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Franklin Financial Network (FSB)

Filed: 6 Aug 19, 4:27pm

 

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 June 30, 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)

 

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

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  

The number of shares outstanding of the registrant’s common stock, no par value per share, as of August 1, 2019, was 14,624,960.

 

 

 


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 Equity

5

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

8

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

34

Item 3. Quantitative and Qualitative Disclosures About Market Risk

53

Item 4. Controls and Procedures

53

 

 

PART II OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

54

Item 1A. Risk Factors

54

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

54

Item 3. Defaults Upon Senior Securities

54

Item 4. Mine Safety Disclosures

54

Item 5. Other Information

54

Item 6. Exhibits

55

 

 

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)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

150,721

 

 

$

280,212

 

Certificates of deposit at other financial institutions

 

 

3,840

 

 

 

3,594

 

Securities available for sale

 

 

715,132

 

 

 

1,030,668

 

Securities held to maturity (fair value 2019—$120,809 and 2018—$118,955)

 

 

118,963

 

 

 

121,617

 

Loans held for sale, at fair value

 

 

27,093

 

 

 

11,103

 

Loans held for investment

 

 

2,880,433

 

 

 

2,665,399

 

Allowance for loan losses

 

 

(27,443

)

 

 

(23,451

)

Net loans

 

 

2,852,990

 

 

 

2,641,948

 

Restricted equity securities, at cost

 

 

24,842

 

 

 

21,831

 

Premises and equipment, net

 

 

12,948

 

 

 

12,371

 

Accrued interest receivable

 

 

14,281

 

 

 

13,337

 

Bank owned life insurance

 

 

55,989

 

 

 

55,239

 

Deferred tax asset

 

 

10,451

 

 

 

13,189

 

Servicing rights, net

 

 

3,299

 

 

 

3,403

 

Goodwill

 

 

18,176

 

 

 

18,176

 

Core deposit intangible, net

 

 

675

 

 

 

952

 

Other assets

 

 

62,571

 

 

 

21,799

 

Total assets

 

$

4,071,971

 

 

$

4,249,439

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

334,802

 

 

$

290,580

 

Interest bearing

 

 

2,811,843

 

 

 

3,141,227

 

Total deposits

 

 

3,146,645

 

 

 

3,431,807

 

Federal Home Loan Bank advances

 

 

396,500

 

 

 

368,500

 

Subordinated notes, net

 

 

58,782

 

 

 

58,693

 

Accrued interest payable

 

 

4,312

 

 

 

4,700

 

Other liabilities

 

 

72,123

 

 

 

12,906

 

Total liabilities

 

 

3,678,362

 

 

 

3,876,606

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, no par value: 1.0 million shares authorized; no shares

   outstanding at June 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, no par value: 30.0 million authorized; 14.6 million and 14.5 million

     issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

268,505

 

 

 

264,905

 

Retained earnings

 

 

127,840

 

 

 

123,176

 

Accumulated other comprehensive loss

 

 

(2,829

)

 

 

(15,341

)

Total shareholders’ equity

 

 

393,516

 

 

 

372,740

 

Non-controlling interest in consolidated subsidiary

 

 

93

 

 

 

93

 

Total equity

 

 

393,609

 

 

 

372,833

 

Total liabilities and equity

 

$

4,071,971

 

 

$

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

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income and dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

40,202

 

 

$

32,312

 

 

$

78,540

 

 

$

61,105

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,614

 

 

 

6,905

 

 

 

11,008

 

 

 

13,016

 

Tax-Exempt

 

 

1,410

 

 

 

1,929

 

 

 

2,880

 

 

 

3,844

 

Dividends on restricted equity securities

 

 

350

 

 

 

329

 

 

 

684

 

 

 

603

 

Federal funds sold and other

 

 

877

 

 

 

661

 

 

 

1,864

 

 

 

1,615

 

Total interest income

 

 

47,453

 

 

 

42,136

 

 

 

94,976

 

 

 

80,183

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

16,679

 

 

 

12,604

 

 

 

33,669

 

 

 

23,247

 

Federal funds purchased and repurchase agreements

 

 

90

 

 

 

131

 

 

 

162

 

 

 

227

 

Federal Home Loan Bank advances and other borrowings

 

 

2,237

 

 

 

1,414

 

 

 

4,196

 

 

 

2,524

 

Subordinated notes

 

 

1,082

 

 

 

1,082

 

 

 

2,164

 

 

 

2,164

 

Total interest expense

 

 

20,088

 

 

 

15,231

 

 

 

40,191

 

 

 

28,162

 

Net interest income

 

 

27,365

 

 

 

26,905

 

 

 

54,785

 

 

 

52,021

 

Provision for loan losses

 

 

7,031

 

 

 

570

 

 

 

12,086

 

 

 

1,143

 

Net interest income after provision for loan losses

 

 

20,334

 

 

 

26,335

 

 

 

42,699

 

 

 

50,878

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

77

 

 

 

51

 

 

 

151

 

 

 

93

 

Other service charges and fees

 

 

903

 

 

 

823

 

 

 

1,660

 

 

 

1,574

 

Mortgage banking revenue

 

 

2,473

 

 

 

2,044

 

 

 

4,145

 

 

 

3,602

 

Wealth management

 

 

673

 

 

 

789

 

 

 

1,300

 

 

 

1,493

 

Gain on sale or call of securities

 

 

367

 

 

 

1

 

 

 

517

 

 

 

1

 

Net (loss) gain on sale of loans

 

 

3

 

 

 

 

 

 

(214

)

 

 

 

Net gain on sale of foreclosed assets

 

 

3

 

 

 

3

 

 

 

7

 

 

 

6

 

Other

 

 

424

 

 

 

436

 

 

 

844

 

 

 

834

 

Total noninterest income

 

 

4,923

 

 

 

4,147

 

 

 

8,410

 

 

 

7,603

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,365

 

 

 

10,268

 

 

 

26,108

 

 

 

19,456

 

Occupancy and equipment

 

 

3,283

 

 

 

2,885

 

 

 

6,396

 

 

 

5,479

 

FDIC assessment expense

 

 

660

 

 

 

778

 

 

 

1,650

 

 

 

1,438

 

Marketing

 

 

301

 

 

 

269

 

 

 

620

 

 

 

549

 

Professional fees

 

 

1,073

 

 

 

1,362

 

 

 

1,996

 

 

 

2,231

 

Amortization of core deposit intangible

 

 

132

 

 

 

182

 

 

 

277

 

 

 

286

 

Other

 

 

2,556

 

 

 

2,306

 

 

 

4,939

 

 

 

4,099

 

Total noninterest expense

 

 

19,370

 

 

 

18,050

 

 

 

41,986

 

 

 

33,538

 

Income before income tax expense

 

 

5,887

 

 

 

12,432

 

 

 

9,123

 

 

 

24,943

 

Income tax expense

 

 

706

 

 

 

2,263

 

 

 

1,040

 

 

 

4,722

 

Net income

 

 

5,181

 

 

 

10,169

 

 

 

8,083

 

 

 

20,221

 

Earnings attributable to noncontrolling interest

 

 

(8

)

 

 

(8

)

 

 

(8

)

 

 

(8

)

Net income available to common shareholders

 

$

5,173

 

 

$

10,161

 

 

$

8,075

 

 

$

20,213

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.35

 

 

$

0.71

 

 

$

0.55

 

 

$

1.46

 

Diluted

 

 

0.34

 

 

 

0.68

 

 

 

0.54

 

 

 

1.41

 

 

See accompanying notes to consolidated financial statements.

 

3


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

5,181

 

 

$

10,169

 

 

$

8,083

 

 

$

20,221

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains/losses on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during the period

 

 

7,116

 

 

 

(3,774

)

 

 

19,109

 

 

 

(18,351

)

Reclassification adjustment for losses (gains) included in net income

 

 

(367

)

 

 

(1

)

 

 

(517

)

 

 

(1

)

Tax effect

 

 

(1,760

)

 

 

988

 

 

 

(4,849

)

 

 

4,796

 

Net of tax

 

 

4,989

 

 

 

(2,787

)

 

 

13,743

 

 

 

(13,556

)

Unrealized gain/loss on cash flow hedge:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss)

 

 

(1,667

)

 

 

 

 

 

(1,667

)

 

 

 

Tax effect

 

 

436

 

 

 

 

 

 

436

 

 

 

 

Net of tax

 

 

(1,231

)

 

 

 

 

 

(1,231

)

 

 

 

Total other comprehensive income (loss)

 

 

3,758

 

 

 

(2,787

)

 

 

12,512

 

 

 

(13,556

)

Comprehensive income

 

$

8,939

 

 

$

7,382

 

 

$

20,595

 

 

$

6,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended June 30, 2019 and June 30, 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 April 1, 2018

 

$

 

 

 

13,258,142

 

 

$

223,594

 

 

$

98,723

 

 

$

(17,555

)

 

$

103

 

 

$

304,865

 

Exercise of common stock options,

     includes net settlement of shares

 

 

 

 

 

135,883

 

 

 

1,717

 

 

 

 

 

 

 

 

 

 

 

 

1,717

 

Stock based compensation expense, net

     of restricted share forfeitures

 

 

 

 

 

 

 

 

1,319

 

 

 

 

 

 

 

 

 

 

 

 

1,319

 

Stock issued in conjunction with 401(k)

     employer match, net of distributions

 

 

 

 

 

(2,481

)

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Issuance of restricted stock, net of

     forfeitures

 

 

 

 

 

118,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for acquisition (net of

     issuance costs)

 

 

 

 

 

970,390

 

 

 

32,932

 

 

 

 

 

 

 

 

 

 

 

 

32,932

 

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

10,169

 

 

 

 

 

 

 

 

 

10,169

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,787

)

 

 

 

 

 

(2,787

)

Balance at June 30, 2018

 

