and 2018—$118,955)

 

 

118,831

 

 

 

121,617

 

Loans held for sale, at fair value

 

 

21,730

 

 

 

11,103

 

Loans held for investment

 

 

2,807,377

 

 

 

2,665,399

 

Allowance for loan losses

 

 

(27,857

)

 

 

(23,451

)

Net loans

 

 

2,779,520

 

 

 

2,641,948

 

Restricted equity securities, at cost

 

 

22,803

 

 

 

21,831

 

Premises and equipment, net

 

 

12,682

 

 

 

12,371

 

Accrued interest receivable

 

 

14,232

 

 

 

13,337

 

Bank owned life insurance

 

 

55,614

 

 

 

55,239

 

Deferred tax asset

 

 

12,208

 

 

 

13,189

 

Servicing rights, net

 

 

3,366

 

 

 

3,403

 

Goodwill

 

 

18,176

 

 

 

18,176

 

Core deposit intangible, net

 

 

807

 

 

 

952

 

Other assets

 

 

75,458

 

 

 

21,799

 

Total assets

 

$

4,238,436

 

 

$

4,249,439

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

304,937

 

 

$

290,580

 

Interest bearing

 

 

3,010,906

 

 

 

3,141,227

 

Total deposits

 

 

3,315,843

 

 

 

3,431,807

 

Federal Home Loan Bank advances

 

 

416,500

 

 

 

368,500

 

Subordinated notes, net

 

 

58,738

 

 

 

58,693

 

Accrued interest payable

 

 

5,041

 

 

 

4,700

 

Other liabilities

 

 

58,800

 

 

 

12,906

 

Total liabilities

 

 

3,854,922

 

 

 

3,876,606

 

Equity

 

 

 

 

 

 

 

 

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

   outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, no par value: 30,000,000 authorized; 14,574,339 and 14,538,085

     issued and outstanding at March 31, 2019, and December 31, 2018, respectively

 

 

266,758

 

 

 

264,905

 

Retained earnings

 

 

123,250

 

 

 

123,176

 

Accumulated other comprehensive loss

 

 

(6,587

)

 

 

(15,341

)

Total shareholders’ equity

 

 

383,421

 

 

 

372,740

 

Non-controlling interest in consolidated subsidiary

 

 

93

 

 

 

93

 

Total equity

 

 

383,514

 

 

 

372,833

 

Total liabilities and equity

 

$

4,238,436

 

 

$

4,249,439

 

 

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,

 

 

 

2019

 

 

2018

 

Interest income and dividends

 

 

 

 

 

 

 

 

Loans, including fees

 

$

38,338

 

 

$

28,793

 

Securities:

 

 

 

 

 

 

 

 

Taxable

 

 

6,394

 

 

 

6,111

 

Tax-Exempt

 

 

1,470

 

 

 

1,915

 

Dividends on restricted equity securities

 

 

334

 

 

 

274

 

Federal funds sold and other

 

 

987

 

 

 

954

 

Total interest income

 

 

47,523

 

 

 

38,047

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

16,990

 

 

 

10,643

 

Federal funds purchased and repurchase agreements

 

 

72

 

 

 

96

 

Federal Home Loan Bank advances

 

 

1,959

 

 

 

1,110

 

Subordinated notes and other borrowings

 

 

1,082

 

 

 

1,082

 

Total interest expense

 

 

20,103

 

 

 

12,931

 

Net interest income

 

 

27,420

 

 

 

25,116

 

Provision for loan losses

 

 

5,055

 

 

 

573

 

Net interest income after provision for loan losses

 

 

22,365

 

 

 

24,543

 

Noninterest income

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

74

 

 

 

42

 

Other service charges and fees

 

 

757

 

 

 

751

 

Mortgage banking revenue

 

 

1,672

 

 

 

1,549

 

Wealth management

 

 

627

 

 

 

704

 

Gain on sale or call of securities

 

 

149

 

 

 

 

Net (loss) gain on sale of loans

 

 

(217

)

 

 

9

 

Net gain on sale of foreclosed assets

 

 

4

 

 

 

3

 

Other

 

 

420

 

 

 

398

 

Total noninterest income

 

 

3,486

 

 

 

3,456

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

14,743

 

 

 

9,188

 

Occupancy and equipment

 

 

3,113

 

 

 

2,594

 

FDIC assessment expense

 

 

990

 

 

 

660

 

Marketing

 

 

319

 

 

 

280

 

Professional fees

 

 

923

 

 

 

869

 

Amortization of core deposit intangible

 

 

145

 

 

 

104

 

Other

 

 

2,383

 

 

 

1,793

 

Total noninterest expense

 

 

22,616

 

 

 

15,488

 

Income before income tax expense

 

 

3,235

 

 

 

12,511

 

Income tax expense

 

 

334

 

 

 

2,459

 

Net income

 

 

2,901

 

 

 

10,052

 

Earnings attributable to noncontrolling interest

 

 

 

 

 

 

Net income available to common shareholders

 

$

2,901

 

 

$

10,052

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.20

 

 

$

0.76

 

Diluted

 

 

0.19

 

 

 

0.73

 

Dividend per share

 

$

0.04

 

 

$

 

 

See accompanying notes to consolidated financial statements.

 

3


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net income

 

$

2,901

 

 

$

10,052

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

13,111

 

 

 

(14,577

)

Reclassification adjustment for gains included in net income

 

 

(149

)

 

 

 

Net unrealized gains (losses)

 

 

12,962

 

 

 

(14,577

)

Tax effect, includes $58 and $0, respectively, income tax (benefit)
expense from sales of securities

 

 

(4,208

)

 

 

3,808

 

Total other comprehensive income (loss)

 

 

8,754

 

 

 

(10,769

)

Comprehensive income (loss)

 

$

11,655

 

 

$

(717

)

 

See accompanying notes to consolidated financial statements.

 

4


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2019 and March 31, 2018

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

(Unaudited)

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

Common Stock

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Noncontrolling

 

 

Total

 

 

 

Stock

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss

 

 

Interest

 

 

Equity

 

Balance at January 1, 2018

 

$

 

 

 

13,237,128

 

 

$

222,665

 

 

$

88,671

 

 

$

(6,786

)

 

$

103

 

 

$

304,653

 

Exercise of common stock options, includes net settlement of shares

 

 

 

 

 

21,348

 

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

220

 

Stock based compensation expense, net of restricted

   share forfeitures

 

 

 

 

 

(334

)

 

 

759

 

 

 

 

 

 

 

 

 

 

 

 

759

 

Stock issued in conjunction with 401(k) employer

   match, net of distributions

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

(50

)

Net income

 

 

 

 

 

 

 

 

 

 

 

10,052

 

 

 

 

 

 

 

 

 

10,052

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,769

)

 

 

 

 

 

(10,769

)

Balance at March 31, 2018

 

$

 

 

 

13,258,142

 

 

$

223,594

 

 

$

98,723

 

 

$

(17,555

)

 

$

103

 

 

$

304,865

 

Balance at January 1, 2019

 

$

 

 

 

14,538,085

 

 

$

264,905

 

 

$

123,176

 

 

$

(15,341

)

 

$

93

 

 

$

372,833

 

Exercise of common stock options, includes net settlement of shares

 

 

 

 

 

35,046

 

 

 

524

 

 

 

 

 

 

 

 

 

 

 

 

524

 

Issuance of restricted stock, net of forfeitures

 

 

 

 

 

1,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense, net of

   share forfeitures

 

 

 

 

 

 

 

 

1,329

 

 

 

 

 

 

 

 

 

 

 

 

1,329

 

Cash dividends - common stock ($0.04 per share)

 

 

 

 

 

 

 

 

 

 

 

(583

)

 

 

 

 

 

 

 

 

(583

)

Adjustment for adoption of ASU 2017-08

   amortization of premiums

 

 

 

 

 

 

 

 

 

 

 

(2,244

)

 

 

 

 

 

 

 

 

(2,244

)

Net income

 

 

 

 

 

 

 

 

 

 

 

2,901

 

 

 

 

 

 

 

 

 

2,901

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,754

 

 

 

 

 

 

8,754

 

Balance at March 31, 2019

 

$

 

 

 

14,574,339

 

 

$

266,758

 

 

$

123,250

 

 

$

(6,587

)

 

$

93

 

 

$

383,514

 

 

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

2,901

 

 

$

10,052

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization on premises and equipment

 

 

410

 

 

 

403

 

Accretion of purchase accounting adjustments

 

 

(172

)

 

 

(252

)

Net amortization of securities

 

 

1,212

 

 

 

1,904

 

Amortization of loan servicing right asset

 

 

225

 

 

 

214

 

Amortization of core deposit intangible

 

 

145

 

 

 

104

 

Amortization of debt issuance costs

 

 

45

 

 

 

44

 

Provision for loan losses

 

 

5,055

 

 

 

573

 

Deferred income tax (benefit) expense

 

 

(2,115

)

 

 

10

 

Excess tax benefit related to stock compensation

 

 

(130

)

 

 

 

Origination of loans held for sale

 

 

(85,008

)

 

 

(83,226

)

Proceeds from sale of loans held for sale

 

 

75,791

 

 

 

83,622

 

Net gain on sale of loans held for sale

 

 

(1,598

)

 

 

(1,439

)

Gain on sale of available for sale securities

 

 

(149

)

 

 

 

Income from bank owned life insurance

 

 

(375

)

 

 

(365

)

Stock-based compensation

 

 

1,329

 

 

 

759

 

Deferred gain on sale of loans

 

 

(4

)

 

 

(4

)

Deferred gain on sale of foreclosed assets

 

 

(4

)

 

 

(3

)

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(12,900

)

 

 

(1,871

)

Accrued interest payable and other liabilities

 

 

3,080

 

 

 

1,896

 

Net cash from operating activities

 

 

(12,262

)

 

 

12,421

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Securities available for sale :

 

 

 

 

 

 

 

 

Sales

 

 

259,613

 

 

 

 

Purchases

 

 

(80,360

)

 

 

(224,712

)

Maturities, prepayments and calls

 

 

62,050

 

 

 

22,129

 

Securities held to maturity :

 

 

 

 

 

 

 

 

Purchases

 

 

 

 

 

(1,676

)

Maturities, prepayments and calls

 

 

2,448

 

 

 

2,714

 

Net change in loans

 

 

(142,455

)

 

 

(53,240

)

Purchase of restricted equity securities

 

 

(972

)

 

 

(1,114

)

Purchases of premises and equipment, net

 

 

(721

)

 

 

(63

)

Net cash from investing activities

 

 

99,603

 

 

 

(255,962

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

(Decrease) increase in deposits

 

 

(115,964

)

 

 

187,925

 

Increase in federal funds purchased and repurchase agreements

 

 

 

 

 

5,067

 

Proceeds from Federal Home Loan Bank advances

 

 

190,000

 

 

 

95,000

 

Repayment of Federal Home Loan Bank advances

 

 

(142,000

)

 

 

(50,000

)

Proceeds from exercise of common stock options

 

 

524

 

 

 

220

 

Divestment of common stock issued to 401(k) plan

 

 

 

 

 

(50

)

Net cash from financing activities

 

 

(67,440

)

 

 

238,162

 

Net change in cash and cash equivalents

 

 

19,901

 

 

 

(5,379

)

Cash and cash equivalents at beginning of period

 

 

280,212

 

 

 

251,543

 

Cash and cash equivalents at end of period

 

$

300,113

 

 

$

246,164

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

19,762

 

 

$

12,925

 

Income taxes paid

 

 

1,428

 

 

 

525

 

Non-cash supplemental information:

 

 

 

 

 

 

 

 

Establishment of lease liability and right-of-use asset

 

 

43,723

 

 

 

 

Transfers from securities available for sale to securities held to maturity

 

 

1,206

 

 

 

 

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—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included as required by Regulation S-X, Rule 10-01. All such adjustments are of a normal recurring nature. It is suggested that these interim consolidated financial statements and notes be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2019.

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

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases which requires recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.

The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for operating leases. The guidance became effective for the Company on January 1, 2019. In July 2016, the FASB issued Accounting Standards Update 2018-10, Codification Improvements to Topic 842,

Leases which provides technical corrections and improvements to ASU 2016-02. In July 2016, the FASB issued Accounting Standards Update 2018-11, Leases (Topic 842): Targeted Improvements which provides an optional transition method to adopt the new requirements of ASU 2016-02 as of the adoption date with no adjustment to the presentation or disclosure of comparative prior periods included in the financial statements in the period of adoption. The Company elected the optional transition method on January 1, 2019, which will result in presentation of periods prior to adoption under the prior lease guidance of ASC Topic 840. In December 2018, the FASB issued Accounting Standards Update 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. ASU 2018-20 permits lessors to account for certain taxes as lessee costs, permits lessors to exclude from revenue certain lessor costs paid by lessees directly to third parties, and requires lessors to allocate certain variable payments to lease and non-lease components. See Note 5 Leases for more information.  

