2016
ANNUAL REPORT
, INC.
About Franklin Financial Network, Inc.:
Franklin Financial Network, Inc. is a financial holding company
headquartered in Franklin, Tennessee. The Company’s wholly
owned bank subsidiary, Franklin Synergy Bank, a Tennessee-
chartered commercial bank founded in November 2007 and a
member of the Federal Reserve System, provides a full range
of banking and related financial services with a focus on service
to small businesses, corporate entities, local governments and
individuals. With consolidated total assets of $2.9 billion at
December 31, 2016, the Bank currently operates through
12 branches and one loan production office in the growing
Williamson, Rutherford and Davidson Counties, all within the
Nashville metropolitan statistical area. Additional information
about the Company, which is included in the NYSE Financial-100
Index, and the FTSE Russell 2000 Index, is available at
www.FranklinSynergyBank.com.
Dear Fellow Shareholder:
I am pleased to report that in our ninth year of operations, and our first full year as a public company,
Franklin Financial Network produced record operating results, highlighted by continued high quality loan
demand, negligible credit losses, and expense efficiencies driven by scale and investment in technology.
Earnings per diluted share increased 57.1% in 2016 compared with 2015. In addition, the share price of
the Company’s stock increased 33.4% during the year.
We believe this performance was driven by, and highlights, the strengths of our banking model. By
taking a disciplined approach to developing long-term customer relationships coupled with innovative
technology, we’ve built a reputation for a level of customer service that we believe is unmatched by our
competition. Our deep knowledge of the communities where we live and work, primarily the Middle
Tennessee market, and a commitment to hiring highly experienced local real estate and commercial
bankers gives us a competitive advantage over out-of-market banks. And, an intentional focus on the
historically lower-risk segments of our core real estate lending business, guided by strict adherence
to conservative underwriting, credit and compliance standards, helps keep loan losses to a minimum.
Financial results for 2016 are best articulated by examining the Company’s asset quality, growth and
profitability, the three primary measures we use to assess our operating performance.
Strong Asset Quality: We completed 2016 with a minimal level of nonperforming loans and
nonperforming assets, each of which were 0.35% of total loans, excluding loans held for sale, compared
with 0.25% and 0.27%, respectively, at the end of 2015. With an allowance for loan losses at year-end
of 0.93% of total loans, excluding loans held for sale, we had more than two and a half times coverage
of our nonperforming loans. Net charge-offs for 2016 remained very low at 0.02% of average loans
compared with 0.01% for 2015.
Substantial Growth: Total loans, including loans held for sale, increased by $479.4 million, or 36.4%,
to $1.80 billion at the end of 2016 compared with the end of 2015, while deposits grew 31.9% to $2.39
billion. Net interest income for 2016 rose 37.3% to $81.6 million from 2015, and non-interest income
was $15.1 million, up 17.8% from 2015. Furthermore, we produced a 25.6% increase in the Company’s
tangible book value to $19.91 per share at the end of 2016 from $15.85 at December 31, 2015.
Expanding Profitability: Compared with 33.8% growth in net interest income plus noninterest income
for 2016, our noninterest expense increased just 22.6%, primarily due to revenue-driven economies of
scale and productivity-enhancing investments in technology. These favorable trends were reflected in a
significant improvement in our efficiency ratio (a measure of how much we spend compared to revenue
produced), to 53.43% for 2016 from 58.29% for 2015. Our increased efficiency, combined with an effective
tax rate of 29.5% for 2016 compared with 35.9% for 2015, produced a 75.4% increase in net income
available for common shareholders to $28.0 million from $16.0 million for 2015. The strength of this
performance produced a return on average assets of a record 1.10% for 2016 and a return on tangible
common equity of 14.41% for 2016, compared to 10.84% in 2015.
Optimizing Risk and Return in Real Estate Lending
Franklin Synergy Bank, the Company’s primary wholly-owned operating subsidiary, was founded in 2007
to continue the work of providing real estate banking services to the Middle Tennessee market, a market
that many of the founders and current officers have served since 1989. This history and knowledge of the
market is important as we continue to maintain a balance between the particular risks in, and available
returns resulting from, real estate lending. We intend to continue our focus on this broad sector of the
market as a primary driver of profitable growth for the foreseeable future.
There are two critical aspects of our business model that are fundamental to past and future success:
First, within the broad category of real estate lending, which comprised 78.8% of our total loans at year-
end 2016, we emphasize the sub-sectors that inherently are less risky. As an illustration, our loans
related to residential lending represented 30% of all real estate loans. Residential lending is historically
among the less risky real estate market segments, particularly in markets like Middle Tennessee where
individuals and developers are constructing primary residences (versus vacation homes). We bolster
this historical trend with very experienced in-market lenders and no single builder or subdivision
concentration. In contrast, our lending activity in the riskiest sector historically-- land acquisition and
development lending-- amounts to just 2.7% of total loans at year end. Real estate loans for commercial
projects represented 27.7% of total loans at year-end 2016 and, here again, are intentionally focused on
less risky projects and limited exposure to large projects, like hotels, motels and apartment buildings.
Second, asset quality is managed and measured throughout the life-cycle of every credit. We believe
strong asset quality begins with our collective in-depth real estate experience, a deep institutional
knowledge of our core markets and a seasoned team of real estate bankers, many of whom have
worked with their customers for multiple years. As a result, the real estate projects we finance and/or
the builders, developers or owners of the projects are almost always located in our Middle Tennessee
market. Further, each credit is subject to our conservative underwriting standards, as well as robust
policies, procedures and processes to assure credit quality over the loan term and to monitor and
manage loan concentrations. We secure secondary sources of repayment whenever feasible, and our
bankers stay close to their customers to identify any developing problems early and resolve them.
We are also constantly investing to improve our underwriting, credit and compliance capabilities,
including a significant upgrade to the Company’s core processing system that was completed in the
first quarter of 2017.