$

 

 

 

14,480,240

 

 

$

259,517

 

 

$

108,884

 

 

$

(20,342

)

 

$

103

 

 

$

348,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2019

 

$

 

 

 

14,574,339

 

 

$

266,758

 

 

$

123,250

 

 

$

(6,587

)

 

$

93

 

 

$

383,514

 

Exercise of common stock options,

     includes net settlement of shares

 

 

 

 

 

74,116

 

 

 

753

 

 

 

 

 

 

 

 

 

 

 

 

753

 

Stock based compensation expense, net

     of restricted share forfeitures

 

 

 

 

 

 

 

 

1,513

 

 

 

 

 

 

 

 

 

 

 

 

1,513

 

Issuance of restricted stock, net of

     forfeitures

 

 

 

 

 

(988

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

 

 

 

(19,180

)

 

 

(519

)

 

 

 

 

 

 

 

 

 

 

 

(519

)

Cash dividends - common stock

     ($0.04 per share)

 

 

 

 

 

 

 

 

 

 

 

(583

)

 

 

 

 

 

 

 

 

(583

)

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

5,181

 

 

 

 

 

 

 

 

 

5,181

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,758

 

 

 

 

 

 

3,758

 

Balance at June 30, 2019

 

$

 

 

 

14,628,287

 

 

$

268,505

 

 

$

127,840

 

 

$

(2,829

)

 

$

93

 

 

$

393,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Six Months Ended June 30, 2019 and June 30, 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

 

 

 

 

 

157,231

 

 

 

1,937

 

 

 

 

 

 

 

 

 

 

 

 

1,937

 

Stock based compensation expense, net

     of restricted share forfeitures

 

 

 

 

 

 

 

 

2,078

 

 

 

 

 

 

 

 

 

 

 

 

2,078

 

Stock issued in conjunction with 401(k)

     employer match, net of distributions

 

 

 

 

 

(2,815

)

 

 

(95

)

 

 

 

 

 

 

 

 

 

 

 

(95

)

Issuance of restricted stock, net of

     forfeitures

 

 

 

 

 

118,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for acquisition (net of

     issuance costs)

 

 

 

 

 

970,390

 

 

 

32,932

 

 

 

 

 

 

 

 

 

 

 

 

32,932

 

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

20,221

 

 

 

 

 

 

 

 

 

20,221

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,556

)

 

 

 

 

 

(13,556

)

Balance at June 30, 2018

 

$

 

 

 

14,480,240

 

 

$

259,517

 

 

$

108,884

 

 

$

(20,342

)

 

$

103

 

 

$

348,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

$

 

 

 

14,538,085

 

 

$

264,905

 

 

$

123,176

 

 

$

(15,341

)

 

$

93

 

 

$

372,833

 

Cumulative-effect of accounting change

 

 

 

 

 

 

 

 

 

 

$

(2,244

)

 

 

 

 

 

 

 

 

(2,244

)

Balance at January 1, 2019, adjusted

 

$

 

 

 

14,538,085

 

 

$

264,905

 

 

$

120,932

 

 

$

(15,341

)

 

$

93

 

 

$

370,589

 

Exercise of common stock options,

     includes net settlement of shares

 

 

 

 

 

109,162

 

 

 

1,277

 

 

 

 

 

 

 

 

 

 

 

 

1,277

 

Stock based compensation expense, net

     of restricted share forfeitures

 

 

 

 

 

 

 

 

2,842

 

 

 

 

 

 

 

 

 

 

 

 

2,842

 

Issuance of restricted stock, net of

     forfeitures

 

 

 

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

 

 

 

(19,180

)

 

 

(519

)

 

 

 

 

 

 

 

 

 

 

 

(519

)

Cash dividends - common stock

     ($0.08 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,167

)

 

 

 

 

 

 

 

 

(1,167

)

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

 

 

8,083

 

 

 

 

 

 

 

 

 

8,083

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,512

 

 

 

 

 

 

12,512

 

Balance at June 30, 2019

 

$

 

 

 

14,628,287

 

 

$

268,505

 

 

$

127,840

 

 

$

(2,829

)

 

$

93

 

 

$

393,609

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


 

FRANKLIN FINANCIAL NETWORK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

8,083

 

 

$

20,221

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization on premises and equipment

 

 

850

 

 

 

841

 

Accretion of purchase accounting adjustments

 

 

(346

)

 

 

(610

)

Net amortization of securities

 

 

3,078

 

 

 

4,073

 

Amortization of loan servicing right asset

 

 

487

 

 

 

441

 

Amortization of core deposit intangible

 

 

277

 

 

 

286

 

Amortization of debt issuance costs

 

 

89

 

 

 

89

 

Provision for loan losses

 

 

12,086

 

 

 

1,143

 

Deferred income tax benefit

 

 

(2,121

)

 

 

(216

)

Excess tax benefit related to stock compensation

 

 

(205

)

 

 

 

Origination of loans held for sale

 

 

(208,009

)

 

 

(184,835

)

Proceeds from sale of loans held for sale

 

 

197,230

 

 

 

183,113

 

Loss (gain) on sale of loans held for investment

 

 

227

 

 

 

 

Net gain on sale of loans held for sale

 

 

(5,594

)

 

 

(3,380

)

Gain on sale of available for sale securities

 

 

(517

)

 

 

(1

)

Income from bank owned life insurance

 

 

(750

)

 

 

(762

)

Stock-based compensation

 

 

2,842

 

 

 

2,078

 

Deferred gain on sale of loans

 

 

(7

)

 

 

(8

)

Deferred gain on sale of foreclosed assets

 

 

(7

)

 

 

(6

)

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

4,478

 

 

 

(2,153

)

Accrued interest payable and other liabilities

 

 

6,875

 

 

 

(3,327

)

Net cash from operating activities

 

 

19,046

 

 

 

16,987

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Securities available for sale :

 

 

 

 

 

 

 

 

Sales and calls

 

 

347,037

 

 

 

 

Purchases

 

 

(94,860

)

 

 

(226,362

)

Maturities and prepayments

 

 

82,556

 

 

 

87,779

 

Securities held to maturity :

 

 

 

 

 

 

 

 

Purchases

 

 

(3,284

)

 

 

(1,676

)

Maturities, prepayments and calls

 

 

5,261

 

 

 

6,393

 

Net change in loans

 

 

(241,477

)

 

 

(118,539

)

Proceeds from sale of loans held for investment

 

 

18,468

 

 

 

 

Purchase of restricted equity securities

 

 

(3,011

)

 

 

(1,165

)

Purchases of premises and equipment, net

 

 

(1,427

)

 

 

(885

)

Increase in certificates of deposits at other financial institutions

 

 

(246

)

 

 

 

Purchase of bank owned life insurance

 

 

 

 

 

(119

)

Net cash acquired from acquisition

 

 

 

 

 

24,660

 

Net cash from investing activities

 

 

109,017

 

 

 

(229,914

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

(Decrease) increase in deposits

 

 

(285,162

)

 

 

107,635

 

Increase (decrease) in federal funds purchased and repurchase agreements

 

 

 

 

 

(30,659

)

Proceeds from Federal Home Loan Bank advances

 

 

340,000

 

 

 

250,000

 

Repayment of Federal Home Loan Bank advances

 

 

(312,000

)

 

 

(182,000

)

Proceeds from issuance of common stock, net of offering costs

 

 

 

 

 

(242

)

Proceeds from exercise of common stock options

 

 

1,277

 

 

 

1,937

 

Divestment of common stock issued to 401(k) plan

 

 

 

 

 

(95

)

Purchase of treasury stock

 

 

(494

)

 

 

 

Dividends paid on common stock

 

 

(1,167

)

 

 

 

Noncontrolling interest distributions

 

 

(8

)

 

 

(8

)

Net cash from financing activities

 

 

(257,554

)

 

 

146,568

 

Net change in cash and cash equivalents

 

 

(129,491

)

 

 

(66,359

)

Cash and cash equivalents at beginning of period

 

 

280,212

 

 

 

251,543

 

Cash and cash equivalents at end of period

 

$

150,721

 

 

$

185,184

 

Supplemental information:

 

 

 

 

 

 

 

 

Interest paid

 

$

40,579

 

 

$

27,004

 

Income taxes paid

 

 

6,043

 

 

 

6,632

 

Non-cash supplemental information:

 

 

 

 

 

 

 

 

Fair value of stock and stock options issued related to Civic Bank acquisition

 

$

-

 

 

$

33,174

 

Transfers from loans to foreclosed assets

 

 

 

 

 

350

 

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.

 

7


 

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 (ASU) 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 now recognize lease assets and lease liabilities for operating leases. 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. In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements” which addresses lessors and clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. The Company adopted ASU 2016-02 on January 1, 2019, elected the optional transition method, and subsequently adopted ASU 2019-01. The Company recorded a right of use asset and lease liability of $43,723. 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 retained earnings totaling $2,244.

In October 2018, the FASB issued 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.” This update expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on the SOFR. Due to concerns about the sustainability of the London Interbank Offered Rate (“LIBOR”), a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York initiated an effort to introduce an alternative reference rate in the U.S. The committee identified SOFR as the preferred alternative reference rate to LIBOR. The OIS rate based on SOFR was added as a U.S. benchmark interest rate to facilitate broader use in the marketplace and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies. The Company adopted the provisions of ASU No. 2018-16 on January 1, 2019, and it did not have a material impact on our consolidated financial statements.

8


 

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 following amendments to ASU 2016-13 are also in consideration by the Company: ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. 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.