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance became effective for the Company on January 1, 2019, and using a modified retrospective transition adoption approach, we recognized a cumulative effect reduction to retain earnings totaling $2,244.

ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 became effective for us on January 1, 2019 and did not have a significant impact on our financial statements.

In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements.” This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

7


 

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, FASB issued ASU 2016-13, 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 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 on available-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; however, the Company does not currently plan to early adopt this ASU. The Company is currently gathering information and working to determine the methodology to be used. 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 Company is still evaluating the impact of this new guidance on our financial statements; however an increase in the overall ALLL is likely upon adoption to provide for expected credit losses over the life of the loan portfolio.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.

ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

 

ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for us on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

8


 

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at March 31, 2019 and December 31, 2018 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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

69,548

 

 

$

70

 

 

$

 

 

$

69,618

 

U.S. government sponsored entities and agencies

 

 

1,829

 

 

 

1

 

 

 

(10

)

 

 

1,820

 

Mortgage-backed securities: residential

 

 

531,551

 

 

 

387

 

 

 

(8,480

)

 

 

523,458

 

Asset-backed securities

 

 

25,745

 

 

 

 

 

 

(695

)

 

 

25,050

 

Corporate notes

 

 

17,878

 

 

 

123

 

 

 

(62

)

 

 

17,939

 

State and political subdivisions

 

 

160,556

 

 

 

2,087

 

 

 

(1,227

)

 

 

161,416

 

Total

 

$

807,107

 

 

$

2,668

 

 

$

(10,474

)

 

$

799,301

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

253,015

 

 

$

59

 

 

$

(60

)

 

$

253,014

 

U.S. government sponsored entities and agencies

 

 

21,999

 

 

 

1

 

 

 

(112

)

 

 

21,888

 

Mortgage-backed securities: residential

 

 

596,766

 

 

 

27

 

 

 

(16,094

)

 

 

580,699

 

Asset-backed securities

 

 

25,744

 

 

 

 

 

 

(900

)

 

 

24,844

 

Corporate notes

 

 

12,480

 

 

 

21

 

 

 

(77

)

 

 

12,424

 

State and political subdivisions

 

 

141,432

 

 

 

863

 

 

 

(4,496

)

 

 

137,799

 

Total

 

$

1,051,436

 

 

$

971

 

 

$

(21,739

)

 

$

1,030,668

 

 

The amortized cost and fair value of the securities held to maturity portfolio at March 31, 2019 and December 31, 2018 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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities: residential

 

$

73,865

 

 

$

85

 

 

$

(1,968

)

 

$

71,982

 

State and political subdivisions

 

 

44,966

 

 

 

1,918

 

 

 

 

 

 

46,884

 

Total

 

$

118,831

 

 

$

2,003

 

 

$

(1,968

)

 

$

118,866

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities: residential

 

$

75,944

 

 

$

34

 

 

$

(3,072

)

 

$

72,906

 

State and political subdivisions

 

 

45,673

 

 

 

466

 

 

 

(90

)

 

 

46,049

 

Total

 

$

121,617

 

 

$

500

 

 

$

(3,162

)

 

$

118,955

 

 

The proceeds from sales and calls of securities available for sale and the associated gains and losses were as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Proceeds

 

$

259,613

 

 

$

 

Gross gains

 

 

1,801

 

 

 

 

Gross losses

 

 

(1,652

)

 

 

 

 

9


 

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, 2019

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Available for sale

 

 

 

 

 

 

 

 

One year or less

 

$

70,053

 

 

$

70,122

 

Over one year through five years

 

 

1,080

 

 

 

1,078

 

Over five years through ten years

 

 

21,576

 

 

 

21,663

 

Over ten years

 

 

157,102

 

 

 

157,930

 

Asset-backed securities

 

 

25,745

 

 

 

25,050

 

Mortgage-backed securities: residential

 

 

531,551

 

 

 

523,458

 

Total

 

$

807,107

 

 

$

799,301

 

Held to maturity

 

 

 

 

 

 

 

 

Over one year through five years

 

 

1,106

 

 

 

1,128

 

Over five years through ten years

 

 

1,039

 

 

 

1,073

 

Over ten years

 

 

42,821

 

 

 

44,683

 

Mortgage-backed securities: residential

 

 

73,865

 

 

 

71,982

 

Total

 

$

118,831

 

 

$

118,866

 

 

Securities pledged at March 31, 2019 and December 31, 2018 had a carrying amount of $711,826 and $939,440, respectively, and were pledged to secure public deposits.

At March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

$

344

 

 

$

(1

)

 

$

1,021

 

 

$

(9

)

 

$

1,365

 

 

$

(10

)

Mortgage-backed securities: residential

 

 

 

 

 

 

 

 

444,647

 

 

 

(8,480

)

 

 

444,647

 

 

 

(8,480

)

Asset-backed securities

 

 

25,050

 

 

 

(695

)

 

 

 

 

 

 

 

 

25,050

 

 

 

(695

)

Corporate

 

 

6,329

 

 

 

(62

)

 

 

 

 

 

 

 

 

6,329

 

 

 

(62

)

State and political subdivisions

 

 

509

 

 

 

(1

)

 

 

60,318

 

 

 

(1,226

)

 

 

60,827

 

 

 

(1,227

)

Total available for sale

 

$

32,232

 

 

$

(759

)

 

$

505,986

 

 

$

(9,715

)

 

$

538,218

 

 

$

(10,474

)

 

 

 

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

 

$

 

 

$

 

 

$

66,578

 

 

$

(1,968

)

 

$

66,578

 

 

$

(1,968

)

Total held to maturity

 

$

 

 

$

 

 

$

66,578

 

 

$

(1,968

)

 

$

66,578

 

 

$

(1,968

)

10


 

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

163,722

 

 

$

(60

)

 

$

 

 

$

 

 

$

163,722

 

 

$

(60

)

U.S. government sponsored entities and agencies

 

 

1,355

 

 

 

(12

)

 

 

19,937

 

 

 

(100

)

 

 

21,292

 

 

 

(112

)

Mortgage-backed securities: residential

 

 

83,203

 

 

 

(755

)

 

 

490,752

 

 

 

(15,339

)

 

 

573,955

 

 

 

(16,094

)

Asset-backed securities

 

 

24,845

 

 

 

(900

)

 

 

 

 

 

 

 

 

24,845

 

 

 

(900

)

Corporate

 

 

9,839

 

 

 

(77

)

 

 

 

 

 

 

 

 

9,839

 

 

 

(77

)

State and political subdivisions

 

 

10,446

 

 

 

(106

)

 

 

69,238

 

 

 

(4,390

)

 

 

79,684

 

 

 

(4,496

)

Total available for sale

 

$

293,410

 

 

$

(1,910

)

 

$

579,927

 

 

$

(19,829

)

 

$

873,337

 

 

$

(21,739

)

 

 

 

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

 

$

2,239

 

 

$

(40

)

 

$

68,067

 

 

$

(3,032

)

 

$

70,306

 

 

$

(3,072

)

State and political subdivisions

 

 

8,362

 

 

 

(39

)

 

 

3,675

 

 

 

(51

)

 

 

12,037

 

 

 

(90

)

Total held to maturity

 

$

10,601

 

 

$

(79

)

 

$

71,742

 

 

$

(3,083

)

 

$

82,343

 

 

$

(3,162

)

 

Unrealized losses on debt securities have not been recognized into income because the issuers’ bonds are of high credit quality (rated AA or higher). As of March 31, 2019, management does not intend to sell and it is more likely than not that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

 

NOTE 3—LOANS

Loans at March 31, 2019 and December 31, 2018 were as follows:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Loans that are not PCI loans

 

 

 

 

 

 

 

 

Construction and land development

 

$

581,340

 

 

$

584,440

 

Commercial real estate:

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

852,838

 

 

 

754,243

 

Other

 

 

40,652

 

 

 

48,017

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

497,160

 

 

 

492,989

 

Other

 

 

197,030

 

 

 

189,817

 

Commercial and industrial

 

 

635,417

 

 

 

590,854

 

Consumer and other

 

 

4,448

 

 

 

5,568

 

Loans before net deferred loan fees

 

 

2,808,885

 

 

 

2,665,928

 

Deferred loan fees, net

 

 

(3,528

)

 

 

(2,544

)

Total loans that are not PCI loans

 

 

2,805,357

 

 

 

2,663,384

 

Total PCI loans

 

 

2,020

 

 

 

2,015

 

Allowance for loan losses

 

 

(27,857

)

 

 

(23,451

)

Total loans, net of allowance for loan losses

 

$

2,779,520

 

 

$

2,641,948

 

11


 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month periods ended March 31, 2019 and 2018:

 

 

 

Construction

and Land

Development

 

 

Commercial

Real

Estate

 

 

Residential

Real

Estate

 

 

Commercial

and

Industrial

 

 

Consumer

and

Other

 

 

Total

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,743

 

 

$

6,725

 

 

$

4,743

 

 

$

7,166

 

 

$

74

 

 

$

23,451

 

Provision for loan losses

 

 

(1

)

 

 

302

 

 

 

80

 

 

 

4,631

 

 

 

43

 

 

 

5,055

 

Loans charged-off

 

 

 

 

 

 

 

 

(15

)

 

 

(568

)

 

 

(70

)

 

 

(653

)

Recoveries

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

 

 

4

 

Total ending allowance balance

 

$

4,742

 

 

$

7,027

 

 

$

4,810

 

 

$

11,229

 

 

$

49

 

 

$

27,857

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,802

 

 

$

5,981

 

 

$

3,834

 

 

$

7,587

 

 

$

43

 

 

$

21,247

 

Provision for loan losses

 

 

582

 

 

 

(106

)

 

 

(241

)

 

 

328

 

 

 

10

 

 

 

573

 

Loans charged-off

 

 

(39

)

 

 

 

 

 

(7

)

 

 

(49

)

 

 

(11

)

 

 

(106

)

Recoveries

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

5

 

 

 

24

 

Total ending allowance balance

 

$

4,345

 

 

$

5,875

 

 

$

3,605

 

 

$

7,866

 

 

$

47

 

 

$

21,738

 

As of both March 31, 2019 and December 31, 2018, there was no 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, 2019 and December 31, 2018. For purposes of this disclosure, recorded investment in loans excludes accrued interest receivable and net deferred loan fees due to immateriality.

 

 

 

Construction

and Land

Development

 

 

Commercial

Real

Estate

 

 

Residential

Real

Estate

 

 

Commercial

and

Industrial

 

 

Consumer

and

Other

 

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

3,455

 

 

$

 

 

$

3,455

 

Collectively evaluated for impairment

 

 

4,742

 

 

 

7,027

 

 

 

4,810

 

 

 

7,774

 

 

 

49

 

 

 

24,402

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total ending allowance balance

 

$

4,742

 

 

$

7,027

 

 

$

4,810

 

 

$

11,229

 

 

$

49

 

 

$

27,857

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

583

 

 

$

 

 

$

1,811

 

 

$

9,177

 

 

$

 

 

$

11,571

 

Collectively evaluated for impairment

 

 

580,757

 

 

 

893,490

 

 

 

692,379

 

 

 

626,240

 

 

 

4,448

 

 

 

2,797,314

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

74

 

 

 

1,946

 

 

 

 

 

 

2,020

 

Total ending loans balance

 

$

581,340

 

 

$

893,490

 

 

$

694,264

 

 

$

637,363

 

 

$

4,448

 

 

$

2,810,905

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

17

 

 

$

 

 

$

17

 

Collectively evaluated for impairment

 

 

4,743

 

 

 

6,725

 

 

 

4,743

 

 

 

7,149

 

 

 

74

 

 

 

23,434

 

Total ending allowance balance

 

$

4,743

 

 

$

6,725

 

 

$

4,743

 

 

$

7,166

 

 

$

74

 

 

$

23,451

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

2,298

 

 

$

 

 

$

3,189

 

 

$

167

 

 

$

 

 

$

5,654

 

Collectively evaluated for impairment

 

 

582,142

 

 

 

802,260

 

 

 

679,617

 

 

 

590,687

 

 

 

5,568

 

 

 

2,660,274

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

76

 

 

 

1,939

 

 

 

 

 

 

2,015

 

Total ending loans balance

 

$

584,440

 

 

$

802,260

 

 

$

682,882

 

 

$

592,793

 

 

$

5,568

 

 

$

2,667,943

 

 

12


 

Loans collectively evaluated for impairment reported at March 31, 2019 include certain acquired loans. At March 31, 2019, these non-PCI loans had a carrying value of $92,050, comprised of contractually unpaid principal totaling $93,133 and discounts totaling $1,083. Management evaluated these loans for credit deterioration since acquisition and determined that an allowance for loan losses of $169 was necessary at March 31, 2019.