Looking forward into 2017, we remain confident in the strengths of our business model and our
approach to real estate lending. We believe we have a meaningful opportunity to continue to leverage
these strengths in our dynamic core Middle Tennessee market, which is expected to remain among the
strongest in the nation in 2017, as measured by economic activity, job growth, entrepreneurship, wage
growth, and business start-ups. In addition, the market has one of lowest rates of office vacancies in the
U.S. and one of the highest rates of new office construction as a percent of existing inventory.
To summarize, we have a great team at Franklin Financial Network and a great market in Middle
Tennessee, which together drove strong, profitable growth for 2016. We are confident of the strengths
of our banking model and of our team’s ability to execute this model in 2017 and beyond. With continued
successful execution, we expect to achieve our goals for long-term growth and increasing shareholder
value. Thank you for your investment in Franklin Financial Network.
Sincerely,
Richard E. Herrington
Chairman, President and
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1800) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
(cid:1798) 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
(State or other jurisdiction of
incorporation or organization)
20-8839445
(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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:1798) Yes (cid:1800) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:1798) Yes (cid:1800) No
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. (cid:1800) Yes (cid:1798) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). (cid:1800) Yes (cid:1798) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:1798)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:1798)
Non-accelerated filer (cid:1798) (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
(cid:1800)
(cid:1798)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:1798) Yes (cid:1800) No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold as of June 30, 2016 was $304,542,479.36 (computed on the basis of $31.36 per share).
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold as of June 30, 2016 was $304,542,479.36 (computed on the basis of $31.36 per share).
The number of shares outstanding of the registrant’s common stock, no par value per share, as of February 28, 2017 was 13,059,162.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference to portions of the definitive proxy statement to be filed within 120 days after
December 31, 2016, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to
be held on May 25, 2017.
TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
BUSINESS.
RISK FACTORS.
UNRESOLVED STAFF COMMENTS.
PROPERTIES.
LEGAL PROCEEDINGS.
MINE SAFETY DISCLOSURES.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
ITEM 6.
ITEM 7.
SELECTED FINANCIAL DATA.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ITEM 7A.
ITEM 8.
ITEM 9.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9A.
ITEM 9B.
FINANCIAL DISCLOSURE.
CONTROLS AND PROCEDURES.
OTHER INFORMATION.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE COMPENSATION.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
ITEM 16.
EXHIBIT INDEX
FORM 10-K SUMMARY.
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
2
2
13
29
29
29
29
30
30
33
34
61
62
62
62
63
64
64
64
64
64
64
65
65
65
71
72
F-1
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements regarding, among other things, our anticipated financial
and operating results. Forward-looking statements reflect our management’s current assumptions, beliefs, and expectations. Words
such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “objective,” “should,” “hope,” “pursue,” “seek,” and similar
expressions are intended to identify forward-looking statements. While we believe that the expectations reflected in our forward-
looking statements are reasonable, we can give no assurance that such expectations will prove correct. Forward-looking statements are
subject to risks and uncertainties that could cause our actual results to differ materially from the future results, performance, or
achievements expressed in or implied by any forward-looking statement we make. Some of the relevant risks and uncertainties that
could cause our actual performance to differ materially from the forward-looking statements contained in this report are discussed
below under the heading “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We caution readers that these discussions
of important risks and uncertainties are not exclusive, and our business may be subject to other risks and uncertainties which are not
detailed there. Readers are cautioned not to place undue reliance on our forward-looking statements. We make forward-looking
statements as of the date on which this Annual Report on Form 10-K is filed with the Securities and Exchange Commission (“SEC”),
and we assume no obligation to update the forward-looking statements after the date hereof whether as a result of new information or
events, changed circumstances, or otherwise, except as required by law.
1
ITEM 1.
BUSINESS.
Company Overview
PART I
We are a financial holding company headquartered in Franklin, Tennessee. Through our wholly owned bank subsidiary, Franklin
Synergy Bank, a Tennessee-chartered commercial bank and a member of the Federal Reserve System, we provide a full range of banking and
related financial services with a focus on service to small businesses, corporate entities, local governments and individuals. We operate
through 12 branches in the demographically attractive and growing Williamson and Rutherford 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 December 31, 2016, we had consolidated total assets of $2.9 billion, total loans, including loans held for sale, of $1.8 billion,
total deposits of $2.4 billion and total equity of $270.4 million.
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.
Our History and Growth
We were formed as a Tennessee corporation in April 2007 and commenced banking operations through the newly-formed Franklin
Synergy Bank in November 2007. We were established with the initial objective of building a locally-managed commercial bank to service
the needs of Franklin, Tennessee and the greater Williamson County area. Our mission statement is to build a legacy company by creating
shareholder value, cultivating strong customer relationships and fostering an extraordinary team of directors, officers and employees. We
were formed by a core management team of veteran bankers based in Middle Tennessee led by our Chairman and Chief Executive Officer,
Richard Herrington. Many of our founders built Franklin Financial Corporation (which is not directly affiliated with our company), which
was founded in 1988, and grew the newly-formed real estate-oriented bank to nine branches and $785 million in assets as of June 30, 2002,
before announcing the sale of the bank to Fifth Third Bancorp, Inc. in July 2002. Mr. Herrington and certain members of this management
team subsequently joined Cumberland Bancorp, Inc. (later renamed Civitas BankGroup, Inc.), a troubled Tennessee-based bank holding
company, in December 2002, to lead its restructuring. The team led a dramatic improvement of Cumberland’s asset quality and profitability,
by decreasing nonperforming loans to total loans from 2.25% in 2003 to 0.31% in 2006 and growing net income from $1.1 million in 2003 to
$6.7 million in 2006, before it was acquired by Greene County Bancshares, Inc. in May 2007.
On July 1, 2014, we completed our acquisition of MidSouth Bank (“MidSouth”) which enabled us to increase our footprint in Middle
Tennessee and in the Nashville metropolitan area, specifically in the attractive Rutherford County market. The acquisition also diversified our
revenue mix by expanding our retail customer base and increasing our capacity to provide wealth management services, including trust
powers which we believe is a competitive advantage to drive new relationships with higher income customers.