 

In August 2018, the FASB issued 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 the Company on January 1, 2020, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

9


 

NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the securities available for sale portfolio at June 30, 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

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

$

1,695

 

 

 

1

 

 

 

(8

)

 

$

1,688

 

Mortgage-backed securities: residential

 

 

476,378

 

 

 

1,417

 

 

 

(3,744

)

 

 

474,051

 

Mortgage-backed securities: commercial

 

 

18,544

 

 

 

275

 

 

 

(120

)

 

 

18,699

 

Asset-backed securities

 

 

25,746

 

 

 

27

 

 

 

(565

)

 

 

25,208

 

Corporate notes

 

 

22,360

 

 

 

356

 

 

 

 

 

 

22,716

 

State and political subdivisions

 

 

172,585

 

 

 

279

 

 

 

(94

)

 

 

172,770

 

Total

 

$

717,308

 

 

$

2,355

 

 

$

(4,531

)

 

$

715,132

 

 

 

 

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 June 30, 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

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities: residential

 

$

74,163

 

 

$

198

 

 

$

(1,029

)

 

$

73,332

 

State and political subdivisions

 

 

44,800

 

 

 

2,677

 

 

 

 

 

 

47,477

 

Total

 

$

118,963

 

 

$

2,875

 

 

$

(1,029

)

 

$

120,809

 

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

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Proceeds

 

$

87,424

 

 

$

1

 

 

$

347,037

 

 

$

1

 

Gross gains

 

 

367

 

 

 

1

 

 

 

2,168

 

 

 

1

 

Gross losses

 

 

 

 

 

 

 

 

(1,651

)

 

 

 

 

10


 

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

 

 

 

June 30, 2019

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Available for sale

 

 

 

 

 

 

 

 

One year or less

 

$

10,502

 

 

$

10,498

 

Over one year through five years

 

 

697

 

 

 

697

 

Over five years through ten years

 

 

27,586

 

 

 

28,033

 

Over ten years

 

 

157,855

 

 

 

157,946

 

Asset-backed securities

 

 

25,746

 

 

 

25,208

 

Mortgage-backed securities: residential

 

 

476,378

 

 

 

474,051

 

Mortgage-backed securities: commercial

 

 

18,544

 

 

 

18,699

 

Total

 

$

717,308

 

 

$

715,132

 

Held to maturity

 

 

 

 

 

 

 

 

Over one year through five years

 

 

1,106

 

 

 

1,138

 

Over five years through ten years

 

 

1,034

 

 

 

1,076

 

Over ten years

 

 

42,660

 

 

 

45,263

 

Mortgage-backed securities: residential

 

 

74,163

 

 

 

73,332

 

Total

 

$

118,963

 

 

$

120,809

 

 

Securities pledged at June 30, 2019 and December 31, 2018 had a carrying amount of $468,429 and $939,440, respectively, and were pledged to secure public deposits.

At June 30, 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 June 30, 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

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

$

48

 

 

$

 

 

$

483

 

 

$

(8

)

 

$

531

 

 

$

(8

)

Mortgage-backed securities: residential

 

 

8,385

 

 

 

(44

)

 

 

329,225

 

 

 

(3,700

)

 

 

337,610

 

 

 

(3,744

)

Mortgage-backed securities: commercial

 

 

 

 

 

 

 

 

7,532

 

 

 

(120

)

 

 

7,532

 

 

 

(120

)

Asset-backed securities

 

 

22,713

 

 

 

(565

)

 

 

 

 

 

 

 

 

22,713

 

 

 

(565

)

State and political subdivisions

 

 

9,996

 

 

 

(4

)

 

 

30,152

 

 

 

(90

)

 

 

40,148

 

 

 

(94

)

Total available for sale

 

$

41,142

 

 

$

(613

)

 

$

367,392

 

 

$

(3,918

)

 

$

408,534

 

 

$

(4,531

)

 

 

 

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

 

$

1,639

 

 

$

(6

)

 

$

59,548

 

 

$

(1,023

)

 

$

61,187

 

 

$

(1,029

)

Total held to maturity

 

$

1,639

 

 

$

(6

)

 

$

59,548

 

 

$

(1,023

)

 

$

61,187

 

 

$

(1,029

)

11


 

 

 

 

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 June 30, 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 June 30, 2019 and December 31, 2018 were as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Loans

 

 

 

 

 

 

 

 

Construction and land development

 

$

584,599

 

 

$

584,440

 

Commercial real estate:

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

894,910

 

 

 

754,243

 

Other

 

 

37,845

 

 

 

48,017

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

496,597

 

 

 

493,065

 

Other

 

 

197,549

 

 

 

189,817

 

Commercial and industrial

 

 

668,065

 

 

 

592,793

 

Consumer and other

 

 

4,945

 

 

 

5,568

 

Loans before net deferred loan fees

 

 

2,884,510

 

 

 

2,667,943

 

Deferred loan fees, net

 

 

(4,077

)

 

 

(2,544

)

Total loans

 

 

2,880,433

 

 

 

2,665,399

 

Allowance for loan losses

 

 

(27,443

)

 

 

(23,451

)

Total loans, net of allowance for loan losses

 

$

2,852,990

 

 

$

2,641,948

 

12


 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month periods ended June 30, 2019 and 2018:

 

 

 

Construction

and Land

Development

 

 

Commercial

Real

Estate

 

 

Residential

Real

Estate

 

 

Commercial

and

Industrial

 

 

Consumer

and

Other

 

 

Total

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,742

 

 

$

7,027

 

 

$

4,810

 

 

$

11,229

 

 

$

49

 

 

$

27,857

 

Provision for loan losses

 

 

42

 

 

 

614

 

 

 

18

 

 

 

6,382

 

 

 

(25

)

 

 

7,031

 

Loans charged-off

 

 

 

 

 

 

 

 

 

 

 

(7,563

)

 

 

(29

)

 

 

(7,592

)

Recoveries

 

 

 

 

 

 

 

 

16

 

 

 

70

 

 

 

61

 

 

 

147

 

Total ending allowance balance

 

$

4,784

 

 

$

7,641

 

 

$

4,844

 

 

$

10,118

 

 

$

56

 

 

$

27,443

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,345

 

 

$

5,875

 

 

$

3,605

 

 

$

7,866

 

 

$

47

 

 

$

21,738

 

Provision for loan losses

 

 

267

 

 

 

288

 

 

 

909

 

 

 

(900

)

 

 

6

 

 

 

570

 

Loans charged-off

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Recoveries

 

 

1

 

 

 

 

 

 

19

 

 

 

10

 

 

 

8

 

 

 

38

 

Total ending allowance balance

 

$

4,613

 

 

$

6,163

 

 

$

4,533

 

 

$

6,976

 

 

$

56

 

 

$

22,341

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 2019 and 2018.

 

 

Construction

and Land

Development

 

 

Commercial

Real

Estate

 

 

Residential

Real

Estate

 

 

Commercial

and

Industrial

 

 

Consumer

and

Other

 

 

Total

 

Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,743

 

 

$

6,725

 

 

$

4,743

 

 

$

7,166

 

 

$

74

 

 

$

23,451

 

Provision for loan losses

 

 

41

 

 

 

916

 

 

 

101

 

 

 

11,012

 

 

 

16

 

 

 

12,086

 

Loans charged-off

 

 

 

 

 

 

 

 

(15

)

 

 

(8,131

)

 

 

(99

)

 

 

(8,245

)

Recoveries

 

 

 

 

 

 

 

 

15

 

 

 

71

 

 

 

65

 

 

 

151

 

Total ending allowance balance

 

$

4,784

 

 

$

7,641

 

 

$

4,844

 

 

$

10,118

 

 

$

56

 

 

$

27,443

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,802

 

 

$

5,981

 

 

$

3,834

 

 

$

7,587

 

 

$

43

 

 

$

21,247

 

Provision for loan losses

 

 

848

 

 

 

182

 

 

 

668

 

 

 

(572

)

 

 

17

 

 

 

1,143

 

Loans charged-off

 

 

(38

)

 

 

 

 

 

(7

)

 

 

(49

)

 

 

(17

)

 

 

(111

)

Recoveries

 

 

1

 

 

 

 

 

 

38

 

 

 

10

 

 

 

13

 

 

 

62

 

Total ending allowance balance

 

$

4,613

 

 

$

6,163

 

 

$

4,533

 

 

$

6,976

 

 

$

56

 

 

$

22,341

 

 

13


 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 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

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

2,193

 

 

$

 

 

$

2,193

 

Collectively evaluated for impairment

 

 

4,784

 

 

 

7,641

 

 

 

4,844

 

 

 

7,925

 

 

 

56

 

 

 

25,250

 

Total ending allowance balance

 

$

4,784

 

 

$

7,641

 

 

$

4,844

 

 

$

10,118

 

 

$

56

 

 

$

27,443

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

1,837

 

 

$

2,193

 

 

$

 

 

$

4,030

 

Collectively evaluated for impairment

 

 

584,599

 

 

 

932,755

 

 

 

692,309

 

 

 

665,872

 

 

 

4,945

 

 

 

2,880,480

 

Total ending loans balance

 

$

584,599

 

 

$

932,755

 

 

$

694,146

 

 

$

668,065

 

 

$

4,945

 

 

$

2,884,510

 

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

 

 

 

679,693

 

 

 

592,626

 

 

 

5,568

 

 

 

2,662,289

 

Total ending loans balance

 

$

584,440

 

 

$

802,260

 

 

$

682,882

 

 

$

592,793

 

 

$

5,568

 

 

$

2,667,943

 

 

14


 

Loans collectively evaluated for impairment reported at June 30, 2019 include certain acquired loans. At June 30, 2019, these non-PCI loans had a carrying value of $72,774, comprised of contractually unpaid principal totaling $73,717 and discounts totaling $943. Management evaluated these loans for credit deterioration since acquisition and determined that an allowance for loan losses of $115 was necessary at June 30, 2019.