The following table presents information related to impaired loans by class of loans as of March 31, 2019 and December 31, 2018:

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

599

 

 

$

583

 

 

$

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

884

 

 

 

849

 

 

 

 

Other

 

 

996

 

 

 

962

 

 

 

 

Subtotal

 

 

2,479

 

 

 

2,394

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

9,177

 

 

 

9,177

 

 

 

3,455

 

Subtotal

 

 

9,177

 

 

 

9,177

 

 

 

3,455

 

Total

 

$

11,656

 

 

$

11,571

 

 

$

3,455

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

2,298

 

 

$

2,298

 

 

$

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

1,272

 

 

 

1,272

 

 

 

 

Other

 

 

1,917

 

 

 

1,917

 

 

 

 

Subtotal

 

 

5,487

 

 

 

5,487

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

167

 

 

 

167

 

 

 

17

 

Subtotal

 

 

167

 

 

 

167

 

 

 

17

 

Total

 

$

5,654

 

 

$

5,654

 

 

$

17

 

 

The following table presents the average recorded investment of impaired loans by class of loans for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended

March 31,

 

Average Recorded Investment

 

2019

 

 

2018

 

With no allowance recorded:

 

 

 

 

 

 

 

 

Construction and land development

 

$

768

 

 

$

367

 

Commercial real estate:

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

51

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

806

 

 

 

420

 

Other

 

 

1,264

 

 

 

372

 

Commercial and industrial

 

 

 

 

 

626

 

Subtotal

 

 

2,889

 

 

 

1,785

 

With an allowance recorded:

 

 

 

 

 

 

 

 

Construction and land development

 

 

183

 

 

 

 

Commercial and industrial

 

 

3,170

 

 

 

1,785

 

Subtotal

 

 

3,353

 

 

 

1,785

 

Total average recorded investment

 

$

6,242

 

 

$

3,570

 

 

13


 

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, 2019 and 2018.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2019 and December 31, 2018:

 

 

 

Nonaccrual

 

 

Loans Past Due

Over 90 Days

 

March 31, 2019

 

 

 

 

 

 

 

 

Construction and land development

 

$

583

 

 

$

 

Commercial real estate:

 

 

 

 

 

 

 

 

Non-farm non-residential

 

 

153

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

849

 

 

 

 

Other

 

 

962

 

 

 

 

Commercial and industrial

 

 

9,177

 

 

 

180

 

Total

 

$

11,724

 

 

$

180

 

December 31, 2018

 

 

 

 

 

 

 

 

Construction and land development

 

$

2,298

 

 

$

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

1,273

 

 

 

 

Other

 

 

1,917

 

 

 

 

Commercial and industrial

 

 

 

 

 

208

 

Total

 

$

5,488

 

 

$

208

 

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, 2019 and December 31, 2018 by class of loans:

 

 

 

30-59

Days

Past Due

 

 

60-89

Days

Past Due

 

 

Greater

Than 89

Days

Past Due

 

 

Total

Past Due

 

 

Loans

Not

Past Due

 

 

PCI

Loans

 

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

139

 

 

$

 

 

$

 

 

$

139

 

 

$

581,201

 

 

$

 

 

$

581,340

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

852,838

 

 

 

 

 

 

852,838

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,652

 

 

 

 

 

 

40,652

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

1,135

 

 

 

11

 

 

 

 

 

 

1,146

 

 

 

496,014

 

 

 

74

 

 

 

497,234

 

Other

 

 

88

 

 

 

 

 

 

 

 

 

88

 

 

 

196,942

 

 

 

 

 

 

197,030

 

Commercial and industrial

 

 

522

 

 

 

622

 

 

 

180

 

 

 

1,324

 

 

 

634,093

 

 

 

1,946

 

 

 

637,363

 

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,448

 

 

 

 

 

 

4,448

 

 

 

$

1,884

 

 

$

633

 

 

$

180

 

 

$

2,697

 

 

$

2,806,188

 

 

$

2,020

 

 

$

2,810,905

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land

   development

 

$

294

 

 

$

1,986

 

 

$

548

 

 

$

2,828

 

 

$

581,612

 

 

$

 

 

$

584,440

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

515

 

 

 

 

 

 

 

 

 

515

 

 

 

753,728

 

 

 

 

 

 

754,243

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,017

 

 

 

 

 

 

48,017

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

2,390

 

 

 

404

 

 

 

228

 

 

 

3,022

 

 

 

489,967

 

 

 

76

 

 

 

493,065

 

Other

 

 

142

 

 

 

 

 

 

1,810

 

 

 

1,952

 

 

 

187,865

 

 

 

 

 

 

189,817

 

Commercial and industrial

 

 

241

 

 

 

252

 

 

 

208

 

 

 

701

 

 

 

590,153

 

 

 

1,939

 

 

 

592,793

 

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,568

 

 

 

 

 

 

5,568

 

 

 

$

3,582

 

 

$

2,642

 

 

$

2,794

 

 

$

9,018

 

 

$

2,656,910

 

 

$

2,015

 

 

$

2,667,943

 

 

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

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

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

15


 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table excludes deferred loan fees and 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, 2019 and December 31, 2018:

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

580,325

 

 

$

432

 

 

$

583

 

 

$

581,340

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

848,221

 

 

 

4,464

 

 

 

153

 

 

 

852,838

 

Other

 

 

40,033

 

 

 

619

 

 

 

 

 

 

40,652

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

492,921

 

 

 

1,567

 

 

 

2,746

 

 

 

497,234

 

Other

 

 

194,675

 

 

 

404

 

 

 

1,951

 

 

 

197,030

 

Commercial and industrial

 

 

596,529

 

 

 

8,519

 

 

 

32,315

 

 

 

637,363

 

Consumer and other

 

 

4,448

 

 

 

 

 

 

 

 

 

4,448

 

 

 

$

2,757,152

 

 

$

16,005

 

 

$

37,748

 

 

$

2,810,905

 

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Total

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

580,468

 

 

$

1,416

 

 

$

2,556

 

 

$

584,440

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

739,469

 

 

 

14,774

 

 

 

 

 

 

754,243

 

Other

 

 

48,017

 

 

 

 

 

 

 

 

 

48,017

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

489,781

 

 

 

948

 

 

 

2,336

 

 

 

493,065

 

Other

 

 

186,485

 

 

 

404

 

 

 

2,928

 

 

 

189,817

 

Commercial and industrial

 

 

553,589

 

 

 

8,313

 

 

 

30,891

 

 

 

592,793

 

Consumer and other

 

 

5,567

 

 

 

1

 

 

 

 

 

 

5,568

 

 

 

$

2,603,376

 

 

$

25,856

 

 

$

38,711

 

 

$

2,667,943

 

 

Troubled Debt Restructurings

As of March 31, 2019, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of $319. As of December 31, 2018, the Company’s loan portfolio contained two loans that had been modified in a troubled debt restructuring with a balance of $490. During the three months ended March 31, 2019, one of the loans that was a troubled debt restructuring at December 31, 2018 was fully charged off with $159 of the loan balance being recognized as a charge-off.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at March 31, 2019 and December 31, 2018 are as follows:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Loan portfolios serviced for:

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

$

494,025

 

 

$

492,761

 

Other

 

 

3,651

 

 

 

3,689

 

 

16


 

The components of net loan servicing fees for the three months ended March 31, 2019 and 2018 were as follows:

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Loan servicing fees, net:

 

 

 

 

 

 

 

 

Loan servicing fees

 

$

306

 

 

$

333

 

Amortization of loan servicing fees

 

 

(225

)

 

 

(214

)

Change in impairment

 

 

 

 

 

 

Total

 

$

81

 

 

$

119

 

 

The fair value of servicing rights was estimated by management to be approximately $4,329 at March 31, 2019. Fair value for March 31, 2019 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 13.9%. At December 31, 2018, the fair value of servicing rights was estimated by management to be approximately $4,836. Fair value for December 31, 2018 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 11.9%.

NOTE 5—LEASES

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. The leases are presented as of part of other assets and other liabilities on the consolidated balance sheet.

 

Lessee Accounting

 

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches and office space with terms extending through 2033. Substantially all of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of condition. Upon adoption of FASB ASU 2016-02 Leases on January 1, 2019, the Company began recognizing right-of-use assets and lease liabilities related to its operating leases. Prior to ASU 2016-02, such assets and liabilities were recognized only for capital leases (referred to as finance leases under the amendments of ASU 2016-02). In accordance with the optional transition method allowed by ASU 2016-11, comparative prior period information included within this note is presented in accordance with guidance in effect during those periods. The Company has one existing finance lease for additional office space with a lease term through 2033. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, and was recorded in other assets and other liabilities, Topic 842 did not materially impact the accounting for this lease. Subsequent to March 31, 2019, one additional lease agreement has been executed with the plan to relocate one branch in Williamson County, Tennessee.

 

The following table represents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition.

 

Lease right-of-use assets

 

Classification

 

March 31, 2019

 

Operating lease right-of-use assets

 

Other Assets

 

$

41,652

 

Finance lease right-of-use assets

 

Other Assets

 

 

2,970

 

Total lease right-of-use assets

 

 

 

$

44,622

 

 

 

 

 

 

 

 

Lease liabilities

 

Classification

 

March 31, 2019

 

Operating lease right-of-use assets

 

Other Liabilities

 

$

43,163

 

Finance lease right-of-use assets

 

Other Liabilities

 

 

3,023

 

Total lease liabilities

 

 

 

$

46,186

 

 

17


 

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion, which will be determined within the timeframe of the lease agreement, and not included within the calculated ROU. The Company utilizes the discount rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company calculated a blended rate consisting of the Federal Home Loan Bank’s rate matching to the duration of the lease (over-collateralized borrowing rate) and the offering rate of the Company’s most recent subordinated debt offering in June of 2016. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019, was used. For the Company’s only finance lease that commenced December 2018, the Company utilized its blended rate calculation based on the term of the lease.

 

Weighted-average remaining lease term

 

 

 

 

 

 

 

 

March 31, 2019

 

Operating leases

 

 

 

 

 

 

 

 

14.8 years

 

Finance lease

 

 

 

 

 

 

 

 

11.9 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

 

 

 

 

5.49%

 

Finance lease

 

 

 

 

 

 

 

 

5.48%

 

 

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

 

Lease costs

 

 

 

 

 

Operating lease cost

 

 

$

1,262

 

Variable lease cost

 

 

 

99

 

Short-term lease cost

 

 

 

24

 

Finance lease cost

 

 

 

 

 

Interest on lease liabilities(1)

 

 

 

41

 

Amortization of right-of-use asset

 

 

 

50

 

Total lease cost

 

 

$

1,476

 

 

(1)

Included in other borrowings interest expense in the Company's consolidated statement of income. All other lease costs in this table are included

in net occupancy expense.

 

Rent expense related to leases during the three months ended March 31, 2018, was $1,228.

 

Other supplemental cash flow information:

 

 

 

 

  Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

  Operating cash flows from operating leases

 

$

1,138

 

  Operating cash flows from finance leases

 

 

41

 

  Financing cash flows from finance leases

 

 

27

 

 

18


 

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of March 31, 2019.

 

Twelve Months Ended:

 

Finance

 

 

Operating

 

2020

 

$

273

 

 

$

4,794

 

2021

 

 

277

 

 

 

4,868

 

2022

 

 

281

 

 

 

4,865

 

2023

 

 

285

 

 

 

4,853

 

2024

 

 

289

 

 

 

4,903

 

Thereafter

 

 

3,059

 

 

 

34,946

 

Total future minimum lease payments

 

$

4,464

 

 

$

59,229

 

Less: Imputed interest

 

 

(1,441

)

 

 

(16,066

)

Total lease liabilities

 

$

3,023

 

 

$

43,163

 

 

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of December 31, 2018.

 

Twelve Months Ended:

 

Finance

 

 

Operating

 

2019

 

$

272

 

 

$

4,841

 

2020

 

 

276

 

 

 

4,849

 

2021

 

 

280

 

 

 

4,871

 

2022

 

 

284

 

 

 

4,856

 

2023

 

 

288

 

 

 

4,885

 

Thereafter

 

 

3,133

 

 

 

36,178

 

Total future minimum lease payments

 

$

4,533

 

 

$

60,480

 

 

NOTE 6—SHARE-BASED PAYMENTS

The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $1,329 and $759 for the three months ended March 31, 2019 and 2018, respectively. The total income tax benefit, which is shown on the Consolidated Statements of Income as a reduction of income tax expense, was $113 and $63 for the three months ended March 31, 2019 and 2018, respectively.

Stock Options: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved, provided for authorized shares up to 4,000,000. The 2007 Plan provided that no options intended to be ISOs may be granted after April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, an equity incentive plan, the 2017 Omnibus Equity Incentive Plan which the Company’s shareholders approved at the 2017 annual meeting of shareholders. On April 12, 2018, the Compensation Committee of the Company’s Board of Directors approved the Amended and Restated 2017 Omnibus Equity Incentive Plan to make certain changes in response to feedback received from our shareholders. The terms of the Amended and Restated 2017 Plan are substantially similar to the terms of the 2007 Plan it was intended to replace. The Amended and Restated 2017 Plan provides for authorized shares up to 3,500,000. At March 31, 2019, there were 2,481,835 authorized shares available for issuance under the Amended and Restated 2017 Plan.