Our Market
We operate 12 branches in Williamson and Rutherford Counties and one loan production office within the Nashville metropolitan area.
Our markets are among the most attractive, both in Tennessee, and the Southeast, and compare favorably to some of the more well-known
and higher-profile markets in the U.S., although our markets are not dependent on commodity pricing. We believe that our focus on, and
success in, growing market share in Williamson and Rutherford Counties will enhance our long-term value and profitability compared to
financial institutions of our size in other regions of the country. The markets in which we operate are characterized by strong demographics
including high incomes, increasing population, a growing workforce and unemployment that tends to be below the national rate.
Our Business Strategy
We consider ourselves to be bankers, not just lenders. Our core business strategy is to provide our banking customers with a full suite
of financial services by cultivating strong long-term customer relationships and by developing an extraordinary team of officers and
employees focused on the customer experience. We are focused on providing convenience and personal service to our customers that is
superior to that of the out-of-state super-regional and national financial institutions operating in our markets, while simultaneously managing
risk and profitability by remaining selective when expanding our customer base and making loans. We also prioritize our client’s financial
security and privacy and assist the communities in which we do business through socially responsible leadership. Our unique culture is a
cornerstone to our business and has resulted in substantial but stable growth and profitability.
2
By continuing to offer several value-added products and services within our core areas of strength, such as mortgage lending
and wealth management, to invest in technology to improve our systems and the customer experience, and to leverage strong
relationships with consumers, professionals, local governments and businesses within our community, we believe we can gain greater
market share, which will improve our operational efficiency and increase profitability. As evidence of the success of our strategy, our
deposit market share in Williamson County has increased from 3.4% in 2009 to a market-leading deposit share of approximately
25.8% per the Federal Deposit Insurance Corporation’s (“FDIC’s”) Summary of Deposits report as of June 30, 2016, despite the
presence of more institutions competing for deposits.
Our Competitive Strengths
We believe that we have a unique operating culture that differentiates us from our competitors and enables us to organically
grow our business and enhance shareholder value. This unique operating culture includes:
•
•
•
a commitment to provide superior and personal service to our customers, both through our employees and via our
continued investment in cutting edge technologies in areas of deposit taking, loan origination and risk management;
a focus on building long-term relationships with our customers; and
community leadership, as we look to engage with local civic, professional and charitable organizations and exhort our
employees to do so as well.
Our culture forms the basis for our competitive strengths, which we believe allow us to leverage our market opportunity and
grow our business profitability. In particular, we believe that the following strengths differentiate us from our competitors and provide
a strong foundation from which to deliver growth and profitability, all while enhancing shareholder value:
Well Positioned in Attractive Markets
We believe that we are well positioned to grow our business profitably in the demographically attractive and growing markets
within the Nashville metropolitan area in which we operate. We believe that our target market segments, small to medium size for
profit businesses and the consumer base working or living in and near our geographical footprint, demand the convenience and
personal service that a smaller, independent financial institution such as we can offer. We believe the heavy out-of-state banking
presence (out-of-state super-regional and national financial institutions control approximately 62.3% of local deposits in the Nashville-
Davidson-Murfreesboro-Franklin metropolitan statistical area (the “Nashville MSA”)) provides an opportunity for a strong local bank
like us to add greater market share from customers who are looking for more personal banking services and a more customer-friendly
experience. Through our efforts to expand our deposit base, we currently have the largest market share of deposits in Williamson
County.
Experienced Management Team
We have an experienced management team with a history of working together in our target markets and a track record of
delivering growth and shareholder value. Many members of our executive leadership team have been with us since inception and
many have worked together at previous banks, including both large financial institutions and community banks. Our Chief Executive
Officer, President, Chief Mortgage Officer, Chief Financial Officer, Chief Investment Officer and Chief Credit Officer have worked in
our local market for a number of years and have experienced a variety of economic cycles. This deep local experience has given us the
ability to understand and react to market changes and maintain strong profitability and growth without sacrificing asset quality.
Our management team has a proven track record of delivering shareholder value. Richard Herrington co-founded Franklin
Financial Corporation (Franklin National Bank) in 1988, where he and his management team grew assets by a compound annual
growth rate (“CAGR”) of 27.5% from 1995 – 2002 and positioned the bank to eventually be sold to Fifth Third Bancorp, Inc., which
was announced in 2002 and closed in 2004, for 5.4 times tangible book value. According to SNL Financial, this multiple represents
the 9th highest price to book multiple for all bank transactions announced in the past 20 years where deal value was in excess of
$50 million. He then served as Chief Executive Officer at Cumberland Bancorp, Inc. (later renamed Civitas BankGroup, Inc.),
where he and his team restructured the bank and significantly bolstered profitability, growing net income by a CAGR of 82% from
2003 – 2006, before selling the bank to Greene County Bancshares, Inc. in 2007 for 3.0 times tangible book value.
The members of our Board of Directors have diverse industry experiences and have deep and long-term ties to the local
community. We believe that we have an ideal blend of directors that have been with our management team at previous banks as well
as directors that have joined our Board in recent years.
3
Local Real Estate Lending Expertise
We are real estate bankers that have focused on Middle Tennessee collateral since 1989. Our in-depth knowledge of the
commercial customers, real estate development and credit in Williamson and Rutherford Counties gives us a competitive advantage in
loan production, deposit attraction and ancillary revenue generation as we grow market share. Even when the local loan market gets
competitive, we do not compromise on pricing and structuring of loan facilities, as our bankers are able to provide customized solutions
delivered with a relatively quick turnaround time, as a result of the fact that our underwriting and banking operations occur locally.
With our firm principles of lending on Middle Tennessee collateral, our local real estate expertise and our localized delivery
apparatus, we are poised to capture greater market share in the demographically-attractive and growing Williamson and Rutherford
Counties.