The following table presents information related to impaired loans by class of loans as of June 30, 2019 and December 31, 2018:

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

$

491

 

 

 

484

 

 

$

 

Other

 

 

1,353

 

 

 

1,353

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

Subtotal

 

 

1,844

 

 

 

1,837

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

5,722

 

 

 

2,193

 

 

 

2,193

 

Subtotal

 

 

5,722

 

 

 

2,193

 

 

 

2,193

 

Total

 

$

7,566

 

 

$

4,030

 

 

$

2,193

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

2,298

 

 

$

2,298

 

 

$

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

1,280

 

 

 

1,272

 

 

 

 

Other

 

 

1,917

 

 

 

1,917

 

 

 

 

Subtotal

 

 

5,495

 

 

 

5,487

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

167

 

 

 

167

 

 

 

17

 

Subtotal

 

 

167

 

 

 

167

 

 

 

17

 

Total

 

$

5,662

 

 

$

5,654

 

 

$

17

 

 

The following table presents the average recorded investment of impaired loans by class of loans for the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

Average Recorded Investment

 

2019

 

 

2018

 

 

2019

 

 

2018

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

 

 

$

 

 

$

384

 

 

$

100

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

 

 

 

 

 

 

25

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

681

 

 

 

496

 

 

 

744

 

 

 

432

 

Other

 

 

1,086

 

 

 

112

 

 

 

1,174

 

 

 

192

 

Commercial and industrial

 

 

2,638

 

 

 

883

 

 

 

1,319

 

 

 

867

 

Subtotal

 

 

4,405

 

 

 

1,491

 

 

 

3,646

 

 

 

1,591

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

 

 

$

 

 

$

91

 

 

$

 

Commercial and industrial

 

 

4,404

 

 

 

1,638

 

 

 

3,787

 

 

 

1,785

 

Subtotal

 

 

4,404

 

 

 

1,638

 

 

 

3,878

 

 

 

1,785

 

Total average recorded investment

 

$

8,809

 

 

$

3,129

 

 

$

7,524

 

 

$

3,376

 

 

15


 

The impact on net interest income for these loans was not material to the Company’s results of operations for the three and six months ended June 30, 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 June 30, 2019 and December 31, 2018:

 

 

 

Nonaccrual

 

 

Loans Past Due

Over 90 Days And

Still Accruing Interest

 

June 30, 2019

 

 

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

$

484

 

 

$

 

Other

 

 

1,353

 

 

 

250

 

Commercial and industrial

 

 

2,193

 

 

 

426

 

Total

 

$

4,030

 

 

$

676

 

 

 

 

 

 

 

 

 

 

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.

16


 

The following table presents the aging of the recorded investment in past due loans as of June 30, 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

 

 

Total

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

 

 

$

380

 

 

$

 

 

$

380

 

 

$

584,219

 

 

$

584,599

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

894,910

 

 

 

894,910

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,845

 

 

 

37,845

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

350

 

 

 

 

 

 

159

 

 

 

509

 

 

 

496,088

 

 

 

496,597

 

Other

 

 

218

 

 

 

404

 

 

 

609

 

 

 

1,231

 

 

 

196,318

 

 

 

197,549

 

Commercial and industrial

 

 

601

 

 

 

289

 

 

 

2,619

 

 

 

3,509

 

 

 

664,556

 

 

 

668,065

 

Consumer and other

 

 

33

 

 

 

 

 

 

 

 

 

33

 

 

 

4,912

 

 

 

4,945

 

 

 

$

1,202

 

 

$

1,073

 

 

$

3,387

 

 

$

5,662

 

 

$

2,878,848

 

 

$

2,884,510

 

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

 

 

 

490,043

 

 

 

493,065

 

Other

 

 

142

 

 

 

 

 

 

1,810

 

 

 

1,952

 

 

 

187,865

 

 

 

189,817

 

Commercial and industrial

 

 

241

 

 

 

252

 

 

 

208

 

 

 

701

 

 

 

592,092

 

 

 

592,793

 

Consumer and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,568

 

 

 

5,568

 

 

 

$

3,582

 

 

$

2,642

 

 

$

2,794

 

 

$

9,018

 

 

$

2,658,925

 

 

$

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.

17


 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. The following table 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 June 30, 2019 and December 31, 2018:

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Total

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

584,251

 

 

 

113

 

 

 

235

 

 

$

584,599

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonfarm, nonresidential

 

 

894,430

 

 

 

480

 

 

 

 

 

 

894,910

 

Other

 

 

37,229

 

 

 

616

 

 

 

 

 

 

37,845

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed-end 1-4 family

 

 

494,306

 

 

 

 

 

 

2,291

 

 

 

496,597

 

Other

 

 

195,207

 

 

 

 

 

 

2,342

 

 

 

197,549

 

Commercial and industrial

 

 

642,120

 

 

 

2,662

 

 

 

23,283

 

 

 

668,065

 

Consumer and other

 

 

4,945

 

 

 

 

 

 

 

 

 

4,945

 

 

 

$

2,852,488

 

 

$

3,871

 

 

$

28,151

 

 

$

2,884,510

 

 

 

 

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 June 30, 2019, the Company’s loan portfolio contains one loan that has been modified in a troubled debt restructuring with a balance of $316. As of December 31, 2018, the Company’s loan portfolio contained one loan that had been modified in a troubled debt restructuring with a balance of $167.

NOTE 4—LOAN SERVICING

Loans serviced for others are not reported as assets. The principal balances of these loans at June 30, 2019 and December 31, 2018 are as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Loan portfolios serviced for:

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

$

491,388

 

 

$

492,761

 

Other

 

 

3,614

 

 

 

3,689

 

 

The related loan servicing rights activity for the three and six months ended June 30, 2019 and 2018 were as follows:

 

18


 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Servicing rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

$

3,366

 

 

$

3,602

 

 

$

3,403

 

 

$

3,620

 

 

Additions

 

 

196

 

 

 

161

 

 

 

383

 

 

 

357

 

 

Amortized to expense

 

 

(263

)

 

 

(227

)

 

 

(487

)

 

 

(441

)

 

Decrease in impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period

 

$

3,299

 

 

$

3,536

 

 

$

3,299

 

 

$

3,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The components of net loan servicing fees for the three and six months ended June 30, 2019 and 2018 were as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Loan servicing fees, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

$

312

 

 

$

330

 

 

$

618

 

 

$

663

 

Amortization of loan servicing fees

 

 

(263

)

 

 

(227

)

 

 

(487

)

 

 

(441

)

Total

 

$

49

 

 

$

103

 

 

$

131

 

 

$

222

 

 

The fair value of servicing rights was estimated by management to be approximately $3,905 at June 30, 2019. Fair value for June 30, 2019 was determined using a weighted average discount rate of 9.5% and a weighted average prepayment speed of 16.4%. 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. During the six months ended June 30, 2019, one additional lease agreement has been executed and is scheduled to commence in 2020 relocating 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.

 

19


 

Lease right-of-use assets

 

Classification

 

June 30, 2019

 

Operating lease right-of-use assets

 

Other Assets

 

$

40,967

 

Finance lease right-of-use assets

 

Other Assets

 

 

2,919

 

Total lease right-of-use assets

 

 

 

$

43,886

 

 

 

 

 

 

 

 

Lease liabilities

 

Classification

 

June 30, 2019

 

Operating lease right-of-use assets

 

Other Liabilities

 

$

42,556

 

Finance lease right-of-use assets

 

Other Liabilities

 

 

2,996

 

Total lease liabilities

 

 

 

$

45,552

 

 

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 (in years)

 

 

 

 

 

 

 

 

June 30, 2019

Operating leases

 

 

 

 

 

 

 

 

 

12.1

 

Finance lease

 

 

 

 

 

 

 

 

 

14.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

 

 

 

 

5.48%

 

Finance lease

 

 

 

 

 

 

 

 

5.49%

 

 

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 costs

 

 

$

2,527

 

Variable lease costs

 

 

 

181

 

Short-term lease costs

 

 

 

94

 

Finance lease costs

 

 

 

 

 

Interest on lease liabilities(1)

 

 

 

82

 

Amortization of right-of-use asset

 

 

 

101

 

Total lease costs

 

 

$

2,985

 

 

(1)

Included in interest expense on Federal Home Loan Advances and other borrowings in the Company's consolidated statement of income. All other lease costs in this table are included in occupancy and equipment expense.

 

Rent expense related to leases during the three and six months ended June 30, 2018, was $1,319 and $2,547, respectively.

 

Other supplemental cash flow information:

 

 

 

 

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

 

 

 

 

  Operating cash flows from operating leases

 

$

2,342

 

  Operating cash flows from finance leases

 

 

82

 

  Financing cash flows from finance leases

 

 

54

 

 

20


 

Future minimum payments for a finance lease and operating leases with initial or remaining terms of one year of more as of June 30, 2019 are as follows:

 

Twelve Months Ended:

 

Finance

 

 

Operating

 

2020

 

$

274

 

 

$

4,812

 

2021

 

 

278

 

 

 

4,869

 

2022

 

 

282

 

 

 

4,876

 

2023

 

 

286

 

 

 

4,850

 

2024

 

 

291

 

 

 

4,921

 

Thereafter

 

 

2,986

 

 

 

33,713

 

Total future minimum lease payments

 

$

4,397

 

 

$

58,041

 

Less: Imputed interest

 

 

(1,401

)

 

 

(15,485

)

Total lease liabilities

 

$

2,996

 

 

$

42,556

 

 

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 are as follows:

 

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 $1,513 and $1,318, and $2,842 and $2,078 for the three and six months ended June 30, 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 $92 and $205 for the three and six months ended June 30, 2019 and was $220 and $283 for the three and six months ended June 30, 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 Company’s Board of Directors approved the Amended and Restated 2017 Omnibus Equity Incentive Plan (“Amended and Restated 2017 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 June 30, 2019, there were 2,421,000 authorized shares available for issuance under the Amended and Restated 2017 Plan.