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

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

19


 

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, 2019

 

 

March 31, 2018

 

Risk-free interest rate

 

 

2.31

%

 

 

2.49

%

Expected term

 

7 years

 

 

7.5 years

 

Expected stock price volatility

 

 

30.44

%

 

 

32.48

%

Dividend yield

 

 

0.50

%

 

 

0.00

%

 

The weighted average fair value of options granted for the three months ended March 31, 2019 and 2018 were $10.01 and $14.77, respectively.

A summary of the activity in the plans for the three months ended March 31, 2019 follows:

 

 

 

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2018

 

 

1,807,922

 

 

$

24.68

 

 

 

6.41

 

 

$

9,581

 

Granted

 

 

30,000

 

 

 

27.72

 

 

 

 

 

 

 

 

 

Exercised

 

 

(35,046

)

 

 

14.93

 

 

 

 

 

 

 

 

 

Forfeited, expired, or cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at period end

 

 

1,802,876

 

 

$

24.92

 

 

 

8.11

 

 

$

7,375

 

Vested or expected to vest

 

 

1,712,732

 

 

$

24.92

 

 

 

8.11

 

 

$

7,006

 

Exercisable at period end

 

 

843,174

 

 

$

14.02

 

 

 

7.96

 

 

$

10,567

 

 

 

 

For the Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Stock options exercised:

 

 

 

 

 

 

 

 

Intrinsic value of options exercised

 

$

623

 

 

$

511

 

Cash received from options exercised

 

 

524

 

 

 

220

 

Tax benefit realized from option exercises

 

 

113

 

 

 

63

 

 

As of March 31, 2019 and 2018, there was $5,306 and $5,708, respectively, of total unrecognized compensation cost related to non-vested stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.1 years.

Restricted Stock: Additionally, the 2007 Plan and the Amended and Restated 2017 Plan each provides for the granting of restricted share awards and other performance related incentives. When the restricted shares are awarded, a participant receives voting and dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards typically have a vesting period of three to five years and vest in equal annual installments on the anniversary date of the grant.

20


 

A summary of activity for non-vested restricted share awards for the three months ended March 31, 2019 is as follows:

 

Non-vested Shares

 

Shares

 

 

Weighted-

Average

Grant-

Date

Fair Value

 

Non-vested at December 31, 2018

 

 

176,516

 

 

$

31.07

 

Granted

 

 

1,255

 

 

 

31.87

 

Vested

 

 

(10,421

)

 

 

31.09

 

Forfeited

 

 

(47

)

 

 

32.95

 

Non-vested at March 31, 2019

 

 

167,303

 

 

 

 

 

 

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, 2019 and 2018, there was $2,028 and $1,580, respectively, of total unrecognized compensation cost related to non-vested shares granted under the 2007 Plan and Amended and Restated 2017 Plan. The cost is expected to be recognized over a weighted-average period of 1.5 years.

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 certain off-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 increased each year until fully implemented at 2.5% in January 2019.

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, 2019, 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, 2019, 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.

21


 

Actual and required capital amounts and ratios are presented below as of March 31, 2019 and December 31, 2018 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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company common equity Tier 1 capital to RWA

 

$

369,202

 

 

 

11.3

%

 

$

146,855

 

 

 

4.5

%

 

N/A

 

 

N/A

 

Company Total Capital to RWA

 

$

455,881

 

 

 

14.0

%

 

$

261,076

 

 

 

8.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to RWA

 

$

369,202

 

 

 

11.3

%

 

$

195,807

 

 

 

6.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to average assets

 

$

369,202

 

 

 

8.8

%

 

$

168,498

 

 

 

4.0

%

 

N/A

 

 

N/A

 

Bank-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank common equity Tier 1 capital to RWA

 

$

425,528

 

 

 

13.0

%

 

$

146,869

 

 

 

4.5

%

 

$

212,144

 

 

 

6.5

%

Bank Total Capital to RWA

 

$

453,469

 

 

 

13.9

%

 

$

261,101

 

 

 

8.0

%

 

$

326,376

 

 

 

10.0

%

Bank Tier 1 (Core) Capital to RWA

 

$

425,528

 

 

 

13.0

%

 

$

195,825

 

 

 

6.0

%

 

$

261,101

 

 

 

8.0

%

Bank Tier 1 (Core) Capital to average assets

 

$

425,528

 

 

 

10.1

%

 

$

168,318

 

 

 

4.0

%

 

$

210,397

 

 

 

5.0

%

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company common equity Tier 1 capital to RWA

 

$

367,096

 

 

 

12.2

%

 

$

135,598

 

 

 

4.5

%

 

N/A

 

 

N/A

 

Company Total Capital to RWA

 

$

449,325

 

 

 

14.9

%

 

$

241,064

 

 

 

8.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to RWA

 

$

367,096

 

 

 

12.2

%

 

$

180,798

 

 

 

6.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to average assets

 

$

367,096

 

 

 

8.8

%

 

$

167,553

 

 

 

4.0

%

 

N/A

 

 

N/A

 

Bank-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank common equity Tier 1 capital to RWA

 

$

421,335

 

 

 

14.0

%

 

$

135,613

 

 

 

4.5

%

 

$

195,886

 

 

 

6.5

%

Bank Total Capital to RWA

 

$

444,871

 

 

 

14.8

%

 

$

241,090

 

 

 

8.0

%

 

$

301,363

 

 

 

10.0

%

Bank Tier 1 (Core) Capital to RWA

 

$

421,335

 

 

 

14.0

%

 

$

180,818

 

 

 

6.0

%

 

$

241,090

 

 

 

8.0

%

Bank Tier 1 (Core) Capital to average assets

 

$

421,335

 

 

 

10.1

%

 

$

167,420

 

 

 

4.0

%

 

$

209,275

 

 

 

5.0

%

 

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.

22


 

NOTE 8—DERIVATIVES INSTRUMENTS

Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings.

Derivatives designated as fair value hedges

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities.

During 2019, the Company entered into sixteen swap transactions with a notional amount of $101.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities.

A summary of the Company's fair value hedge relationships as of March 31, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

Balance Sheet Location

 

Weighted Average Remaining Maturity (In Years)

 

 

Weighted Average Pay Rate

 

 

Receive Rate

 

Notional Amount

 

 

Estimated Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements - securities

 

Other liabilities

 

 

7.59

 

 

2.528%

 

 

3 month LIBOR

 

$

101,205

 

 

$

(1,118

)

There were no fair value hedge relationships as of December 31, 2018.

The effects of fair value hedge relationships reported in interest income on securities on the consolidated statements of income for the three months ended March 31, 2019 and 2018 were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

Gain (loss) on fair value hedging relationship

 

2019

 

 

2018

 

Interest rate swap agreements - securities:

 

 

 

 

 

 

 

 

Hedged items

 

$

1,118

 

 

$

-

 

Derivative designated as hedging instruments

 

 

(1,118

)

 

 

-

 

 

 

 

 

 

 

 

 

 

23


 

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at March 31, 2019:

 

 

 

Carrying Amount of the Hedged Assets (in thousands)

 

 

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets

 

Line item on the balance sheet

 

March 31, 2019

 

 

March 31, 2019

 

Securities available-for-sale

 

$

116,634

 

 

$

1,118

 

 

NOTE 9—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 and 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). Included in securities is interest rate swap agreements. The carrying amount of the interest rate swap agreements is based on pricing models that utilize observable market inputs (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Other Assets: Included in other assets are certain assets carried at fair value and interest rate locks associated with the mortgage loan pipeline. The fair value of the mortgage loan pipeline rate locks is based upon the projected sales price of the underlying loans, taking into account market interest rates and other market factors at the measurement date, net of the projected fallout rate.  These assets are valued using similar observable data that occurs in the market. (Level 2).

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

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

24


 

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

Loans Held For Sale: 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).

Other Liabilities: The Company has certain liabilities carried at fair value including certain interest rate swap agreements to facilitate customer transactions and the interest rate locks associated with the funding for its mortgage loan originations.  The fair value of these liabilities is based on pricing models that utilize observable market inputs (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, 2019 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. Treasury securities

 

$

69,618

 

 

$

 

 

$

 

U.S. government sponsored entities and agencies

 

 

 

 

 

1,820

 

 

 

 

Mortgage-backed securities-residential

 

 

 

 

 

523,458

 

 

 

 

Asset-backed securities

 

 

 

 

 

25,050

 

 

 

 

Corporate notes

 

 

 

 

 

17,939

 

 

 

 

State and political subdivisions

 

 

 

 

 

161,416

 

 

 

 

Total securities available for sale

 

$

69,618

 

 

$

729,683

 

 

$

 

Loans held for sale

 

$

 

 

$

21,730

 

 

$

 

Other assets

 

$

 

 

$

190

 

 

$

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

$

 

 

$

1,331

 

 

$

 

25


 

 

 

 

Fair Value Measurements at

December 31, 2018 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. Treasury securities

 

$

253,014

 

 

$

 

 

$

 

U.S. government sponsored entities and agencies

 

 

 

 

 

21,888

 

 

 

 

Mortgage-backed securities-residential

 

 

 

 

 

580,699

 

 

 

 

Asset-backed securities

 

 

 

 

 

24,844

 

 

 

 

Corporate notes

 

 

 

 

 

 

12,424

 

 

 

 

 

State and political subdivisions

 

 

 

 

 

137,799

 

 

 

 

Total securities available for sale

 

$

253,014

 

 

$

777,654

 

 

$

 

Loans held for sale

 

$

 

 

$

11,103

 

 

$

 

Other assets

 

$

 

 

$

206

 

 

$

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

$

 

 

$

129

 

 

$

 

 

As of March 31, 2019, the unpaid principal balance of loans held for sale was $21,079 resulting in an unrealized gain of $651 included in mortgage banking revenue. As of December 31, 2018, the unpaid principal balance of loans held for sale was $10,722, resulting in an unrealized gain of $381 included in mortgage banking revenue. For the three months ended March 31, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $270 and ($26), respectively. None of these loans were 90 days or more past due or on nonaccrual as of March 31, 2019 and December 31, 2018.

There were no transfers between level 1 and 2 during 2019 or 2018.

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

There were six collateral-dependent impaired loans carried at fair value of $5,722 as of March 31, 2019. The level 3 fair value measurement for these assets measured at fair value on a non-recurring basis used the income approach with an adjustment for differences in net operating income expectations based on an unobservable input of earnings before interest, tax, depreciation and amortization (EBITDA). There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three months ended March 31, 2019, $3,455 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral. For the three months ended March 31, 2018, $0 in additional provision for loan losses was recorded related to impaired loans recorded at fair value of collateral.  

 

Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $0 as of March 31, 2019 and December 31, 2018, respectively. There were no properties at March 31, 2019 or 2018 that had required write-downs to fair value.  

26


 

The carrying amounts and estimated fair values of financial instruments at March 31, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at

March 31, 2019 Using:

 

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

300,113

 

 

$

300,113

 

 

$

 

 

$

 

 

$

300,113

 

Certificates of deposit held at other financial

   institutions

 

 

3,595

 

 

 

 

 

 

3,601

 

 

 

 

 

 

3,601

 

Securities available for sale

 

 

799,301

 

 

 

69,618

 

 

 

729,683

 

 

 

 

 

 

799,301

 

Securities held to maturity

 

 

118,831

 

 

 

 

 

 

118,866

 

 

 

 

 

 

118,866

 

Loans held for sale

 

 

21,730

 

 

 

 

 

 

21,730

 

 

 

 

 

 

21,730

 

Net loans

 

 

2,779,520

 

 

 

 

 

 

 

 

 

2,781,888

 

 

 

2,781,888

 

Servicing rights, net

 

 

3,366

 

 

 

 

 

 

 

 

 

4,329

 

 

 

4,329

 

Other assets

 

 

190

 

 

 

 

 

 

190

 

 

 

 

 

 

190

 

Accrued interest receivable

 

 

14,232

 

 

 

140

 

 

 

5,151

 

 

 

8,941

 

 

 

14,232

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,315,843

 

 

$

2,201,698

 

 

$

1,112,151

 

 

$

 

 

$

3,313,849

 

Federal Home Loan Bank advances

 

 

416,500

 

 

 

 

 

 

415,845

 

 

 

 

 

 

415,845

 

Subordinated notes, net

 

 

58,738

 

 

 

 

 

 

 

 

 

60,426

 

 

 

60,426

 

Other liabilities

 

 

1,331

 

 

 

 

 

 

1,331

 

 

 

 

 

 

1,331

 

Accrued interest payable

 

 

5,041

 

 

 

205

 

 

 

350

 

 

 

4,486

 

 

 

5,041

 

 

 

 

 

 

 

 

Fair Value Measurements at

December 31, 2018 Using:

 

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

280,212

 

 

$

280,212

 

 

$

 

 

$

 

 

$

280,212

 

Certificates of deposit held at other financial

   institutions

 

 

3,594

 

 

 

 

 

 

3,594

 

 

 

 

 

 

3,594

 

Securities available for sale

 

 

1,030,668

 

 

 

253,014

 

 

 

777,654

 

 

 

 

 

 

1,030,668

 

Securities held to maturity

 

 

121,617

 

 

 

 

 

 

118,955

 

 

 

 

 

 

118,955

 

Loans held for sale

 

 

11,103

 

 

 

 

 

 

11,103

 

 

 

 

 

 

11,103

 

Net loans

 

 

2,641,948

 

 

 

 

 

 

 

 

 

2,622,386

 

 

 

2,622,386

 

Servicing rights, net

 

 

3,403

 

 

 

 

 

 

 

 

 

4,836

 

 

 

4,836

 

Other assets

 

 

206

 

 

 

 

 

 

206

 

 

 

 

 

 

206

 

Accrued interest receivable

 

 

13,337

 

 

 

71

 

 

 

5,539

 

 

 

7,727

 

 

 

13,337

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,431,807

 

 

$

2,105,951

 

 

$

1,319,326

 

 

$

 

 

$

3,425,277

 

Federal Home Loan Bank advances

 

 

368,500

 

 

 

 

 

 

366,786

 

 

 

 

 

 

366,786

 

Subordinated notes, net

 

 

58,693

 

 

 

 

 

 

 

 

 

59,852

 

 

 

59,852

 

Other liabilities

 

 

129

 

 

 

 

 

 

129

 

 

 

 

 

 

129

 

Accrued interest payable

 

 

4,700

 

 

 

146

 

 

 

3,866

 

 

 

688

 

 

 

4,700

 

 

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: In accordance with ASU 2016-01, the fair value of loans held for investment, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using a cash flow projection methodology that relies on three primary assumptions: (1) the expected prepayment rate of loans; (2) the magnitude of future net losses based on expected default rate and severity of loss; and (3) the discount rate applicable to the expected cash flows of the loan portfolio. Loans are considered a Level 3 classification.