Successful Balance of Growth and Profitability
We understand the importance of successfully balancing growth and profitability with asset quality to enhance shareholder
value. The following highlights the key aspects of our approach to maintaining this balance:
•
•
Consistent, Strong and Disciplined Growth. Our approach balances both disciplined growth and profitability. Our
community-focused business model has resulted in loan growth with a CAGR of 41% from December 31, 2009 to
December 31, 2016. Since opening in 2007, we have expanded into the very attractive Rutherford County market, and we
have added a loan production office in Davidson County. Additionally, we have increased focus on small business lending
and have grown our commercial and industrial (“C&I”) loans, which represent approximately 21% of our portfolio at
December 31, 2016, by a CAGR of nearly 69% since 2009. We have grown our deposit market share in Williamson
County and are the top local financial institution in the county by deposits with a market share of nearly 26%. Our growth
has resulted in improved profitability, as reflected by return on average assets increasing from negative in 2009 to 1.10%
for 2016.
Disciplined Credit Risk Management. Our robust approach to risk management has enabled growth of our loan portfolio
without compromising credit. Our credit risk management strategy is based on prudent underwriting criteria and local
knowledge. Our lending decisions are centralized and committee-focused, with committees meeting multiple times per
week. We are collateral lenders, with strong focus on secondary sources of repayment, especially collateral based in
Williamson and Rutherford Counties. As a result of the implementation of our risk management strategy, less than 2% of
our total loans are unsecured.
We believe that by maintaining our consistent origination and underwriting strategy, we will be able to maintain our consistent
growth across shifting market environments.
Products and Services
The Bank operates as a full-service financial institution for its customers in its expanded market area with a full line of financial
products, including:
Commercial Banking
Traditional commercial banking services are the mainstay of the Bank. The Bank’s focus is to service small to medium-sized
businesses and self-employed professionals. Certain not-for-profit and governmental entities also find the Bank’s services attractive.
The Bank’s focus in the commercial banking market is to provide high quality service for its customers supported by the latest
bank technology. In the credit service area, the Bank endeavors to give its commercial customers access to a highly-trained team of
credit and deposit service specialists who remain with the customer relationship for long periods of time. Credit decision-making is
customized to meet the borrower’s financial needs and designed for rapid response. Credit judgments involve the Bank’s senior
management and, where legally required, involve the directors of the Bank. Government guaranteed lending services such as the
Small Business Administration (“SBA”) may be utilized as needed.
Consumer Banking
The Bank offers a broad range of financial services designed to meet the credit, savings, and transactional needs of local
consumers. First mortgage real estate loans, home equity loans, and other personal loans are the focus of consumer lending. Consumer
depository and transaction needs are met through dual delivery systems of traditional branches and the Internet, including mobile
banking.
4
Mortgage Loans
Our mortgage loan department originates single-family, fixed rate residential mortgage loans that we sell in the secondary
market. Construction loans also are available for residential and commercial purposes.
Deposits
The Bank’s deposit products include demand, interest-bearing transaction accounts, money market accounts, certificates of
deposit (“CDs”), municipal deposits, savings, and deposit accounts. CDs offer various maturities ranging from thirty days to five
years. The Bank generates relationships by personal contacts within the conventional trading markets for such services by its officers,
directors, and employees, who include persons with banking experience in these markets. The Bank also solicits local deposits through
the Internet and offers Internet-only deposit accounts to supplement traditional depository accounts. Loan customers are encouraged to
bring their deposit business to the Bank, including transaction accounts, CDs, and retirement accounts. This practice further increases
the deposit base for the Bank and assists in controlling overall market costs related to deposit acquisition.
Wealth Management/Trust Services
As a result of the MidSouth acquisition, the Bank has increased its capacity to provide wealth management services, including
trust services, as the Bank is now authorized to exercise trust powers, which provides the Bank with a competitive advantage. As of
December 31, 2016, our wealth management and trust services division managed $323.7 million in assets.
Other Products and Services
In order to meet all financial needs of the customers, the Bank offers retirement planning, financial planning, investment
services and insurance products through its financial services department. Some of these products may be outsourced through
relationships with other financial institutions.
Recent Trends
From a financial perspective, management believes the Bank has reached key milestones significantly faster than most banks in
the United States during their first nine full years of operation. As of December 31, 2016, the Bank had $1.8 billion in loans, including
loans held for sale; assets of $2.9 billion, $2.4 billion in deposits, $270.4 million of equity, and was number one in deposit market
share in Williamson County based on deposits at June 30, 2016. On November 16, 2016, we launched a secondary public offering for
our common stock. In the offering, we issued 2,242,500 shares of our common stock at a price of $32.00 per share. The secondary
public offering was completed during November 2016.
Management addresses changes in banking over recent years and embarks on new initiatives as appropriate. In the past, banks
needed branches on every corner; today that is considered an outdated way of doing business. Many of the Bank’s customers like to
visit with personnel at the Bank, and the Bank will continue to offer a welcoming environment. Other customers prefer to bank online
and through mobile channels. The Bank provides a full range of banking products and services designed to attract all types of
customers.
The Bank continues to enhance banking convenience by offering the option of opening accounts online and through mobile
channels (savings accounts, checking accounts and CDs). Customers can access banking services at their convenience. The Bank’s
remote deposit system allows consumers to deposit checks online without the need to come to a branch. Business customers enjoy this
convenience as well.
Local businesses are important to the Bank. The Bank has many products that can help its corporate customers become more
profitable, including sweep accounts, credit card processing, remote capture and automated lock box. A unique offering is workplace
banking, which allows employers to offer a special banking benefits package to their employees. The Bank also can meet the
borrowing needs of businesses through traditional working capital loans, as well as accounts receivable loans and business expansion
loans. One of the Bank’s specialties is customizing services to the unique needs of the business.