Employee, organizer and director stock option 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 Compensation Committee 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.

21


 

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

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

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Risk-free interest rate

 

 

2.47

%

 

 

2.96

%

Expected term

 

7 years

 

 

7.5 years

 

Expected stock price volatility

 

 

30.64

%

 

 

32.09

%

Dividend yield

 

 

0.57

%

 

 

0.00

%

 

The weighted average fair value of options granted for the six months ended June 30, 2019 and 2018 were $9.78 and $12.03, respectively.

A summary of the activity in the plans for the six months ended June 30, 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

 

 

91,823

 

 

 

27.83

 

 

 

 

 

 

 

 

 

Exercised

 

 

(128,125

)

 

 

14.14

 

 

 

 

 

 

 

 

 

Forfeited, expired, or cancelled

 

 

(18,883

)

 

 

32.74

 

 

 

 

 

 

 

 

 

Outstanding at period end

 

 

1,752,737

 

 

$

18.47

 

 

 

6.87

 

 

$

4,113

 

Vested or expected to vest

 

 

1,666,525

 

 

$

25.52

 

 

 

6.13

 

 

$

3,908

 

Exercisable at period end

 

 

839,675

 

 

$

17.32

 

 

 

6.13

 

 

$

8,847

 

 

 

 

For the Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Stock options exercised:

 

 

 

 

 

 

 

 

Intrinsic value of options exercised

 

$

1,869

 

 

$

3,745

 

Cash received from options exercised

 

 

1,277

 

 

 

1,937

 

Tax benefit realized from option exercises

 

 

205

 

 

 

283

 

 

As of June 30, 2019, there was $4,786 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 1.97 years.

Restricted Stock and Restricted Stock Units: 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. In April 2019, the Company began awarding restricted share units which participants do not have voting rights or dividend rights 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.

22


 

A summary of activity for non-vested restricted share awards for the six months ended June 30, 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

 

 

(70,069

)

 

 

30.33

 

Forfeited

 

 

(1,035

)

 

 

32.95

 

Non-vested at June 30, 2019

 

 

106,667

 

 

 

 

 

 

Compensation expense associated with the restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of June 30, 2019, there was $1,713 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 1.30 years.

 

The Company began granting restricted stock units in 2019. The following table outlines restricted stock units that were granted, grouped by similar vesting criteria, during the six months ended June 30, 2019.

 

 

Grant year

 

Units Awarded

 

 

Service period

 

 

Period in which units to be settled into shares of common stock

 

2019

 

 

124,661

 

 

 

3.00

 

 

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense related with the restricted share units for the three and six months ended June 30, 2019 was $483 and $579, respectively. There was no expense related to restricted share units in 2018. This stock compensation is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. As of June 30, 2019, there was $3,814 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 2.75 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 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 June 30, 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 June 30, 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.

23


 

Actual and required capital amounts and ratios are presented below as of June 30, 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

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company common equity Tier 1 capital to RWA

 

$

375,710

 

 

 

11.2

%

 

$

151,266

 

 

 

4.5

%

 

N/A

 

 

N/A

 

Company Total Capital to RWA

 

$

462,020

 

 

 

13.7

%

 

$

268,918

 

 

 

8.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to RWA

 

$

375,710

 

 

 

11.2

%

 

$

201,689

 

 

 

6.0

%

 

N/A

 

 

N/A

 

Company Tier 1 (Core) Capital to average assets

 

$

375,710

 

 

 

9.2

%

 

$

134,459

 

 

 

4.0

%

 

N/A

 

 

N/A

 

Bank-Level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank common equity Tier 1 capital to RWA

 

$

433,574

 

 

 

12.9

%

 

$

151,253

 

 

 

4.5

%

 

$

218,476

 

 

 

6.5

%

Bank Total Capital to RWA

 

$

461,102

 

 

 

13.7

%

 

$

268,894

 

 

 

8.0

%

 

$

336,117

 

 

 

10.0

%

Bank Tier 1 (Core) Capital to RWA

 

$

433,574

 

 

 

12.9

%

 

$

201,670

 

 

 

6.0

%

 

$

268,894

 

 

 

8.0

%

Bank Tier 1 (Core) Capital to average assets

 

$

433,574

 

 

 

10.6

%

 

$

163,420

 

 

 

4.0

%

 

$

204,274

 

 

 

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.

24


 

NOTE 8—DERIVATIVE 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 $101,205 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 June 30, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

 

7.23

 

 

2.527%

 

 

3 month LIBOR

 

$

101,205

 

 

$

4,733

 

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 and six months ended June 30, 2019 and 2018 were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Gain (loss) on fair value hedging relationship

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest rate swap agreements - securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

$

3,615

 

 

$

 

 

$

4,733

 

 

$

 

Derivative designated as hedging instruments

 

(3,615

)

 

 

 

 

 

(4,733

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges at June 30, 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

 

June 30, 2019

 

 

June 30, 2019

 

Securities available-for-sale

 

$

101,205

 

 

$

4,733

 

 

 

25


 

 

 

Derivatives designated as cash flow hedges

 

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company uses cash flow hedge relationships in an effort to manage future interest rate exposure. The hedging strategy converts the LIBOR-based variable interest rate on forecasted borrowings to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability. A summary of the Company's cash flow hedge relationships as of June 30, 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

Balance Sheet Location

 

Weighted Average Remaining Maturity (In Years)

 

 

Weighted Average Pay Rate

 

 

Receive Rate

 

Notional Amount

 

 

Estimated Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities

 

 

2

 

 

2.232%

 

 

3 month LIBOR

 

$

100,000

 

 

$

1,667

 

 

There were no cash flow hedge relationships as of December 31, 2018.

 

The effects of the Company's cash flow hedge relationships on the statement of comprehensive income (loss) during the three and six months ended June 30, 2019 and 2018 were as follows:

 

 

Amount of Gain Recognized in Other Comprehensive Income (Loss)

 

 

Amount of Gain Recognized in Other Comprehensive Income (Loss)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Liability derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

$

(1,231

)

 

$

 

 

$

(1,231

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The cash flow hedges were determined to be highly effective during the periods presented and as a result qualify for hedge accounting treatment. The Company expects the hedges to continue to be highly effective and qualify for hedge accounting during the remaining terms of the swaps.

26


 

NOTE 9—COMMITMENTS AND CONTINGENCIES

We enter into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. Those agreements involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. These off-balance sheet arrangements include commitments to make loans, credit lines and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept or use these commitments. A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our customers under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Actual borrowing needs of our customers may exceed our expected funding requirements, especially during a challenging economic environment when our client companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from other sources. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our customers may have a material adverse effect on our business, financial condition, results of operations or reputation.

Commitments to make loans, credit lines and standby letters of credit involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

The contractual amounts of financial instruments with off-balance sheet risk were as follows:

  

 

 

June 30,

2019

 

 

December 31,

2018

 

 

Unused lines of credit

 

$

801,049

 

 

$

654,584

 

 

Standby letters of credit

 

 

52,064

 

 

 

40,024

 

 

Unfunded loan commitments

 

 

63,707

 

 

 

28,731

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 10—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.

27


 

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.

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 cash flow hedge and 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:

28


 

 

 

Fair Value Measurements at

June 30, 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. government sponsored entities and agencies

 

$

 

 

 

1,688

 

 

$

 

Mortgage-backed securities-residential

 

 

 

 

 

474,051

 

 

 

 

Mortgage-backed securities-commercial

 

 

 

 

 

18,699

 

 

 

 

Asset-backed securities

 

 

 

 

 

25,208

 

 

 

 

Corporate notes

 

 

 

 

 

22,716

 

 

 

 

State and political subdivisions

 

 

 

 

 

172,770

 

 

 

 

Total securities available for sale

 

$

 

 

$

715,132

 

 

$

 

Loans held for sale

 

$

 

 

$

27,093

 

 

$

 

Other assets

 

$

 

 

$

278

 

 

$

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

$

 

 

$

6,580

 

 

$

 

 

 

 

 

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 June 30, 2019, the unpaid principal balance of loans held for sale was $26,118 resulting in an unrealized gain of $975 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 June 30, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $324 and $220, respectively. For the six months ended June 30, 2019 and 2018, the change in fair value related to loans held for sale, which is included in mortgage banking revenue, was $594 and $194, respectively. None of these loans were 90 days or more past due or on nonaccrual as of June 30, 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:

29


 

There was one collateral-dependent impaired loan carried at fair value of $0 as of June 30, 2019. For the three and six months ended June 30, 2019, an additional provision for loan losses of  $6,304 and $9,759 was recorded related to impaired loans recorded at fair value of collateral. There was one collateral-dependent impaired loan carried at fair value of $150 as of December 31, 2018. For the three and six months ended June 30, 2018, an additional provision for loan losses of $16 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 June 30, 2019 and December 31, 2018. There were no properties at June 30, 2019 or 2018 that had required write-downs to fair value.