27


 

(c) 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 3 classification.

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

(e) 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.

(f) 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.

(g) 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.

(h) 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.

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

NOTE 10—EARNINGS PER SHARE

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

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Basic

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

2,901

 

 

$

10,052

 

Less: earnings allocated to participating securities

 

 

(34

)

 

 

(71

)

Net income allocated to common shareholders

 

$

2,867

 

 

$

9,981

 

Weighted average common shares outstanding

   including participating securities

 

 

14,561,721

 

 

 

13,249,728

 

Less: Participating securities

 

 

(168,638

)

 

 

(94,010

)

Average shares

 

 

14,393,083

 

 

 

13,155,718

 

Basic earnings per common share

 

$

0.20

 

 

$

0.76

 

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Diluted

 

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

$

2,867

 

 

$

9,981

 

Weighted average common shares outstanding for

   basic earnings per common share

 

 

14,393,083

 

 

 

13,155,718

 

Add: Dilutive effects of assumed exercises of stock

   options

 

 

411,747

 

 

 

516,666

 

Add: Dilutive effects of assumed exercises of stock

   warrants

 

 

 

 

 

 

Average shares and dilutive potential common shares

 

 

14,804,830

 

 

 

13,672,384

 

Dilutive earnings per common share

 

$

0.19

 

 

$

0.73

 

 

28


 

For three months ended March 31, 2019 and 2018, stock options for 768,458 and 411,279 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.

NOTE 11—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled $58,738 and $58,693 at March 31, 2019 and at December 31, 2018, 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 (the “March 2016 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 (the “June 2016 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 issuance costs related to the March 2016 Subordinated Notes amounted to $1,382 and are being amortized as interest expense over the ten-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 the ten-year term of the June 2016 Subordinated Notes. For the three months ended March 31, 2019 and 2018, amortization of issuance costs has amounted to $45 and $45, respectively.

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

 

 

 

March 2016

Subordinated

Notes

 

 

June 2016

Subordinated

Notes

 

Principal amount issued

 

$40,000

 

 

$20,000

 

Maturity date

 

March 30, 2026

 

 

July 1, 2026

 

Initial fixed interest rate

 

6.875%

 

 

7.00%

 

Initial interest rate period

 

5 years

 

 

5 years

 

First interest rate change date

 

March 30, 2021

 

 

July 1, 2021

 

Interest payment frequency through year five*

 

Semiannually

 

 

Semiannually

 

Interest payment frequency after five years*

 

Quarterly

 

 

Quarterly

 

Interest repricing index and margin

 

3-month LIBOR

plus 5.636%

 

 

3-month LIBOR

plus 6.04%

 

Repricing frequency after five years

 

Quarterly

 

 

Quarterly

 

 

29


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All dollar values in this section are in thousands.)

The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 19, 2019, which includes additional information about critical accounting policies and practices and risk factors. Historical results and trends that might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.

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 15 branches and a loan production office in the 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 Bank), 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.

As of March 31, 2019, we had consolidated total assets of $4,238,436, total loans, including loans held for sale, of $2,801,250, total deposits of $3,315,843 and total equity of $383,514.

Our principal executive office is located at 722 Columbia Avenue, Franklin, Tennessee 37064-2828, and our telephone number is (615) 236-2265. Our website is www.franklinsynergybank.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein.

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 Annual Report on Form 10-K that was filed with the SEC on March 19, 2019. 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 (ALLL)

The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan balance has become uncollectible. 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.

30


 

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 (TDR’s) and classified as impaired.

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

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

TDR’s 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 TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDR’s that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the ALLL.

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

COMPARISON OF RESULTS OF OPERATIONS FOR

THE THREE MONTHS ENDED MARCH 31, 2019 and 2018

(Dollar Amounts in Thousands)

Overview

The Company reported net income and net income available to common shareholders of $2,901 and $10,052 for the three months ended March 31, 2019 and 2018, respectively.  Net income available to common shareholders decreased by $7,151 when comparing 2019 with 2018, primarily due to $4,143 related to post employment and retirement expense, along with $3,486 related to a specific loan loss provision on a shared national credit (SNC).

Net Interest Income/Margin

Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three months ended March 31, 2019 and 2018 totaled $27,420 and $25,116, respectively, an increase of $2,304 or 9.2%. For the three months ended March 31, 2019, interest income increased $9,476 or 24.9% due primarily to growth in the loan portfolio. For the three months ended March 31, 2019, interest expense increased $7,172 or 55.5% due primarily to increases in interest rates paid on deposits.

31


 

Interest-earning assets averaged $4,044,231 and $3,867,957 during the three months ended March 31, 2019 and 2018, respectively, an increase of $176,274, or 4.6%. This increase was primarily due to growth in average loans of $466,214, which was offset by decreases in securities and federal funds sold and other of $187,947 and $106,488, respectively, when comparing the three months ended March 31, 2019 with the same period in 2018.

When comparing the three months ended March 31, 2019 and 2018, the yield on average interest earning assets, adjusted for tax equivalent yield, increased 76 basis points in 2019 to 4.82% compared to 4.06% for the same period during 2018. For the three months ended March 31, 2019, the tax equivalent yield on loans was 5.61%, and for the three months ended March 31, 2018, the tax equivalent yield on loans was 5.07%. The primary driver for the increase in yields on loans was the increase in market interest rates when compared to the same quarter in the previous year.

Interest-bearing liabilities averaged $3,490,227 during the three months ended March 31, 2019, compared to $3,371,827 for the same period in 2018, an increase of $118,400, or 3.5%. Total average interest-bearing deposits grew $71,408, or 2.4%, including an increase in average money market deposit accounts of $248,369, offset by decreases in average interest checking ($61,236), average savings deposits ($9,833) and average time deposits ($105,892) for the three months ended March 31, 2019, as compared to the same period during 2018. Average FHLB advances also increased by $68,044 when comparing the three months ended March 31, 2019 with the same period in 2018.

When comparing the three months ended March 31, 2019 and 2018, the cost of average interest-bearing liabilities increased 78 basis points to 2.34% from 1.56%. The increase was due to rate increases for interest-bearing deposits, FHLB advances and federal funds purchased.

32


 

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, 2019 and 2018:

Average Balances—Yields & Rates (7)

(Dollars are in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)(6)

 

$

2,764,675

 

 

$

38,238

 

 

 

5.61

%

 

$

2,299,219

 

 

$

28,732

 

 

 

5.07

%

Loans held for sale

 

 

9,438

 

 

 

115

 

 

 

4.94

 

 

 

8,680

 

 

 

73

 

 

 

3.41

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

919,549

 

 

 

6,394

 

 

 

2.82

 

 

 

1,059,989

 

 

 

6,111

 

 

 

2.34

 

Tax-exempt(6)

 

 

181,699

 

 

 

1,990

 

 

 

4.44

 

 

 

229,206

 

 

 

2,592

 

 

 

4.59

 

Restricted equity securities

 

 

22,375

 

 

 

334

 

 

 

6.05

 

 

 

18,658

 

 

 

274

 

 

 

5.96

 

Certificates of deposit at other financial institutions

 

 

3,592

 

 

 

20

 

 

 

2.26

 

 

 

2,814

 

 

 

12

 

 

 

1.73

 

Federal funds sold and other(2)

 

 

142,903

 

 

 

967

 

 

 

2.74

 

 

 

249,391

 

 

 

942

 

 

 

1.53

 

TOTAL INTEREST EARNING ASSETS

 

$

4,044,231

 

 

$

48,058

 

 

 

4.82

%

 

$

3,867,957

 

 

$

38,736

 

 

 

4.06

%

Allowance for loan and lease losses

 

 

(24,054

)

 

 

 

 

 

 

 

 

 

 

(21,683

)

 

 

 

 

 

 

 

 

All other assets

 

 

200,078

 

 

 

 

 

 

 

 

 

 

 

125,590

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,220,255

 

 

 

 

 

 

 

 

 

 

$

3,971,864

 

 

 

 

 

 

 

 

 

LIABILITIES & EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

857,096

 

 

$

4,420

 

 

 

2.09

%

 

$

918,332

 

 

$

3,166

 

 

 

1.40

%

Money market

 

 

992,842

 

 

 

5,979

 

 

 

2.44

 

 

 

744,473

 

 

 

2,600

 

 

 

1.42

 

Savings

 

 

40,609

 

 

 

28

 

 

 

0.28

 

 

 

50,442

 

 

 

38

 

 

 

0.31

 

Time deposits

 

 

1,165,666

 

 

 

6,563

 

 

 

2.28

 

 

 

1,271,558

 

 

 

4,839

 

 

 

1.54

 

Federal Home Loan Bank advances

 

 

364,711

 

 

 

1,918

 

 

 

2.13

 

 

 

296,667

 

 

 

1,110

 

 

 

1.52

 

Federal funds purchased and other(3)

 

 

10,594

 

 

 

72

 

 

 

2.76

 

 

 

31,823

 

 

 

96

 

 

 

1.22

 

Subordinated notes and other borrowings

 

 

58,709

 

 

 

1,123

 

 

 

7.76

 

 

 

58,532

 

 

 

1,082

 

 

 

7.50

 

TOTAL INTEREST BEARING LIABILITIES

 

$

3,490,227

 

 

$

20,103

 

 

 

2.34

%

 

$

3,371,827

 

 

$

12,931

 

 

 

1.56

%

Demand deposits

 

 

291,176

 

 

 

 

 

 

 

 

 

 

 

286,918

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

61,736

 

 

 

 

 

 

 

 

 

 

 

13,279

 

 

 

 

 

 

 

 

 

Total equity

 

 

377,116

 

 

 

 

 

 

 

 

 

 

 

299,840

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

4,220,255

 

 

 

 

 

 

 

 

 

 

$

3,971,864

 

 

 

 

 

 

 

 

 

NET INTEREST SPREAD(4)

 

 

 

 

 

 

 

 

 

 

2.48

%

 

 

 

 

 

 

 

 

 

 

2.50

%

NET INTEREST INCOME

 

 

 

 

 

$

27,955

 

 

 

 

 

 

 

 

 

 

$

25,805

 

 

 

 

 

NET INTEREST MARGIN(5)

 

 

 

 

 

 

 

 

 

 

2.80

%

 

 

 

 

 

 

 

 

 

 

2.71

%

 

(1) 

Loan balances include loans held in the Bank’s portfolio 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 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 of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.

(7) 

Average balances are average daily balances.