5
Competition
All phases of FFN’s and the Bank’s business are highly competitive. FFN and the Bank are subject to intense competition from various
financial institutions and other companies or firms that offer financial services. The Bank competes for deposits with other commercial
banks, savings and loan associations, credit unions and issuers of commercial paper and other securities, such as money-market and mutual
funds. In making loans, the Bank competes with other commercial banks, savings and loan associations, consumer finance companies, credit
unions, leasing companies, and other lenders. Information about specific competition in Williamson County and Rutherford County is
included under “RISK FACTORS—Competition For Deposits and Loans is Expected To Be Intense, and No Assurance Can Be Given That
We Will Be Successful in Our Efforts to Compete with Other Financial Institutions.”
While the direction of recent and proposed federal legislation seems to favor increased competition between banks and different types
of financial or other institutions for both deposits and loans, it is not possible to forecast the impact such developments may have on
commercial banking in general or as to the Bank or FFN in particular. The Bank will continue to compete with these and other financial
institutions, many of which have far greater assets and financial resources than the Bank and whose common stock may be more widely
traded than that of FFN. See “BUSINESS—Supervision and Regulation.” No assurance can be given that the Bank will be successful in its
efforts to compete with such other institutions.
Enterprise Risk Management
We place significant emphasis on risk mitigation as an integral component of our organizational culture. We believe that our emphasis
on risk management is manifested in our solid asset quality statistics and our credit risk management procedures discussed above.
We also focus on risk management in numerous other areas throughout our organization, including with respect to asset/liability
management, regulatory compliance and internal controls. We have implemented an extensive asset/liability management process aided by
simulation models provided by reputable third parties. We engage in ongoing internal audit and review of all areas of our operations and
regulatory compliance.
We have implemented management assessment and testing of internal controls consistent with the Sarbanes-Oxley Act and have
engaged an experienced independent public accounting firm to assist us with respect to compliance.
Employees
Management employs officers who have substantial experience and proven records in the banking industry and proven histories in
business and commerce, and pays competitive salaries to attract and retain such persons. It is not anticipated that we will experience any
substantial difficulty in attracting and retaining the desired caliber of officers and other employees. We offer a typical health and disability
insurance plan to our employees and those of our subsidiary, as well as a 401(k) Plan and officer equity-based incentive awards.
FFN currently has eight directors and the Bank currently has 11 directors, and as of December 31, 2016, we and our bank subsidiary
had 267 full-time employees and one part-time employee. We consider our relationship with our employees to be excellent. Furthermore, we
are not subject to any collective bargaining agreements.
Trademarks
We obtained registrations with the United States Patent and Trademark Office for the protection of the trademarks “FRANKLIN
SYNERGY BANK®” and “FRANKLIN FINANCIAL NETWORK®.” Management does not believe these trademarks are confusingly
similar to trademarks used by other institutions in the financial services business and intends to protect the use of these trademarks
nationwide.
Policies and Procedures
The Board of Directors of the Bank has established a statement of lending policies and procedures being used by loan officers of the
Bank when making loans. Asset quality is of utmost importance and an independent loan review process has been established to monitor the
Bank’s lending function. It is imperative that the Board of Directors and management have an independent and objective evaluation of the
quality of specific individual loans and of the overall quality of the total portfolio.
The Board of Directors of the Bank also has established an investment policy that guides the Bank officers in determining the
investment portfolio of the Bank. Other policies include a code of ethics, audit policy, loan policy, fair lending, compliance, bank secrecy,
personnel and information system policies.
6
Under the Community Reinvestment Act of 1977 (the “CRA”), the Board of Governors of the Federal Reserve System
(the “Federal Reserve”) evaluates the Bank’s record of helping to meet the credit needs of its community consistent with safe and
sound operations. The Federal Reserve also takes this record into account when deciding on certain applications submitted by the
Bank. The Bank’s assessment area is Williamson County, Rutherford County and Davidson County for business loans, mortgage, and
general financial services.
The Bank is a fair and equal credit lender. Management’s lending objectives are to make credit products available to all
segments of the Bank’s market and community. Williamson County has one moderate census tract, Davidson County has thirty-eight
moderate income census tracts and twenty-nine low income tracts, and Rutherford County has seven moderate census tracts and two
low census tracts. Products are being developed and marketed to individuals and businesses located in those census tracts.
Supervision and Regulation
The following summaries of statutes and regulations affecting banks and their holding companies do not purport to be complete.
Such summaries are qualified in their entirety by reference to the statutes and regulations described.
Bank Holding Company Regulation
FFN is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Holding
Company Act”), and is registered with the Federal Reserve. Banking subsidiaries of bank holding companies are subject to restrictions
under federal law, which limit the transfer of funds by the subsidiary banks to their respective holding companies and non-banking
subsidiaries, whether in the form of loans, extensions of credit, investments or asset purchases. Under Section 23A of the Federal
Reserve Act, such transfers by any subsidiary bank to its holding company or any nonbanking subsidiary are limited in amount to 10%
of the subsidiary bank’s capital and surplus and, with respect to FFN and all such non-banking subsidiaries, to an aggregate of 20% of
such bank’s capital and surplus. Banking subsidiaries of bank holding companies are also subject to the provisions of Section 23B of
the Federal Reserve Act, which, among other things, prohibits an institution from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as
those prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, such loans and extensions of
credit are required to be secured in specified amounts. The Holding Company Act also prohibits, subject to certain exceptions, a bank
holding company from engaging in or acquiring direct or indirect control of more than 5% of the voting stock of any company
engaged in non-banking activities. An exception to this prohibition is for activities expressly found by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a proper incident thereto, such as consumer lending and other
activities that have been approved by the Federal Reserve by regulation or order. Certain servicing activities are also permissible for a
bank holding company if conducted for or on behalf of the bank holding company or any of its affiliates. FFN has elected to be a
financial holding company under Regulation Y, allowing FFN to engage in certain financial activities without the prior approval of the
Federal Reserve.
As a bank holding company, FFN is required to file with the Federal Reserve semi-annual reports and such additional
information as the Federal Reserve may require. The Federal Reserve may also make examinations of FFN and its non-bank affiliates.