The carrying amounts and estimated fair values of financial instruments at June 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at

June 30, 2019 Using:

 

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150,721

 

 

$

150,721

 

 

$

 

 

$

 

 

$

150,721

 

Certificates of deposit held at other financial

   institutions

 

 

3,840

 

 

 

 

 

 

3,840

 

 

 

 

 

 

3,840

 

Securities available for sale

 

 

715,132

 

 

 

 

 

 

715,132

 

 

 

 

 

 

715,132

 

Securities held to maturity

 

 

118,963

 

 

 

 

 

 

120,809

 

 

 

 

 

 

120,809

 

Loans held for sale

 

 

27,093

 

 

 

 

 

 

27,093

 

 

 

 

 

 

27,093

 

Net loans

 

 

2,852,990

 

 

 

 

 

 

 

 

 

2,886,557

 

 

 

2,886,557

 

Servicing rights, net

 

 

3,299

 

 

 

 

 

 

 

 

 

3,905

 

 

 

3,905

 

Other assets

 

 

278

 

 

 

 

 

 

278

 

 

 

 

 

 

278

 

Accrued interest receivable

 

 

14,281

 

 

 

136

 

 

 

5,196

 

 

 

8,950

 

 

 

14,282

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

3,146,645

 

 

$

2,182,888

 

 

$

965,228

 

 

$

 

 

$

3,148,116

 

Federal Home Loan Bank advances

 

 

396,500

 

 

 

 

 

 

396,624

 

 

 

 

 

 

396,624

 

Subordinated notes, net

 

 

58,782

 

 

 

 

 

 

 

 

 

61,438

 

 

 

61,438

 

Other liabilities

 

 

6,580

 

 

 

 

 

 

6,580

 

 

 

 

 

 

6,580

 

Accrued interest payable

 

 

4,312

 

 

 

179

 

 

 

687

 

 

 

3,446

 

 

 

4,312

 

 

 

 

 

 

 

 

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

 

 

30


 

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.

(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 11—EARNINGS PER SHARE

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

5,173

 

 

$

10,161

 

 

$

8,075

 

 

$

20,213

 

Less: earnings allocated to participating securities

 

 

(41

)

 

 

(118

)

 

 

(79

)

 

 

(192

)

Net income allocated to common shareholders

 

$

5,132

 

 

$

10,043

 

 

$

7,996

 

 

$

20,021

 

Weighted average common shares outstanding

   including participating securities

 

 

14,599,407

 

 

 

14,383,493

 

 

 

14,580,370

 

 

 

13,819,742

 

Less: Participating securities

 

 

(117,063

)

 

 

(167,381

)

 

 

(143,043

)

 

 

(130,898

)

Average shares

 

 

14,482,344

 

 

 

14,216,112

 

 

 

14,437,327

 

 

 

13,688,844

 

Basic earnings per common share

 

$

0.35

 

 

$

0.71

 

 

$

0.55

 

 

$

1.46

 

31


 

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to common shareholders

 

$

5,132

 

 

$

10,043

 

 

$

7,996

 

 

$

20,021

 

Weighted average common shares outstanding for

   basic earnings per common share

 

 

14,482,344

 

 

 

14,216,112

 

 

 

14,437,327

 

 

 

13,688,844

 

Add: Dilutive effects of assumed exercises of stock

   options

 

 

341,777

 

 

 

597,947

 

 

 

376,762

 

 

 

557,307

 

Add: Dilutive effects of assumed restricted stock units

 

 

70,019

 

 

 

 

 

 

35,203

 

 

 

 

Average shares and dilutive potential common shares

 

 

14,894,140

 

 

 

14,814,059

 

 

 

14,849,292

 

 

 

14,246,151

 

Dilutive earnings per common share

 

$

0.34

 

 

$

0.68

 

 

$

0.54

 

 

$

1.41

 

 

For three months ended June 30, 2019 and 2018, stock options for 980,099 and 659,291 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were antidilutive. Stock options for 874,279 and 535,285 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2019 and 2018, respectively, because they were antidilutive.

NOTE 12—SUBORDINATED DEBT ISSUANCE

The Company’s subordinated notes, net of issuance costs, totaled $58,782 and $58,693 at June 30, 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 six months ended June 30, 2019 and 2018, amortization of issuance costs remained consistent at $89.

32


 

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

 

 

33


 

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 June 30, 2019, we had consolidated total assets of $4,071,971, total loans, including loans held for sale, of $2,907,526, total deposits of $3,146,645 and total equity of $393,609.

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 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.

34


 

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” or “TDRs”) 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.

TDRs 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 TDRs 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 AND SIX MONTHS ENDED JUNE 30, 2019 and 2018

(Dollar Amounts in Thousands)

Overview

The Company reported net income of $5,181 and $8,083 for the three and six months ended June 30, 2019, respectively, compared to $10,169 and $20,221 for the three and six months ended June 30, 2018, respectively. After earnings attributable to noncontrolling interest, the Company’s net earnings available to common shareholders for the three and six months ended June 30, 2019, was $5,173 and $8,075, respectively, compared to $10,161 and $20,213 for the three and six months ended June 30, 2018, respectively. Net income available to common shareholders decreased by $4,988 and $12,138 for the three and six months ended June 30, 2019, compared to June 30, 2018, primarily related to a specific loan loss provision on a shared national credit relationship (“SNC”) of $6,304 and $9,759 for the three and six months ended June 30, 2019, respectively, and $4,143 related to post-employment and retirement expense recorded in the first quarter of 2019.

 

Net Interest Income/Margin

Net interest income consists of interest income generated by earning-assets less interest expense paid on interest-bearing liabilities and is the most significant component of our revenues. Net interest income for the three and six months ended June 30, 2019, totaled $27,365 and $54,785, respectively, compared to $26,905 and $52,021 for the same periods in 2018, an increase of $460 and $2,764, or 1.7% and 5.3%, between the respective periods. For the three and six months ended June 30, 2019, interest income increased $5,317 and $14,793, or 12.6% and 18.4%, respectively, compared with the same periods in 2018, due to growth in both the loan and investment securities portfolios. For the three and six months ended June 30, 2019, interest expense increased $4,857 and

35


 

$12,029, or 31.9% and 42.7%, respectively, primarily due to increases in interest-bearing deposits combined with an increase in interest rates for deposits and Federal Home Loan Bank (“FHLB”) advances.

Interest-earning assets averaged $3,940,266 and $4,046,709 during the three months ended June 30, 2019 and 2018, respectively, a decrease of $106,443, or 2.6%. This decrease was due to the strategically planned asset rotation and decrease in the total investment securities. Average total loans increased $420,711, or 17.1%, and investment securities decreased $528,315, or 37.5%, when comparing the three months ended June 30, 2019, with the same period in 2018.

When comparing the three months ended June 30, 2019 and 2018, the yield on average interest earning assets, adjusted for tax equivalent yield, increased 64 basis points in 2019, to 4.89% compared to 4.25% for the same period during 2018. For the three months ended June 30, 2019, the tax equivalent yield on loans held for investment was 5.61%, and for the three months ended June 30, 2018, the tax equivalent yield on loans held for investment was 5.27%. 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 $3,340,033 during the three months ended June 30, 2019, compared to $3,518,299 for the same period in 2018, a decrease of $178,266, or 5.1%. Total average interest-bearing deposits decreased $179,800, or 5.8%, including a decline in average interest checking of $44,806 and average time deposits of $380,237 for the three months ended June 30, 2019, as compared to the same period during 2018. Total average money market deposits increased $254,168, or 32.9% for the three months ended June 30, 2019. Total non-interest deposits averaged $313,104, an increase of $14,979, or 5.0%, during the three months ended June 30, 2019, compared to the same period during 2018. The growth in the loan portfolio contributed to an increase in average FHLB advances of $18,857 for the three months ended June 30, 2019.

When comparing the three months ended June 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 67 basis points to 2.41% from 1.74%. The increase was due to rate increases in the cost of funds for interest-bearing deposits, FHLB advances and federal funds purchased.

Interest-earning assets averaged $3,991,962 and $3,958,127 during the six months ended June 30, 2019 and 2018, respectively, an increase of $33,835, or 0.9%. This increase was due to growth in the loan portfolio over the past year. Average loans held for investment increased $437,608, or 18.4%, for the six months ended June 30, 2019, as compared to the same period for 2018. Investment securities decreased $359,071, or 26.6%, when comparing the six months ended June 30, 2019, with the same period in 2018. When comparing the six months ended June 30, 2019 and 2018, the yield on average interest-earning assets, adjusted for tax equivalent yield, increased approximately 69 basis points to 4.85% in 2019 compared to 4.16% for the same period during 2018.

For the six months ended June 30, 2019 and 2018, the tax equivalent yield on loans held for investment was 5.61% and 5.17% respectively. The primary driver for the increase in yield on loans held for investment for the six months ended June 30, 2019 was the increase in market interest rates during the past year.

For the six months ended June 30, 2019, the tax equivalent yield on taxable securities was 2.79%, and for the six months ended June 30, 2018, the tax equivalent yield on taxable securities was 2.34%. For the six months ended June 30, 2019, the tax equivalent yield on tax-exempt securities was 4.03%, and for the six months ended June 30, 2018, the tax equivalent yield on tax-exempt securities was 4.56%. The primary driver for the yield decreases in both taxable and tax-exempt securities was the decrease in volume due to the strategically-planned balance sheet rotation focused on core loan growth.

Interest-bearing liabilities averaged $3,416,223 during the six months ended June 30, 2019, compared to $3,444,835 for the same period in 2018, a decrease of $28,612, or 0.8%. Total average interest-bearing deposits decreased $54,259, including decreases in interest-bearing checking of $52,975 and average time deposits of $243,823 for the six months ended June 30, 2019, as compared to the same period during 2018. Total non-interest deposits averaged $302,200, an increase of $9,647, or 3.3%, during the six months ended June 30, 2019, compared to the same period in 2018. The growth in the loan portfolio also contributed to an increase in average FHLB advances of $44,824 during the six months ended June 30, 2019.

When comparing the six months ended June 30, 2019 and 2018, the cost of average interest-bearing liabilities increased 72 basis points from 1.65% to 2.37%. The increase was due to rate increases for interest-bearing deposits, FHLB advances and federal funds purchased.