 

 

33


 

Analysis of Changes in Interest Income and Expenses

 

 

Net change three months ended

March 31, 2019 versus March 31, 2018

 

 

 

Volume

 

 

Rate

 

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

5,819

 

 

$

3,687

 

 

$

9,506

 

Loans held for sale

 

 

6

 

 

 

36

 

 

 

42

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(810

)

 

 

1,093

 

 

 

283

 

Tax-exempt

 

 

(538

)

 

 

(64

)

 

 

(602

)

Restricted equity securities

 

 

55

 

 

 

5

 

 

 

60

 

Certificates of deposit at other financial institutions

 

 

3

 

 

 

5

 

 

 

8

 

Federal funds sold and other

 

 

(402

)

 

 

427

 

 

 

25

 

TOTAL INTEREST INCOME

 

$

4,133

 

 

$

5,189

 

 

$

9,322

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

(211

)

 

$

1,465

 

 

$

1,254

 

Money market accounts

 

 

870

 

 

 

2,509

 

 

 

3,379

 

Savings

 

 

(8

)

 

 

(2

)

 

 

(10

)

Time deposits

 

 

(402

)

 

 

2,126

 

 

 

1,724

 

Federal Home Loan Bank advances

 

 

255

 

 

 

553

 

 

 

808

 

Fed funds purchased and other borrowed funds

 

 

(64

)

 

 

40

 

 

 

(24

)

Subordinated Notes and other borrowings

 

 

3

 

 

 

38

 

 

 

41

 

TOTAL INTEREST EXPENSE

 

$

443

 

 

$

6,729

 

 

$

7,172

 

NET INTEREST INCOME

 

$

3,690

 

 

$

(1,540

)

 

$

2,150

 

 

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an ALLL 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  $5,055 and $573 for the three months ended March 31, 2019 and 2018, respectively. The higher provision for the three months ended March 31, 2019 compared to the same period in 2018 is based on the Company’s analysis of its ALLL which, based on the loan portfolio’s risk profile driven primarily by a specific reserve of $3,455 related to a SNC relationship, and comparatively higher loan growth, resulted in more provision being recorded. Nonperforming loans at March 31, 2019 totaled $11,904 compared to $5,696 at December 31, 2018, representing 0.42% and 0.22% of total loans for the respective periods.

Non-Interest Income

Non-interest income for the three months ended March 31, 2019 was $3,486 compared to $3,456 for the same period in 2018. The following is a summary of the components of non-interest income (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

$

Increase

 

 

%

Increase

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

(Decrease)

 

Service charges on deposit accounts

 

$

74

 

 

$

42

 

 

$

32

 

 

 

76.2

%

Other service charges and fees

 

 

757

 

 

 

751

 

 

 

6

 

 

 

0.8

 

Mortgage banking revenue

 

 

1,672

 

 

 

1,549

 

 

 

123

 

 

 

7.9

 

Wealth management

 

 

627

 

 

 

704

 

 

 

(77

)

 

 

(10.9

)

Gain on sale or call of securities

 

 

149

 

 

 

 

 

 

149

 

 

NM

 

Net (loss) gain on sale of loans

 

 

(217

)

 

 

9

 

 

 

(226

)

 

 

(2,511.1

)

Net gain on sale of foreclosed assets

 

 

4

 

 

 

3

 

 

 

1

 

 

 

33.3

 

Other

 

 

420

 

 

 

398

 

 

 

22

 

 

 

5.5

 

Total non-interest income

 

$

3,486

 

 

$

3,456

 

 

$

30

 

 

 

0.9

%

34


 

 

Mortgage banking revenue increased $123 for the three months ended March 31, 2019. The increase was due to the volume of mortgage loans originated, the sales related to those loans, and more favorable market rates in 2019, which resulted in favorable fair value adjustments on mortgage derivatives.

 

The decrease in (loss) gain on sale of loans is attributable to the sale of a Shared National Credit relationship during the three months ended March 31, 2019.

 

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2019 was $22,616 compared to $15,488 for the same period in 2018. The increases were the result of the following components listed in the table below (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

$

Increase

 

 

%

Increase

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

14,743

 

 

$

9,188

 

 

$

5,555

 

 

 

60.5

%

Occupancy and equipment

 

 

3,113

 

 

 

2,594

 

 

 

519

 

 

 

20.0

 

FDIC assessment expense

 

 

990

 

 

 

660

 

 

 

330

 

 

 

50.0

 

Marketing

 

 

319

 

 

 

280

 

 

 

39

 

 

 

13.9

 

Professional fees

 

 

923

 

 

 

869

 

 

 

54

 

 

 

6.2

 

Amortization of core deposit intangible

 

 

145

 

 

 

104

 

 

 

41

 

 

 

39.4

 

Other

 

 

2,383

 

 

 

1,793

 

 

 

590

 

 

 

32.9

 

Total non-interest expense

 

$

22,616

 

 

$

15,488

 

 

$

7,128

 

 

 

46.0

%

 

The increase in non-interest expense noted in the table above is related to the Company’s overall growth. The Company’s largest increases for the three months ended March 31, 2019, in comparison with the same periods of 2018, were in salaries and employee benefits, occupancy and equipment, professional fees, and other non-interest expense.

Salaries and employee benefits increased $5,555, or 60.5%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase is primarily due to $4,143 in post employment and retirement expenses. In addition, stock-based compensation expense increased $569 for the three months ended March 31, 2019 in comparison with the same period in 2018.

Occupancy and equipment expense increased $519, or 20.0%, when comparing the three months ended March 31, 2019 with the same period in 2018. The variance for the three months ended March 31, 2019 versus the three months ended March 31, 2018 is primarily attributable to increases in building rent expense of $158, software maintenance fees of $244, and other furniture, fixture & equipment expense $60.

The Company’s FDIC assessment expense increased $330, or  50.0%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase in comparing the three months ended March 31, 2019 to March 31, 2018 is due to asset growth.

Professional fees increased $54, or 6.2%, when comparing the three months ended March 31, 2019 with the same period in 2018. The increase when comparing the three months ended March 31, 2019 with the same period in 2018 is due to increases in other professional fees $9 and legal fees $86.

For the three months ended March 31, 2019, other non-interest expense increased $590, or 32.9%, when compared to the three months ended March 31, 2018. The increase in other non-interest expense for the three months ended March 31, 2019 versus March 31, 2018 is attributed to increases in several types of expenses, but the following expense types represent the largest variances: director fees of $44 and ATM Network Expense of $69.

35


 

Income Tax Expense

The Company recognized income tax expense for the three months ended March 31, 2019 of $334, compared to $2,459 for the three months ended March 31, 2018. The Company’s quarter-to-date income tax expense for the period ended March 31, 2019 reflects an effective income tax rate of 10.3%, which is a significant decrease compared to 19.7% for the same period in 2018 resulting from the Company’s participation in Tennessee’s Community Investment Tax Credit (CITC) program and due to the current quarter’s $4.1 million related to post employment and retirement expenses, along with $3.5 million related to a specific loan loss provision on a shared national credit (SNC).

COMPARISON OF BALANCE SHEETS AT March 31, 2019 and December 31, 2018

Overview

The Company’s total assets decreased by $11,003, or 0.3%, from December 31, 2018 to March 31, 2019. The decrease in total assets has primarily been the result of the continued balance sheet rotation and optimization strategies and the planned sales of investment securities during the three months ended March 31, 2019 offset by organic growth in the loan portfolio.

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, 2019 and December 31, 2018 were $2,807,377 and $2,665,399, respectively, an increase of $141,978, or 5.3%. As a percentage of total assets, total loans, net of deferred fees, at March 31, 2019 and December 31, 2018 were 66.2% and 62.7% of total assets, respectively. Growth in the loan portfolio is primarily due to increased market penetration and a healthy local economy. The Company has also attracted a number of experienced commercial and mortgage lenders to develop new relationships and broaden its presence in its primary markets in Middle Tennessee which include, Williamson County, Davidson County and Rutherford County.

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

 

 

March 31, 2019

 

 

December 31, 2018

 

Types of Loans

 

Amount

 

 

% of Total

Loans

 

 

Amount

 

 

% of Total

Loans

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

581,340

 

 

 

20.7

%

 

$

584,440

 

 

 

21.9

%

Commercial

 

 

893,491

 

 

 

31.8

 

 

 

802,260

 

 

 

30.1

 

Residential

 

 

694,190

 

 

 

24.7

 

 

 

682,806

 

 

 

25.6

 

Commercial and industrial

 

 

635,417

 

 

 

22.5

 

 

 

590,854

 

 

 

22.1

 

Consumer and other

 

 

4,447

 

 

 

0.2

 

 

 

5,568

 

 

 

0.2

 

Total loans—gross, excluding PCI loans

 

 

2,808,885

 

 

 

99.9

 

 

 

2,665,928

 

 

 

99.9

 

Total PCI loans

 

 

2,020

 

 

 

0.1

 

 

 

2,015

 

 

 

0.1

 

Total gross loans

 

 

2,810,905

 

 

 

100.0

%

 

 

2,667,943

 

 

 

100.0

%

Less: deferred loan fees, net

 

 

(3,528

)

 

 

 

 

 

 

(2,544

)

 

 

 

 

Allowance for loan losses

 

 

(27,857

)

 

 

 

 

 

 

(23,451

)

 

 

 

 

Total loans, net allowance for loan losses

 

$

2,779,520

 

 

 

 

 

 

$

2,641,948

 

 

 

 

 

 

36


 

The table below provides a summary of the Share National Credit portfolio for the periods noted.

 

Shared National Credit ("SNC"s) and Healthcare Portfolios

 

March 31, 2019

 

 

December 31, 2018

 

 

September 30, 2018

 

 

June 30, 2018

 

 

March 31, 2018

 

 

QoQ

Growth*

 

 

YoY

Growth

 

Total SNC

 

$

229,608

 

 

$

249,033

 

 

$

162,588

 

 

$

155,798

 

 

$

117,721

 

 

 

(31.6

%)

 

 

95.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Total loans held for investment

 

 

8.2

%

 

 

9.3

%

 

 

6.4

%

 

 

6.3

%

 

 

5.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

318,020

 

 

$

290,464

 

 

$

285,284

 

 

$

257,225

 

 

$

199,425

 

 

 

38.5

%

 

 

59.5

%

SNC

 

 

107,156

 

 

 

123,097

 

 

 

103,772

 

 

 

107,894

 

 

 

89,162

 

 

 

(52.5

%)

 

 

20.2

%

Non-SNC

 

 

210,864

 

 

 

167,367

 

 

 

181,512

 

 

 

149,331

 

 

 

110,263

 

 

 

105.4

%

 

 

91.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Annualized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The discussion in the following paragraphs includes the PCI loans in the breakdown of the various categories of loans.

Total gross loans increased 5.3% during the first three months ended March 31, 2019, 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 4.8% with growth occurring in the residential real estate 1.7% and commercial real estate 11.4%  segments. The Company also experienced an increase of 7.5% in the commercial and industrial segment during the three months ended March 31, 2019.

Real estate loans, including $74 of PCI loans, comprised 77.2% of the loan portfolio at March 31, 2019. The largest portion of the real estate segments as of March 31, 2019, was commercial real estate loans, which totaled 41.2% of real estate loans. Commercial real estate loans totaled $893,490 at March 31, 2019, and comprised 31.8% 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 other properties.

Construction and land development loans totaled $581,340 at March 31, 2019, and comprised 26.8% of total real estate loans and 20.7% 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.

The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-lien home mortgages, not including loans held-for-sale in the secondary market, and it also includes home equity lines of credit and other junior lien mortgage loans. Residential real estate loans totaled $694,264 and comprised 32.0% of real estate loans and 24.7% of total loans at March 31, 2019.

Commercial and industrial loans totaled $637,363 at March 31, 2019 which includes $1,946 of PCI loans. Loans in this classification comprised 22.7% of total loans at March 31, 2019. The commercial and industrial classification consists of commercial loans to small-to-medium sized businesses, shared national credits, and commercial healthcare loans.

The banking agencies define a “Shared National Credit” (SNC) as any loan extended to a borrower which aggregates $100 million or more and is shared by three or more banks. The SNC portfolio totaled $229,608 at March 31, 2019, decreasing $19,425, or 31.6%, from $249,033 at December 31, 2018. All of the outstanding balance of SNCs was included in the commercial and industrial portfolio. SNC participations are originated in the normal course of business to meet the needs of our customers and are reviewed at least quarterly for credit quality.  

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, 2019, excluding unearned net fees and costs.

37


 

Loan Maturity Schedule

 

 

March 31, 2019

 

 

 

One year

or less

 

 

Over one

year to five

years

 

 

Over five

years

 

 

Total

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

300,870

 

 

$

146,717

 

 

$

133,753

 

 

$

581,340

 

Commercial

 

 

52,879

 

 

 

258,502

 

 

 

582,109

 

 

 

893,490

 

Residential

 

 

43,045

 

 

 

164,953

 

 

 

486,266

 

 

 

694,264

 

Commercial and industrial

 

 

75,135

 

 

 

395,320

 

 

 

166,908

 

 

 

637,363

 

Consumer and other

 

 

1,712

 

 

 

2,407

 

 

 

329

 

 

 

4,448

 

Total

 

$

473,641

 

 

$

967,899

 

 

$

1,369,365

 

 

$

2,810,905

 

Fixed interest rate

 

$

142,237

 

 

$

377,726

 

 

$

420,834

 

 

$

940,797

 

Variable interest rate

 

 

331,404

 

 

 

590,173

 

 

 

948,531

 

 

 

1,870,108

 

Total

 

$

473,641

 

 

$

967,899

 

 

$

1,369,365

 

 

$

2,810,905

 

 

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 (ALLL)

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

 

past loan experience;

 

the nature and volume of the portfolio;

 

risks known about specific borrowers;

 

underlying estimated values of collateral securing loans;

 

current and anticipated economic conditions; and

 

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

The ALLL consists of two primary components: (1) a specific component which relates to loans that are individually classified as impaired and (2) a general component which covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a combination of the Company’s loss history and loss history from peer group 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.