According to federal law and Federal Reserve policy, bank holding companies are expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary. This support may be
required at times when a bank holding company may not be able to provide such support. Furthermore, in the event of a loss suffered
or anticipated by the FDIC—either as a result of default of a banking or thrift subsidiary of FFN or related to FDIC assistance
provided to a subsidiary in danger of default—the other banking subsidiaries of FFN may be assessed for the FDIC’s loss, subject to
certain exceptions.
Regulation Y generally requires persons acting directly or indirectly or in concert with one or more persons to give the Federal
Reserve 60 days advanced written notice before acquiring control of a bank holding company. Under the regulation, control is defined
as the ownership or control with the power to vote 25% or more of any class of voting securities of the bank holding company. The
regulation also provides for a presumption of control if a person owns, controls, or holds with the power to vote 10% or more
(but less than 25%) of any class of voting securities. A bank holding company may be limited to ownership of 5% ownership of voting
securities. If the person or persons making the acquisition is a company, prior approval from the Federal Reserve may be required.
Various federal and state statutory provisions limit the amount of dividends subsidiary banks can pay to their holding companies
without regulatory approval. The payment of dividends by any bank also may be affected by other factors, such as the maintenance of
adequate capital for such subsidiary bank. In addition to the foregoing restrictions, the Federal Reserve has the power to prohibit
dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy
statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank
holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be
7
funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Federal Reserve may also order a
bank holding company to terminate an activity or control of a non-bank subsidiary if such activity or control constitutes a significant
risk to the financial safety, soundness, or stability of a subsidiary bank and is inconsistent with sound banking principles. Furthermore,
the Tennessee Department of Financial Institutions (“TDFI”) also has authority to prohibit the payment of dividends by a Tennessee
bank when it determines such payment to be an unsafe and unsound banking practice.
A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks
located outside of the state in which the operations of the bank holding company’s subsidiaries are located, unless the bank holding
company and its subsidiaries are well-capitalized and well managed.
In approving acquisitions by holding companies of banks and companies engaged in the banking-related activities described
above, the Federal Reserve considers a number of factors, including the expected benefits to the public such as greater convenience,
increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve is also empowered
to differentiate between new activities and activities commenced through the acquisition of a going concern.
The Attorney General of the United States may, within 30 days after approval by the Federal Reserve of an acquisition, bring an
action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending
a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the holding
company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition
from future challenge under the anti-monopolization provisions of the Sherman Act.
Capital Guidelines
The Federal Reserve has issued risk-based capital guidelines for bank holding companies and member banks. Under the
guidelines, the minimum ratio of capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of
credit) is 8%. To be considered a “well capitalized” bank or bank holding company under the guidelines, a bank or bank holding
company must have a total risk-based capital ratio of 10% or greater. At least half of the total capital is to be comprised of common
equity, retained earnings, and a limited amount of perpetual preferred stock, after subtracting goodwill and certain other adjustments
(“Tier 1 capital”). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of
subordinated debt, other preferred stock not qualifying for Tier 1 capital, and a limited amount of loan loss reserves (“Tier 2 capital”).
The Bank is subject to similar capital requirements adopted by the Federal Reserve. In addition, the Federal Reserve and the FDIC
have adopted a minimum leverage ratio (Tier 1 capital to total assets) of 3% or 4% based on supervisory considerations. Generally,
banking organizations are expected to operate well above the minimum required capital level of 3% unless they meet certain specified
criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a leverage ratio of
3% or 4%, as applicable, plus an additional cushion of at least 1% to 2%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance upon intangible assets.
In July 2013, the federal banking regulators, in response to the statutory requirements of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), adopted regulations implementing the Basel Capital Adequacy Accord (“Basel III”),
which had been approved by the Basel member central bank governors in 2010 as an agreement among the countries’ central banks and
bank regulators on the amount of capital banks must hold as a cushion against losses and insolvency. The new minimum capital to risk-
weighted assets (“RWA”) requirements are a Common Equity Tier 1 Capital ratio of 4.5% and a Tier 1 Capital ratio of 6.0%, and a Total
Capital ratio of 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The new rule also changes the definition of
capital, mainly by adopting stricter eligibility criteria for regulatory capital instruments, and new constraints on the inclusion of minority
interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of unconsolidated financial institutions. In
addition, the new rule requires that most regulatory capital deductions be made from Common Equity Tier 1 Capital.
Under the Basel III rules, in order to avoid limitations on capital distributions, including dividend payments and certain
discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of
Common Equity Tier 1 Capital above its minimum risk-based capital requirements. The buffer is measured relative to RWA. Phase-in
of the capital conservation buffer requirements began on January 1, 2016 and the requirements will be fully phased in on January 1,
2019. The capital conservation buffer threshold for 2016 is 0.625%. A banking organization with a buffer greater than 2.5% once the
capital conservation buffer is fully phased in would not be subject to limits on capital distributions or discretionary bonus payments;
however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer
approaches zero. The rule also prohibits a banking organization from making distributions or discretionary bonus payments during any
quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the
beginning of the quarter. Effectively, the Basel III framework will require us to meet minimum capital ratios of (i) 7% for Common
Equity Tier 1 Capital, (ii) 8.5% Tier 1 Capital, and (iii) 10.5% Total Capital. The eligible retained income of a banking organization is
8
defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly
regulatory reports, net of any distributions and associated tax effects not already reflected in net income. When the new rule is fully phased
in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action (“PCA”) well-capitalized
thresholds.
Under the new rule, mortgage-servicing assets and deferred tax assets are subject to stricter limitations than those applicable under the
current general risk-based capital rule. More specifically, certain deferred tax assets arising from temporary differences, mortgage-servicing
assets, and significant investments in the capital of unconsolidated financial institutions in the form of common stock are each subject to an
individual limit of 10% of Common Equity Tier 1 Capital elements and are subject to an aggregate limit of 15% of Common Equity Tier 1
Capital elements. The amount of these items in excess of the 10% and 15% thresholds are to be deducted from Common Equity Tier 1
Capital. Amounts of mortgage-servicing assets, deferred tax assets, and significant investments in unconsolidated financial institutions that
are not deducted due to the aforementioned 10% and 15% thresholds must be assigned a 250% risk weight. Finally, the new rule increases the
risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk
weights and credit conversion factors.