36


 

The tables below summarize average balances, annualized yields and rates, cost of funds, and the analysis of changes in interest income and interest expense for the three and six months ended June 30, 2019 and 2018:

Average Balances—Yields & Rates (7)

(Dollars are in thousands)

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)(6)

 

$

2,858,713

 

 

$

40,003

 

 

 

5.61

%

 

$

2,448,646

 

 

$

32,187

 

 

 

5.27

%

Loans held for sale

 

 

24,118

 

 

 

256

 

 

 

4.26

 

 

 

13,474

 

 

$

152

 

 

 

4.52

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

673,386

 

 

 

4,614

 

 

 

2.75

 

 

 

1,179,000

 

 

 

6,905

 

 

 

2.35

 

Tax-exempt(6)

 

 

208,417

 

 

 

1,909

 

 

 

3.67

 

 

 

231,118

 

 

 

2,613

 

 

 

4.53

 

Restricted equity securities

 

 

24,641

 

 

 

350

 

 

 

5.70

 

 

 

20,619

 

 

 

329

 

 

 

6.40

 

Certificates of deposit at other financial institutions

 

 

3,759

 

 

 

22

 

 

 

2.35

 

 

 

3,459

 

 

 

19

 

 

 

2.20

 

Federal funds sold and other(2)

 

 

147,232

 

 

 

855

 

 

 

2.33

 

 

 

150,393

 

 

 

642

 

 

 

1.71

 

TOTAL INTEREST EARNING ASSETS

 

$

3,940,266

 

 

$

48,009

 

 

 

4.89

%

 

$

4,046,709

 

 

$

42,847

 

 

 

4.25

%

Allowance for loan and lease losses

 

 

(28,007

)

 

 

 

 

 

 

 

 

 

 

(21,994

)

 

 

 

 

 

 

 

 

All other assets

 

 

192,843

 

 

 

 

 

 

 

 

 

 

 

144,738

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,105,102

 

 

 

 

 

 

 

 

 

 

$

4,169,453

 

 

 

 

 

 

 

 

 

LIABILITIES & EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

816,429

 

 

$

4,357

 

 

 

2.14

%

 

$

861,235

 

 

$

3,329

 

 

 

1.55

%

Money market

 

 

1,026,200

 

 

 

6,103

 

 

 

2.39

 

 

 

772,032

 

 

 

3,048

 

 

 

1.58

 

Savings

 

 

38,882

 

 

 

27

 

 

 

0.28

 

 

 

47,807

 

 

 

38

 

 

 

0.32

 

Time deposits

 

 

1,036,904

 

 

 

6,192

 

 

 

2.40

 

 

 

1,417,141

 

 

 

6,189

 

 

 

1.75

 

Federal Home Loan Bank advances and other (8)

 

 

349,615

 

 

 

2,237

 

 

 

2.57

 

 

 

330,758

 

 

 

1,414

 

 

 

1.71

 

Federal funds purchased and other(3)

 

 

13,249

 

 

 

90

 

 

 

2.72

 

 

 

30,750

 

 

 

131

 

 

 

1.71

 

Subordinated notes

 

 

58,754

 

 

 

1,082

 

 

 

7.39

 

 

 

58,576

 

 

 

1,082

 

 

 

7.41

 

TOTAL INTEREST BEARING LIABILITIES

 

$

3,340,033

 

 

$

20,088

 

 

 

2.41

%

 

$

3,518,299

 

 

$

15,231

 

 

 

1.74

%

Demand deposits

 

 

313,104

 

 

 

 

 

 

 

 

 

 

 

298,125

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

63,505

 

 

 

 

 

 

 

 

 

 

 

12,854

 

 

 

 

 

 

 

 

 

Total equity

 

 

388,460

 

 

 

 

 

 

 

 

 

 

 

340,175

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

4,105,102

 

 

 

 

 

 

 

 

 

 

$

4,169,453

 

 

 

 

 

 

 

 

 

NET INTEREST SPREAD(4)

 

 

 

 

 

 

 

 

 

 

2.48

%

 

 

 

 

 

 

 

 

 

 

2.51

%

NET INTEREST INCOME

 

 

 

 

 

$

27,921

 

 

 

 

 

 

 

 

 

 

$

27,616

 

 

 

 

 

NET INTEREST MARGIN(5)

 

 

 

 

 

 

 

 

 

 

2.84

%

 

 

 

 

 

 

 

 

 

 

2.74

%

(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.

(8) 

Includes finance lease.

 

37


 

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

 

Average

Balance

 

 

Interest

Inc / Exp

 

 

Average

Yield /

Rate

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)(6)

 

$

2,811,954

 

 

$

78,241

 

 

 

5.61

%

 

$

2,374,346

 

 

$

60,911

 

 

 

5.17

%

Loans held for sale

 

 

16,818

 

 

 

371

 

 

 

4.45

 

 

 

11,090

 

 

$

233

 

 

 

4.24

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

795,788

 

 

 

11,008

 

 

 

2.79

 

 

 

1,119,823

 

 

 

13,017

 

 

 

2.34

 

Tax-exempt(6)

 

 

195,132

 

 

 

3,899

 

 

 

4.03

 

 

 

230,168

 

 

 

5,205

 

 

 

4.56

 

Restricted equity securities

 

 

23,514

 

 

 

684

 

 

 

5.87

 

 

 

19,644

 

 

 

603

 

 

 

6.19

 

Certificates of deposit at other financial institutions

 

 

3,676

 

 

 

42

 

 

 

2.30

 

 

 

3,138

 

 

 

31

 

 

 

1.99

 

Federal funds sold and other(2)

 

 

145,080

 

 

 

1,822

 

 

 

2.53

 

 

 

199,918

 

 

 

1,584

 

 

 

1.60

 

TOTAL INTEREST EARNING ASSETS

 

$

3,991,962

 

 

$

96,067

 

 

 

4.85

%

 

$

3,958,127

 

 

$

81,584

 

 

 

4.16

%

Allowance for loan and lease losses

 

 

(26,041

)

 

 

 

 

 

 

 

 

 

 

(21,840

)

 

 

 

 

 

 

 

 

All other assets

 

 

196,446

 

 

 

 

 

 

 

 

 

 

 

134,877

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

4,162,367

 

 

 

 

 

 

 

 

 

 

$

4,071,164

 

 

 

 

 

 

 

 

 

LIABILITIES & EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

836,650

 

 

$

8,777

 

 

 

2.12

%

 

$

889,625

 

 

$

6,495

 

 

 

1.47

%

Money market

 

 

1,009,613

 

 

 

12,082

 

 

 

2.41

 

 

 

757,698

 

 

 

5,648

 

 

 

1.50

 

Savings

 

 

39,741

 

 

 

55

 

 

 

0.28

 

 

 

49,117

 

 

 

76

 

 

 

0.31

 

Time deposits

 

 

1,100,929

 

 

 

12,755

 

 

 

2.34

 

 

 

1,344,752

 

 

 

11,028

 

 

 

1.65

 

Federal Home Loan Bank advances and other (8)

 

 

358,630

 

 

 

4,196

 

 

 

2.36

 

 

 

313,806

 

 

 

2,524

 

 

 

1.62

 

Federal funds purchased and other(3)

 

 

11,929

 

 

 

162

 

 

 

2.74

 

 

 

31,283

 

 

 

227

 

 

 

1.46

 

Subordinated notes

 

 

58,731

 

 

 

2,164

 

 

 

7.43

 

 

 

58,554

 

 

 

2,164

 

 

 

7.45

 

TOTAL INTEREST BEARING LIABILITIES

 

$

3,416,223

 

 

$

40,191

 

 

 

2.37

%

 

$

3,444,835

 

 

$

28,162

 

 

 

1.65

%

Demand deposits

 

 

302,200

 

 

 

 

 

 

 

 

 

 

 

292,553

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

61,133

 

 

 

 

 

 

 

 

 

 

 

13,657

 

 

 

 

 

 

 

 

 

Total equity

 

 

382,811

 

 

 

 

 

 

 

 

 

 

 

320,119

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

4,162,367

 

 

 

 

 

 

 

 

 

 

$

4,071,164

 

 

 

 

 

 

 

 

 

NET INTEREST SPREAD(4)

 

 

 

 

 

 

 

 

 

 

2.48

%

 

 

 

 

 

 

 

 

 

 

2.51

%

NET INTEREST INCOME

 

 

 

 

 

$

55,876

 

 

 

 

 

 

 

 

 

 

$

53,422

 

 

 

 

 

NET INTEREST MARGIN(5)

 

 

 

 

 

 

 

 

 

 

2.82

%

 

 

 

 

 

 

 

 

 

 

2.72

%

(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.

(8) 

Includes finance lease.

38


 

 

Analysis of Changes in Interest Income and Expenses

 

 

 

Net change three months ended

June 30, 2019 versus June 30, 2018

 

 

 

Volume

 

 

Rate

 

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

5,390

 

 

$

2,426

 

 

$

7,816

 

Loans held for sale

 

 

120

 

 

 

(16

)

 

 

104

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(2,961

)

 

 

670

 

 

 

(2,291

)

Tax-exempt

 

 

(257

)

 

 

(447

)

 

 

(704

)

Restricted equity securities

 

 

64

 

 

 

(43

)

 

 

21

 

Certificates of deposit at other financial institutions

 

 

2

 

 

 

1

 

 

 

3

 

Federal funds sold and other

 

 

(13

)

 

 

226

 

 

 

213

 

TOTAL INTEREST INCOME

 

$

2,345

 

 

$

2,817

 

 

$

5,162

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

(173

)

 

$

1,201

 

 

$

1,028

 

Money market accounts

 

 

1,003

 

 

$

2,052

 

 

 

3,055

 

Savings

 

 

(7

)

 

$

(4

)

 

 

(11

)

Time deposits

 

 

(1,661

)

 

$

1,664

 

 

 

3

 

Federal Home Loan Bank advances and other(1)

 

 

81

 

 

$

742

 

 

 

823

 

Federal funds purchased and other(2)

 

 

(75

)

 

$

34

 

 

 

(41

)

Subordinated notes

 

 

3

 

 

$

(3

)

 

 

-

 

TOTAL INTEREST EXPENSE

 

$

(829

)

 

$

5,686

 

 

$

4,857

 

NET INTEREST INCOME

 