38


 

In the table below, the components, as discussed above, of the ALLL are shown at March 31, 2019 and December 31, 2018.

 

 

March 31, 2019

 

 

December 31, 2018

 

 

Increase (Decrease)

 

 

 

Loan

Balance

 

 

ALLL

Balance

 

 

%

 

 

Loan

Balance

 

 

ALLL

Balance

 

 

%

 

 

Loan

Balance

 

 

ALLL

Balance

 

 

 

 

 

Non impaired loans

 

$

2,714,663

 

 

$

24,233

 

 

 

0.89

%

 

$

2,568,930

 

 

$

23,249

 

 

 

0.91

%

 

$

145,733

 

 

$

984

 

 

-2 bps

 

Non-PCI acquired loans

   (Note 1)

 

 

82,701

 

 

 

169

 

 

 

0.20

 

 

 

91,344

 

 

 

185

 

 

 

0.20

 

 

 

(8,643

)

 

 

(16

)

 

0 bps

 

Impaired loans

 

 

11,521

 

 

 

3,455

 

 

 

29.99

 

 

 

5,654

 

 

 

17

 

 

 

0.30

 

 

 

5,867

 

 

 

3,438

 

 

2969 bps

 

Non-PCI loans

 

 

2,808,885

 

 

 

27,857

 

 

 

0.99

 

 

 

2,665,928

 

 

 

23,451

 

 

 

0.88

 

 

 

142,957

 

 

 

4,406

 

 

11 bps

 

PCI loans

 

 

2,020

 

 

 

 

 

 

 

 

 

2,015

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

Total loans

 

$

2,810,905

 

 

$

27,857

 

 

 

0.99

%

 

$

2,667,943

 

 

$

23,451

 

 

 

0.88

%

 

$

142,962

 

 

$

4,406

 

 

11 bps

 

  (1) Loans acquired are performing loans recorded at estimated fair value at the acquisition date. Based on the analysis performed by management as of March 31, 2019, $169 in ALLL was recorded at March 31, 2019 related to the loans acquired and not otherwise considered PCI.

At March 31, 2019, the ALLL was $27,857, compared to $23,451 at December 31, 2018. The ALLL as a percentage of total loans was 0.99% at March 31, 2019 and 0.88% at December 31, 2018. The Company’s loan growth and management’s evaluation of the risk profile, combined with recent developments in one SNC relationship during the first quarter of 2019 are the primary reasons for the increase in the allowance amount.


39


 

The table below sets forth the activity in the ALLL for the periods presented.

 

 

 

Three Months Ended March 31, 2019

 

 

Three Months Ended March 31, 2018

 

Beginning balance

 

$

23,451

 

 

$

21,247

 

Loans charged-off:

 

 

 

 

 

 

 

 

Construction & land development

 

 

 

 

 

39

 

Commercial real estate

 

 

 

 

 

 

Residential real estate

 

 

15

 

 

 

7

 

Commercial & industrial

 

 

568

 

 

 

49

 

Consumer & other

 

 

70

 

 

 

11

 

Total loans charged-off

 

 

653

 

 

 

106

 

Recoveries on loans previously charged-off:

 

 

 

 

 

 

 

 

Construction & land development

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

Residential real estate

 

 

2

 

 

 

19

 

Commercial & industrial

 

 

 

 

 

 

Consumer & other

 

 

2

 

 

 

5

 

Total loan recoveries

 

 

4

 

 

 

24

 

Net charge-offs

 

 

(649

)

 

 

(82

)

Provision for loan losses charged to expense

 

 

5,055

 

 

 

573

 

Total allowance at end of period

 

$

27,857

 

 

$

21,738

 

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

 

$

2,810,905

 

 

$

2,312,243

 

Average gross loans(1)

 

$

2,764,675

 

 

$

2,301,054

 

Allowance to total loans

 

 

0.99

%

 

 

0.94

%

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

 

 

0.10

%

 

 

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 ALLL by loan category and loans in each category as a percentage of total loans, for the periods presented.

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Amount

 

 

% of

Loan Segment to Total Loans

 

 

Amount

 

 

% of

Loan Segment to Total Loans

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

4,680

 

 

 

20.7

%

 

$

4,743

 

 

 

21.9

%

Commercial

 

 

7,118

 

 

 

31.8

 

 

 

6,725

 

 

 

30.1

 

Residential

 

 

4,726

 

 

 

24.7

 

 

 

4,743

 

 

 

25.6

 

Total real estate

 

 

16,524

 

 

 

77.2

 

 

 

16,211

 

 

 

77.6

 

Commercial and industrial

 

 

11,283

 

 

 

22.6

 

 

 

7,166

 

 

 

22.2

 

Consumer and other

 

 

50

 

 

 

0.2

 

 

 

74

 

 

 

0.2

 

 

 

$

27,857

 

 

 

100.0

%

 

$

23,451

 

 

 

100.0

%

40


 

Nonperforming Assets

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

The primary component of non-performing loans is non-accrual loans, which as of March 31, 2019 totaled $11,724. The other component of non-performing loans are loans past due greater than 90 days and still accruing interest which totaled $180 at March 31, 2019. Loans past due greater than 90 days are placed on non-accrual status, unless they are both well-secured and in the process of collection.

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

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Non-accrual loans

 

$

11,724

 

 

$

5,488

 

Past due loans 90 days or more and still accruing interest

 

 

180

 

 

 

208

 

Total non-performing loans

 

 

11,904

 

 

 

5,696

 

Foreclosed real estate and repossessed assets

 

 

-

 

 

 

-

 

Total non-performing assets

 

 

11,904

 

 

 

5,696

 

Total non-performing loans as a percentage of total loans

 

 

0.42

%

 

 

0.21

%

Total non-performing assets as a percentage of total assets

 

 

0.28

%

 

 

0.13

%

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

 

 

234

%

 

 

412

%

 

As of March 31, 2019, there were 13 loans on non-accrual status. The amount and number are further delineated by collateral segment and number of loans in the table below.

 

 

 

Total Amount

 

 

Percentage of Total Non-Accrual

Loans

 

 

Number of

Non-Accrual

Loans

 

Construction & land development

 

$

583

 

 

 

5.0

%

 

 

1

 

Commercial real estate

 

 

153

 

 

 

1.3

 

 

 

1

 

Residential real estate

 

 

1,811

 

 

 

15.4

 

 

 

6

 

Commercial & industrial

 

 

9,177

 

 

 

78.3

 

 

 

5

 

Consumer

 

 

 

 

 

 

 

 

 

Total non-accrual loans

 

$

11,724

 

 

 

100.0

%

 

 

13

 

 

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities, totaled $799,301 at March 31, 2019, compared to $1,030,668 at December 31, 2018, a decrease of $231,367, or 22.4%. The decrease in available-for-sale securities was primarily attributed to security sales during the first three months of 2019.

Held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government sponsored enterprises, mortgage-backed securities and municipal securities, totaled  $118,831 at March 31, 2019, compared to $121,617 at December 31, 2018, a decrease of $2,786, or 2.3%. The decrease is attributable to securities that matured or had principal pay downs during the first three months of 2019.

41


 

The combined securities portfolios represented 21.7% and 27.1% of total assets at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, the Company had no securities that were classified as having other than temporary impairment.

The Company also had other investments of  $22,803 and $21,831 at March 31, 2019 and December 31, 2018, respectively, primarily consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank System (FRB) and the Federal Home Loan Bank System (FHLB)). The FHLB and FRB investments are “restricted” in that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no ready market or quoted market value, and are carried at cost.

Bank Premises and Equipment

Bank premises and equipment totaled  $12,682 at March 31, 2019 compared to $12,371 at December 31, 2018, an increase of $311, or 2.5%. The increase is primarily attributed to an increase of $389 in leasehold improvements net of depreciation related to several of the Company’s locations.

Deposits

At March 31, 2019, total deposits were $3,315,844, an increase of $115,963, or 3.4%, compared to $3,431,807 at December 31, 2018. Included in the Company’s funding strategy are brokered deposits, public funds deposits and reciprocal deposits. Total brokered deposits decreased $79,112, or 9.9%, to $718,683 at March 31, 2019, when compared with $797,795 at December 31, 2018, which reflects the Company’s strategy to reduce its dependence on non-core funding. Public funds deposits decreased $153,904, or 19.7%, to $628,985 at March 31, 2019 when compared with $782,889 at December 31, 2018 due to the Company’s strategy to redirect some of the Company’s local government customers into the reciprocal account relationships, thereby decreasing the Company’s requirements to collateralize those public funds deposits.  As a result, reciprocal deposits increased $122,509, or 39.2%, to $435,191 at March 31, 2019.

Time deposits, excluding brokered deposits and public funds, as of March 31, 2019, amounted to $412,650, compared to $532,445 as of December 31, 2018, a decrease of $119,795, or 22.5%.

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

 

 

 

March 31, 2019

 

Three months or less

 

$

178,399

 

Three through six months

 

 

74,839

 

Six through twelve months

 

 

58,875

 

Over twelve months

 

 

150,667

 

Total

 

$

462,780

 

Federal Funds Purchased and Repurchase Agreements

The Company had no federal funds purchased from correspondent banks or repurchase agreements as of March 31, 2019 and December 31, 2018.   

Federal Home Loan Bank Advances

The Company has established a line of credit with the FHLB of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages and home equity lines of credit. At March 31, 2019 and at December 31, 2018, advances totaled  $416,500 and $368,500, respectively, and the scheduled maturities and interest rates of these advances were as follows:

 

Scheduled Maturities

 

Amount

 

 

Weighted

Average Rates

 

2019

 

$

261,500

 

 

 

2.30

%

2020

 

 

155,000

 

 

 

2.41

%

Total

 

$

416,500

 

 

 

2.34

%

42


 

Subordinated Notes

At March 31, 2019, the Company’s subordinated notes, net of issuance costs, totaled  $58,738, compared with  $58,693 at December 31, 2018. For more information related to the subordinated notes and the related issuance costs, please see Note 11 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 March 2016 Subordinated Notes and June 2016 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. The Bank’s ability to pay a dividend may be restricted due to regulatory requirements as well as the Bank’s future earnings and capital needs.

Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered deposits. As of March 31, 2019,  $799,301 of the investment securities portfolio was classified as available-for-sale and is reported at fair value on the consolidated balance sheet. Another  $118,831 of the portfolio was classified as held-to-maturity and is reported at amortized cost. Approximately $711,826 of the total  $918,132 investment securities portfolio on hand at March 31, 2019, 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, 2019, the Company’s equity was $383,514, as compared with $372,833 as of December 31, 2018. The increase in equity was due to the Company’s earnings of $2,901 in the first quarter of 2019, the increase in common stock of $1,853, offset by the $8,754 decrease in the 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.

Off Balance Sheet Arrangements

The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines and letters of credit to customers in the ordinary course of business. At March 31, 2019, the Company had unfunded loan commitments outstanding of $49,565, unused lines of credit of $751,601, and outstanding standby letters of credit of $40,461.

43


 

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

 

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

 

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

 

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

 

“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.