The new minimum capital requirements of Basel III were effective on January 1, 2015, whereas the capital conservation buffer and the
deductions from Common Equity Tier 1 Capital phase in over time. Similarly, nonqualifying capital instruments phase out over time, except
as described above.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could
subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates
of interest that the institution may pay on its deposits, and other restrictions on its business.
Tennessee Banking Act; Federal Deposit Insurance Act
The Bank is incorporated under the banking laws of the State of Tennessee and, as such, is subject to the applicable provisions of those
laws. The Bank is subject to the supervision of the TDFI and to regular examination by that department. The Bank is a member of the Federal
Reserve and therefore is subject to Federal Reserve regulations and policies and is subject to regular exam by the Federal Reserve. The
Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund, or “DIF,” and the Bank is, therefore, subject to the provisions
of the Federal Deposit Insurance Act (“FDIA”).
The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. Under the Dodd-Frank Act, the FDIC was required to adopt regulations that
would base deposit insurance assessments on total assets less capital rather than deposit liabilities and to include off-balance sheet liabilities
of institutions and their affiliates in risk-based assessments. EESA (as defined below) provided for a temporary increase in the basic limit on
federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased level of basic deposit insurance was made
permanent by the Dodd-Frank Act. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but
did not extend unlimited insurance protection for these accounts.
The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.
Tennessee statutes and the federal law regulate a variety of the banking activities of the Bank, including required reserves, investments,
loans, mergers and consolidations, issuances of securities, payments of dividends, and the establishment of branches. There are certain
limitations under federal and Tennessee law on the payment of dividends by banks. A state bank, with the approval of the TDFI, may transfer
funds from its surplus account to the undivided profits (retained earnings) account or any part of its paid-in-capital account. The payment of
dividends by any bank is dependent upon its earnings and financial condition and, in addition to the limitations referred to above, is subject to
the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The
payment of dividends could, depending upon the financial condition of the Bank, be deemed to constitute such an unsafe or unsound practice.
Also, without regulatory approval, a dividend only can be paid to the extent of the net income of the Bank for that year plus the net income of
the prior two years. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default
in the payment of any assessments due the FDIC.
State banks also are subject to regulation respecting the maintenance of certain minimum capital levels (see above), and the Bank is
required to file annual reports and such additional information as the Tennessee Banking Act and Federal Reserve regulations require. The
Bank also is subject to certain restrictions on loan amounts, interest rates, “insider” loans to officers, directors and principal shareholders, tie-
in arrangements, privacy, transactions with affiliates, and many other matters. Strict compliance at all times with state and federal banking
laws is required.
9
Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and
amount of loans that may be granted and on the types of investments which may be made. The operations of banks are also affected by
various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All
Tennessee banks must become and remain insured banks under the FDIA. (See 12 U.S.C. § 1811, et seq.).
Under Tennessee law, state banks are prohibited from lending to any one person, firm, or corporation amounts more than 15% of its
equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable
nonperishable staples or (ii) the Bank may make a loan to one person, firm or corporation of up to 25% of its equity capital accounts with the
prior written approval of the Bank’s Board of Directors or finance committee (however titled).
The TDFI and the Federal Reserve will examine the Bank periodically for compliance with various regulatory requirements. Such
examinations, however, are for the protection of the DIF and for depositors and not for the protection of investors and shareholders.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
FDICIA substantially revised the depository institution regulatory and funding provisions of the FDIA, and made revisions to several
other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take “prompt corrective action” in
respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under
applicable regulations, a FDIC-insured depository institution is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a
risk adjusted Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and is not subject to a directive, order or written
agreement to meet and maintain specific capital levels. An insured depository institution is defined to be adequately capitalized if it meets all
of its minimum capital requirements as described above in the first paragraph of the section entitled “Capital Guidelines.” In addition, an
insured depository institution is considered undercapitalized if it fails to meet any minimum required measure; significantly undercapitalized
if it has a total risk-based capital ratio of less than 6%, a tier 1 risked-based capital ratio less than 3% or a leverage ratio less than 3%; and
critically undercapitalized if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. An insured depository
institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of
dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized.
Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding
company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking
agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely
to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from
correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally
within 90 days of the date on which they became critically undercapitalized.
The capital-based prompt corrective action provision of FDICIA and their implementing regulations apply to FDIC-insured depository
institutions and are not directly applicable to the holding companies which control those institutions. However, the Federal Reserve has
indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of
the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to these provisions and regulations.
The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the
regulations, a bank cannot accept or rollover or renew brokered deposits unless it is well capitalized or it is adequately capitalized and
receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain
employee benefit accounts. Whether or not it has obtained this waiver, an adequately capitalized bank may not pay an interest rate on any
deposits in excess of 75 basis points over certain index prevailing market rates specified by regulation. There are no such restrictions on a
bank that is well capitalized.
FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, limitations on the FDIC’s
payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised
regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a
depository institution provide 90 days prior notice of the closing of any branches.
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The Dodd-Frank Act
In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. Many of
these reforms were implemented over the course of 2011-2013 and continue to be implemented through regulations being adopted by
various federal banking and securities regulations. The following discussion describes the material elements of the regulatory
framework. Many of the Dodd-Frank Act provisions are stated to only apply to larger financial institutions and do not directly impact
community-based institutions like the Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading
activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory
authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1
capital are among the provisions that do not directly impact the Bank either because of exemptions for institutions below a certain
asset size or because of the nature of the Bank’s operations. Other provisions that have impacted or will impact the Bank:
•
Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less
tangible capital, eliminate the ceiling and increase the size of the floor of the DIF, and offset the impact of the increase in
the minimum floor on institutions with less than $10 billion in assets.