$

3,174

 

 

$

(2,869

)

 

$

305

 

 

 

Net change six months ended

June 30, 2019 versus June 30, 2018

 

 

 

Volume

 

 

Rate

 

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

11,226

 

 

$

6,104

 

 

$

17,330

 

Loans held for sale

 

 

120

 

 

 

18

 

 

 

138

 

Securities

 

$

-

 

 

$

-

 

 

 

 

 

Taxable

 

 

(3,767

)

 

 

1,758

 

 

 

(2,009

)

Tax-exempt

 

 

(792

)

 

 

(514

)

 

 

(1,306

)

Restricted equity securities

 

 

119

 

 

 

(38

)

 

 

81

 

Certificates of deposit at other financial institutions

 

 

5

 

 

 

6

 

 

 

11

 

Federal funds sold and other

 

 

(434

)

 

 

672

 

 

 

238

 

TOTAL INTEREST INCOME

 

$

6,477

 

 

$

8,006

 

 

$

14,483

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

 

$

(387

)

 

$

2,669

 

 

$

2,282

 

Money market accounts

 

 

1,878

 

 

 

4,556

 

 

 

6,434

 

Savings

 

 

(15

)

 

 

(6

)

 

 

(21

)

Time deposits

 

 

(2,000

)

 

 

3,727

 

 

 

1,727

 

Federal Home Loan Bank advances and other(1)

 

 

361

 

 

 

1,311

 

 

 

1,672

 

Fed funds purchased and other(2)

 

 

(140

)

 

 

75

 

 

 

(65

)

Subordinated Notes

 

 

7

 

 

 

(7

)

 

 

-

 

TOTAL INTEREST EXPENSE

 

$

(296

)

 

$

12,325

 

 

$

12,029

 

NET INTEREST INCOME

 

$

6,773

 

 

$

(4,319

)

 

$

2,454

 

     (1)    Includes finance lease.

     (2)    Includes repurchase agreements.

39


 

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 the 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 $7,031 and $570 for the three months ended June 30, 2019 and 2018, respectively, and $12,086 and $1,143 for the six months ended June 30, 2019 and 2018, respectively. The higher provision for the three and six months ended June 30, 2019 compared to the same periods in 2018 is based on the Company’s analysis of its ALLL which is based on the loan portfolio’s risk profile and was primarily driven by a specific reserve of $6,304 and $9,759 for the three and six months ended June 30, 2019, related to a SNC relationship. The Company allocated the specific reserve for this credit relationship (and estimated the amount of the relationship to be charged-off) based on information currently available to the Company. The circumstances related to the SNC defaults are fluid, and the Company intends to address events related to the SNC as they develop. In addition, comparatively higher loan growth resulted in more provision being recorded. Nonperforming loans at June 30, 2019 totaled $4,705 compared to $5,696 at December 31, 2018, representing 0.16% and 0.21% of total loans for the respective periods.

Non-Interest Income

Non-interest income for the three and six months ended June 30, 2019 was $4,923 and $8,410, compared to $4,147 and $7,603 for the same period in 2018, respectively. The following is a summary of the components of non-interest income (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

$

Increase

 

 

%

Increase

 

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

(Decrease)

 

 

Service charges on deposit accounts

 

$

77

 

 

$

51

 

 

$

26

 

 

 

51.0

 

%

Other service charges and fees

 

 

903

 

 

 

823

 

 

 

80

 

 

 

9.7

 

 

Mortgage banking revenue

 

 

2,473

 

 

 

2,044

 

 

 

429

 

 

 

21.0

 

 

Wealth management

 

 

673

 

 

 

789

 

 

 

(116

)

 

 

(14.7

)

 

Gain on sale or call of securities

 

 

367

 

 

 

1

 

 

 

366

 

 

NM

 

 

Net (loss) gain on sale of loans

 

 

3

 

 

 

 

 

 

3

 

 

NM

 

 

Net gain on sale of foreclosed assets

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

Other

 

 

424

 

 

 

436

 

 

 

(12

)

 

 

(2.8

)

 

Total non-interest income

 

$

4,923

 

 

$

4,147

 

 

$

776

 

 

 

18.7

 

%

 

 

 

Six Months Ended

June 30,

 

 

$

Increase

 

 

%

Increase

 

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

(Decrease)

 

 

Service charges on deposit accounts

 

$

151

 

 

$

93

 

 

$

58

 

 

 

62.4

 

%

Other service charges and fees

 

 

1,660

 

 

 

1,574

 

 

 

86

 

 

 

5.5

 

 

Mortgage banking revenue

 

 

4,145

 

 

 

3,602

 

 

 

543

 

 

 

15.1

 

 

Wealth management

 

 

1,300

 

 

 

1,493

 

 

 

(193

)

 

 

(12.9

)

 

Gain on sale or call of securities

 

 

517

 

 

 

1

 

 

 

516

 

 

NM

 

 

Net (loss) gain on sale of loans

 

 

(214

)

 

 

 

 

 

(214

)

 

NM

 

 

Net gain on sale of foreclosed assets

 

 

7

 

 

 

6

 

 

 

1

 

 

 

16.7

 

 

Other

 

 

844

 

 

 

834

 

 

 

10

 

 

 

1.2

 

 

Total noninterest income

 

$

8,410

 

 

$

7,603

 

 

$

807

 

 

 

10.6

 

%

 

 

Mortgage banking revenue increased $429 and $543 for the three and six months ended June 30, 2019, respectively. 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.

 

 

40


 

Non-Interest Expense

Non-interest expense for the three and six months ended June 30, 2019 was $19,370 and $18,050 and $41,986 and $33,538 for the same period in 2018, respectively. The increases were the result of the following components listed in the table below (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

$

Increase

 

 

%

Increase

 

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

(Decrease)

 

 

Salaries and employee benefits

 

$

11,365

 

 

$

10,268

 

 

$

1,097

 

 

 

10.7

 

%

Occupancy and equipment

 

 

3,283

 

 

 

2,885

 

 

 

398

 

 

 

13.8

 

 

FDIC assessment expense

 

 

660

 

 

 

778

 

 

 

(118

)

 

 

(15.2

)

 

Marketing

 

 

301

 

 

 

269

 

 

 

32

 

 

 

11.9

 

 

Professional fees

 

 

1,073

 

 

 

1,362

 

 

 

(289

)

 

 

(21.2

)

 

Amortization of core deposit intangible

 

 

132

 

 

 

182

 

 

 

(50

)

 

 

(27.5

)

 

Other

 

 

2,556

 

 

 

2,306

 

 

 

250

 

 

 

10.8

 

 

Total non-interest expense

 

$

19,370

 

 

$

18,050

 

 

$

1,320

 

 

 

7.3

 

%

 

 

 

Six Months Ended

June 30,

 

 

$

Increase

 

 

%

Increase

 

 

 

 

2019

 

 

2018

 

 

(Decrease)

 

 

(Decrease)

 

 

Salaries and employee benefits

 

$

26,108

 

 

$

19,456

 

 

$

6,652

 

 

 

34.2

 

%

Occupancy and equipment

 

 

6,396

 

 

 

5,479

 

 

 

917

 

 

 

16.7

 

 

FDIC assessment expense

 

 

1,650

 

 

 

1,438

 

 

 

212

 

 

 

14.7

 

 

Marketing

 

 

620

 

 

 

549

 

 

 

71

 

 

 

12.9

 

 

Professional fees

 

 

1,996

 

 

 

2,231

 

 

 

(235

)

 

 

(10.5

)

 

Amortization of core deposit intangible

 

 

277

 

 

 

286

 

 

 

(9

)

 

 

(3.1

)

 

Other

 

 

4,939

 

 

 

4,099

 

 

 

840

 

 

 

20.5

 

 

Total non-interest expense

 

$

41,986

 

 

$

33,538

 

 

$

8,448

 

 

 

25.2

 

%

 

 

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 and six months ended June 30, 2019, in comparison with the same periods of 2018, were in salaries and employee benefits, occupancy and equipment, and other non-interest expense.

Salaries and employee benefits increased $1,097 and $6,652, or 10.7% and 34.2%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The increases in both periods are primarily due to the Company’s staffing growth, during which the Company went from 326 full-time equivalent employees as of June 30, 2018, to 343 as of June 30, 2019, many of which were officer level positions as the Company has worked to enhance its management team to properly oversee the Company’s growth. Stock-based compensation expense also increased $195 and $764, respectively, for the three and six months ended June 30, 2019 in comparison with the same periods in 2018.

Occupancy and equipment expense increased $398 and $917, or 13.8% and 16.7%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The variance for the three months ended June 30, 2019 versus the three months ended June 30, 2018 is primarily attributable to increases in building rent expense of $202 and software maintenance fees of $113. The variance when comparing the six months ended June 30, 2019 with the six months ended June 30, 2018 is attributable to increases in building rent expense of $360, software maintenance fees of $357 and other furniture, fixture & equipment expense of $57.

The Company’s FDIC assessment expense decreased $118, or 15.2%, and increased $212, or 14.7%, respectively, when comparing the three and six months ended June 30, 2019, with the same periods in 2018. The increase in comparing the six months ended June 30, 2019 to June 30, 2018 is due to loan growth and change in loan mix.

Professional fees decreased $289 and $235, or 21.2% and 10.5%, respectively, when comparing the three and six months ended June 30, 2019 with the same periods in 2018. The decrease when comparing the three months ended June 30, 2019 with the same period in 2018 is due to changes in other professional fees of $140, legal fees of $154, and merger-related expense of $356. The decrease, when comparing the six months ended June 30, 2019 and 2018, is due to changes in merger-related expenses of $377, other professional fees of $132, and legal fees of $240.

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For the three and six months ended June 30, 2019, other non-interest expense increased $250 and $840, or 10.8% and 20.5%, respectively, when compared to the three and six months