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

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

 

 

 

As of or for the Three Months Ended

 

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

 

March 31,

2019

 

 

December 31,

2018

 

 

Sept 30,

2018

 

 

June 30,

2018

 

 

Mar 31,

2018

 

Total shareholders’ equity

 

$

383,421

 

 

$

372,740

 

 

$

356,074

 

 

$

348,059

 

 

$

304,762

 

Less: Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common shareholders’ equity

 

 

383,421

 

 

 

372,740

 

 

 

356,074

 

 

 

348,059

 

 

 

304,762

 

Common shares outstanding

 

 

14,574,339

 

 

 

14,538,085

 

 

 

14,525,351

 

 

 

14,480,240

 

 

 

13,258,142

 

Book value per share

 

$

26.31

 

 

$

25.64

 

 

$

24.51

 

 

$

24.04

 

 

$

22.99

 

Total common shareholders’ equity

 

 

383,421

 

 

 

372,740

 

 

 

356,074

 

 

 

348,059

 

 

 

304,762

 

Less: Goodwill and other intangible assets

 

 

19,020

 

 

 

19,128

 

 

 

19,327

 

 

 

19,499

 

 

 

10,074

 

Tangible common shareholders’ equity

 

$

364,401

 

 

$

353,612

 

 

$

336,747

 

 

$

328,560

 

 

$

294,688

 

Common shares outstanding

 

 

14,574,339

 

 

 

14,538,085

 

 

 

14,525,351

 

 

 

14,480,240

 

 

 

13,258,142

 

Tangible book value per share

 

$

25.00

 

 

$

24.32

 

 

$

23.18

 

 

$

22.69

 

 

$

22.23

 

Average total common equity

 

 

377,116

 

 

 

299,840

 

 

 

351,293

 

 

 

340,175

 

 

 

299,840

 

Less: Average Preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Average Goodwill and other intangible assets

 

 

19,109

 

 

 

19,268

 

 

 

19,433

 

 

 

19,860

 

 

 

10,136

 

Average tangible common shareholders’ equity

 

$

358,007

 

 

$

280,572

 

 

$

331,860

 

 

$

320,315

 

 

$

289,704

 

Net income available to common shareholders

 

 

2,901

 

 

 

3,743

 

 

 

10,549

 

 

 

10,161

 

 

 

10,052

 

Average tangible common equity

 

 

358,007

 

 

 

325,012

 

 

 

331,860

 

 

 

320,315

 

 

 

289,704

 

Return on average tangible common equity

 

 

3.3

%

 

 

4.6

%

 

 

12.6

%

 

 

12.7

%

 

 

14.1

%

Efficiency Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

27,420

 

 

$

26,920

 

 

$

26,562

 

 

$

26,905

 

 

$

25,116

 

Noninterest income

 

 

3,486

 

 

 

(383

)

 

 

3,442

 

 

 

4,147

 

 

 

3,456

 

Operating revenue

 

 

30,906

 

 

 

26,537

 

 

 

30,004

 

 

 

31,052

 

 

 

28,572

 

Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

22,616

 

 

 

21,689

 

 

 

18,251

 

 

 

18,050

 

 

 

15,488

 

Efficiency ratio

 

 

73.2

%

 

 

81.7

%

 

 

60.8

%

 

 

58.1

%

 

 

54.2

%

 

44


 

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, 2019

 

 

Dec 31, 2018

 

 

Sep 30, 2018

 

 

Jun 30, 2018

 

 

Mar 31, 2018

 

Income Statement Data ($):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

47,523

 

 

 

46,046

 

 

 

43,717

 

 

 

42,136

 

 

 

38,047

 

Interest expense

 

 

20,103

 

 

 

19,125

 

 

 

17,155

 

 

 

15,231

 

 

 

12,931

 

Net interest income

 

 

27,420

 

 

 

26,921

 

 

 

26,562

 

 

 

26,905

 

 

 

25,116

 

Provision for loan losses

 

 

5,055

 

 

 

975

 

 

 

136

 

 

 

570

 

 

 

573

 

Noninterest income (expense)

 

 

3,486

 

 

 

(384

)

 

 

3,442

 

 

 

4,147

 

 

 

3,456

 

Noninterest expense

 

 

22,616

 

 

 

21,689

 

 

 

18,251

 

 

 

18,050

 

 

 

15,488

 

Net income before taxes

 

 

3,235

 

 

 

3,873

 

 

 

11,617

 

 

 

12,432

 

 

 

12,511

 

Income tax expense

 

 

334

 

 

 

122

 

 

 

1,068

 

 

 

2,263

 

 

 

2,459

 

Net income

 

 

2,901

 

 

 

3,743

 

 

 

10,549

 

 

 

10,161

 

 

 

10,052

 

Earnings before interest and taxes

 

 

23,338

 

 

 

23,048

 

 

 

28,722

 

 

 

27,663

 

 

 

25,442

 

Net income available to common shareholders

 

 

2,901

 

 

 

3,743

 

 

 

10,549

 

 

 

10,161

 

 

 

10,052

 

Weighted average diluted common shares

 

 

14,804,830

 

 

 

14,821,540

 

 

 

14,903,751

 

 

 

14,814,059

 

 

 

13,672,384

 

Earnings per share, basic

 

 

0.20

 

 

 

0.26

 

 

 

0.73

 

 

 

0.71

 

 

 

0.76

 

Earnings per share, diluted

 

 

0.19

 

 

 

0.25

 

 

 

0.70

 

 

 

0.68

 

 

 

0.73

 

Dividend per share

 

 

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Profitability (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

0.28

 

 

 

0.35

 

 

 

1.01

 

 

 

0.98

 

 

 

1.03

 

Return on average equity

 

 

3.1

 

 

 

4.1

 

 

 

11.9

 

 

 

12.0

 

 

 

13.6

 

Return on average tangible common equity(3)

 

 

3.3

 

 

 

4.6

 

 

 

12.6

 

 

 

12.7

 

 

 

14.1

 

Efficiency ratio(3)

 

 

73.2

 

 

 

81.7

 

 

 

60.8

 

 

 

58.1

 

 

 

54.2

 

Net interest margin(1)

 

 

2.80

 

 

 

2.69

 

 

 

2.70

 

 

 

2.74

 

 

 

2.71

 

Balance Sheet Data ($):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (including HFS)

 

 

2,829,107

 

 

 

2,676,502

 

 

 

2,564,684

 

 

 

2,488,862

 

 

 

2,322,889

 

Loan loss reserve

 

 

27,857

 

 

 

23,451

 

 

 

22,479

 

 

 

22,341

 

 

 

21,738

 

Cash

 

 

300,113

 

 

 

280,212

 

 

 

144,660

 

 

 

176,870

 

 

 

246,164

 

Securities

 

 

918,132

 

 

 

1,152,285

 

 

 

1,319,774

 

 

 

1,357,918

 

 

 

1,399,801

 

Goodwill

 

 

18,176

 

 

 

18,176

 

 

 

18,176

 

 

 

18,176

 

 

 

9,124

 

Intangible assets (Sum of core deposit intangible and

   SBA servicing rights)

 

 

844

 

 

 

952

 

 

 

1,151

 

 

 

1,323

 

 

 

950

 

Assets

 

 

4,238,436

 

 

 

4,249,439

 

 

 

4,167,813

 

 

 

4,165,238

 

 

 

4,083,663

 

Deposits

 

 

3,315,843

 

 

 

3,431,807

 

 

 

3,371,550

 

 

 

3,398,025

 

 

 

3,355,153

 

Liabilities

 

 

3,854,922

 

 

 

3,876,606

 

 

 

3,811,636

 

 

 

3,817,076

 

 

 

3,778,798

 

Total shareholders' equity

 

 

383,421

 

 

 

372,740

 

 

 

356,074

 

 

 

348,059

 

 

 

304,865

 

Total equity

 

 

383,514

 

 

 

372,833

 

 

 

356,177

 

 

 

348,162

 

 

 

304,762

 

Tangible common equity(3)

 

 

364,401

 

 

 

353,612

 

 

 

336,747

 

 

 

328,560

 

 

 

294,688

 

Asset Quality (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans/ total loans(2)

 

 

0.42

 

 

 

0.21

 

 

 

0.16

 

 

 

0.14

 

 

 

0.15

 

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

 

 

0.42

 

 

 

0.21

 

 

 

0.23

 

 

 

0.21

 

 

 

0.22

 

Loan loss reserve / total loans(2)

 

 

0.99

 

 

 

0.88

 

 

 

0.88

 

 

 

0.90

 

 

 

0.94

 

Net charge-offs (recoveries) / average loans

 

 

0.10

 

 

 

0.00

 

 

 

0.00

 

 

 

0.00

 

 

 

0.01

 

Capital (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tangible common equity to tangible assets(3)

 

 

8.6

 

 

 

8.4

 

 

 

8.1

 

 

 

7.9

 

 

 

7.2

 

Leverage ratio

 

 

8.8

 

 

 

8.8

 

 

 

8.7

 

 

 

8.3

 

 

 

7.8

 

Common Equity Tier 1 ratio

 

 

11.3

 

 

 

12.2

 

 

 

12.2

 

 

 

12.1

 

 

 

11.5

 

Tier 1 risk-based capital ratio

 

 

11.3

 

 

 

12.2

 

 

 

12.2

 

 

 

12.1

 

 

 

11.5

 

Total risk-based capital ratio

 

 

14.0

 

 

 

14.9

 

 

 

15.0

 

 

 

15.0

 

 

 

14.4

 

 

(1) 

Net interest margins shown in the table above include tax-equivalent adjustments to adjust interest income on tax-exempt loans and tax-exempt investment securities to a fully taxable basis.

(2) 

Total loans in this ratio exclude loans held for sale.

(3) 

See Non-GAAP table in the preceding pages.

45


 

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 date of the first sale of common equity securities under our Registration Statement on Form S-4, which was declared effective by the SEC on May 14, 2014; (2) the last day of the fiscal year in which we have $1.07 billion or more in annual revenues; (3) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (4) the date on which we have, during the previous three-year period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

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

46


 

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 the Asset Liability Committee (“ALCO”) of the Bank meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings cover the spread between the cost of funds (primarily time deposits) and interest yields generated primarily through loans and investments, rate shock analyses, liquidity and dependency positions, and other areas necessary for proper balance sheet management.

Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a 12-month time period ended March 31, 2019, net interest income was estimated to decrease 1.40% and 3.63% if rates were to increase 100 basis points and 200 basis points, respectively, and was estimated to increase 0.84% and 2.58% in a 100 basis points and 200 basis points declining rate assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.

The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of March 31, 2019.

 

Projected Interest

Rate Change

 

Net Interest

Income $

 

 

Net Interest Income $

Change from Base

 

 

% Change

from Base

 

-200

 

 

110,455

 

 

 

2,783

 

 

 

2.58

%

-100

 

 

108,577

 

 

 

905

 

 

 

0.84

%

Base

 

 

107,672

 

 

 

 

 

 

0.00

%

+100

 

 

106,162

 

 

 

(1,510

)

 

 

(1.40

%)

+200

 

 

103,761

 

 

 

(3,911

)

 

 

(3.63

%)

+300

 

 

101,128

 

 

 

(6,544

)

 

 

(6.08

%)

+400

 

 

98,589

 

 

 

(9,083

)

 

 

(8.44

%)

 

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 management, with the participation of the Company’s chief executive officer and chief financial officer, have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2019, the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

47


 

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 19, 2019.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

 

Nolensville Lease

On May 6, 2019, the Bank and Nolensville Real Estate Partners, LLC entered into a Triple Net Office Lease Agreement (the “Lease”) related to the relocation of the Bank’s Nolensville, Tennessee branch, which is currently located at 7177 Nolensville Road, Suite A3, Nolensville, Tennessee 37135, to the premises subject to the Lease, which is located at 7216 Nolensville Road, Suite 100, Nolensville, Tennessee 37135. Nolensville Real Estate Partners, LLC is an affiliate of Henry W. Brockman, Jr. and Dr. David H. Kemp, each of whom are directors of the Company and the Bank. The Lease has a term of 15 years, which the Bank has the option to renew for two successive five year periods, and provides for monthly rent payments of $9,453 per month for the first year of the term of the Lease, subject to annual adjustments thereafter.

Executive Officer Resignation

On May 7, 2019, Sally E. Bowers entered into a Severance Agreement and General Release with the Bank, pursuant to which Ms. Bowers resigned from her position as Executive Vice President, Chief Mortgage Officer of the Bank, effective May 10, 2019. The Severance Agreement provides that Ms. Bowers will receive, in exchange for her release of all potential claims against the Company, and in accordance with the terms of her Confidentiality, Non-Competition, and Non-Solicitation Agreement dated as of January 29, 2014, a payment of (i) $132,934, which is equal to 12 months of Ms. Bowers’ current base pay, and (ii) $6,866.21, which is equal to one times the average cash incentive bonus pay earned by Ms. Bowers based on the last three years, in each case payable in bi-monthly installments. In addition, all of Ms. Bowers' outstanding, unvested equity awards will become fully vested on May 10, 2019.

 

48


 

ITEM 6. EXHIBITS

 

Exhibit No.

Description

 

 

10.1

Executive Transition Agreement dated March 8, 2019, between Franklin Financial Network, Inc., Franklin Synergy Bank, and Richard E. Herrington (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-k filed with the Securities and Exchange Commission on March 8, 2019).

 

 

10.2*

Triple Net Office Lease Agreement, by and between Nolensville Real Estate Partners, LLC and Franklin Synergy Bank, on May 6, 2019.

 

 

10.3*

Severance Agreement and General Release, by and between Franklin Synergy Bank and Sally Bowers, dated May 7, 2019.

 

 

10.4*

Commencement Agreement, by and between South Royal Oaks Partners, LLC and Franklin Synergy Bank, dated December 8, 2018.

 

 

10.5*

Commencement Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank, dated January 1, 2019.

 

 

10.6*

Commencement Agreement, by and between 204 9th Avenue Partners, LLC and Franklin Synergy Bank, dated February 14, 2019.

 

 

31.1*

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

 

 

31.2*

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 Certification).

 

 

32**

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 Certification).

 

 

101*

Interactive Data Files.

*

Filed herewith

**

Furnished herewith

 

 

49


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Franklin Financial Network, INC.

 

 

 

 

May 9, 2019

 

By:

/s/ Christopher J. Black

 

 

 

Christopher J. Black

Executive Vice President and Chief Financial Officer

 

 

 

On behalf of the registrant and as Chief Financial Officer

(Principal Financial Officer)