• Make permanent the $250,000 limit for federal deposit insurance.
•
•
•
•
•
•
•
•
Repeal the federal prohibition on payment of interest on demand deposits, thereby permitting depositing institutions to
pay interest on business transaction and other accounts.
Centralize responsibility for consumer financial protection by creating the Consumer Financial Protection Bureau (the
“CFPB”), responsible for implementing federal consumer protection laws, although banks below $10 billion in assets will
continue to be examined and supervised for compliance with these laws by their federal bank regulator.
Restrict the preemption of state law by federal law and disallow national bank subsidiaries from availing themselves of
such preemption.
Impose new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain
yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet
certain provision qualifications, prohibitions and limitations on certain mortgage terms and various new mandated
disclosures to mortgage borrowers.
Apply the same leverage and risk based capital requirements that apply to insured depository institutions to holding
companies.
Permit national and state banks to establish de novo interstate branches at any location where a bank based in that state
could establish a branch, and require that bank holding companies and banks be well-capitalized and well managed in
order to acquire banks located outside their home state.
Impose new limits on affiliated transactions and cause derivative transactions to be subject to lending limits.
Implement corporate governance revisions, including with regard to executive compensation and proxy access to
shareholders that apply to all public companies not just financial institutions.
FDIC Insurance Premiums
The Bank is required to pay quarterly FDIC deposit insurance assessments to the DIF. The FDIC maintains the DIF by assessing
depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the
balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based
premium system that assesses higher rates on those institutions that pose greater risks to the DIF.
On March 15, 2016, the FDIC adopted a rule in accordance with provisions of the Dodd-Frank Act that requires large
institutions to bear the burden of raising the Reserve Ratio from 1.15% to 1.35%. Since the Reserve Ratio has reached 1.15%, the
FDIC will collect assessment surcharges from large institutions. Once the reserve ratio reaches 1.38%, small institutions will receive
credits to offset their contribution to raising the Reserve Ratio to 1.35%. On April 26, 2016, the FDIC Board of Directors approved the
final rule to improve the deposit insurance assessment system for established small insured depository institutions (generally, those
banks with less than $10 billion in total assets that have been insured for at least five years). The final rule was effective July 1, 2016.
Since the reserve ratio of the DIF reached 1.15 percent before that date, the final rule determined assessment rates beginning July 1,
2016. Effective July 1, 2016, the initial base assessment rates for all insured institutions were reduced from 5 to 35 basis points to 3 to
30 basis points. Total base assessment rates after possible adjustments were reduced from 2.5 to 45 basis points to 1.5 to 40 basis
points. Although the base assessment rates were reduced, the assessment calculation includes pricing adjustments for certain financial
11
ratios that relate to asset growth, loan mix, funding ratios, and nonperforming assets, which in the case of the Bank, have adversely impacted
the Company’s earnings due to increased premium assessments. Additional increases in premiums will impact FFN’s earnings adversely.
Depending on any future losses that the FDIC insurance fund may suffer due to failed institutions, there can be no assurance that there will
not be additional significant premium increases in order to replenish the fund.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by a federal bank regulatory agency.
The CRA
The CRA requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC and the state banking
regulators, as applicable, evaluate the record of each financial institution in meeting the credit needs of its local community, including low
and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional requirements and limitations on us. Additionally, we must publicly
disclose the terms of various CRA-related agreements.
Other Regulations
Interest and other charges that our subsidiary bank collects or contracts for are subject to state usury laws and federal laws concerning
interest rates. Our bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:
•
•
•
•
•
•
The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community
it serves;
The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit;
The Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
The Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
and
The rules and regulations of the various governmental agencies charged with the responsibility of implementing these federal
laws.
In addition, our bank subsidiary’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve to implement this act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and
liabilities arising from the use of automated teller machines and other electronic banking services.
Effects of Governmental Policies
The Bank’s earnings are affected by the difference between the interest earned by the Bank on its loans and investments and the
interest paid by the Bank on its deposits or other borrowings. The yields on its assets and the rates paid on its liabilities are sensitive to
changes in prevailing market rates of interest. Thus, the earnings and growth of the Bank are influenced by general economic conditions,
fiscal policies of the federal government, and the policies of regulatory agencies, particularly the Federal Reserve, which establishes national
monetary policy. The nature and impact of any future changes in fiscal or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various regulatory authorities, including the Federal Reserve. An important
function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements on
bank deposits, changes in the discount rate on bank borrowings and limitations on interest rates that banks may pay on time and savings
deposits. The Federal Reserve uses these means in varying combinations to influence overall growth of bank loans, investments and deposits,
and also to affect interest rates charged on loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the Federal Reserve, also affect the banking industry. Through
changes in the reserve requirements against bank deposits, open market operations in U.S. Government securities and changes in the discount
rate on bank borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending and investing. No prediction
can be made with respect to possible future changes in interest rates, deposit levels or loan demand or with respect to the impact of such
changes on the business and earnings of the Bank.
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From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance between banks and other financial institutions. The nature and extent of the
future legislative and regulatory changes affecting financial institutions and the resulting impact on those institutions is very
unpredictable at this time. Bills are currently pending which may have the effect of changing the way the Bank conducts its business.
Recent Developments
Civic Acquisition
As previously disclosed in the Current Report on Form 8-K of FFN, which was filed on December 14, 2015, FFN and the Bank
entered into an Agreement and Plan of Reorganization and Bank Merger (the “Merger Agreement”) with Civic Bank & Trust
(“Civic”), a Tennessee banking corporation, on December 14, 2015. Under the terms of the Merger Agreement, Civic will merge with
and into the Bank, with the Bank as the surviving Tennessee banking corporation (the “Civic Merger”). On May 9, 2016, FFN, the
Bank and Civic amended the Merger Agreement solely to (i) extend the termination date set forth in the Merger Agreement until
March 31, 2017, subject to extension by FFN until June 30, 2017, if FFN has provided Civic with evidence reasonably satisfactory to
Civic that an application for approval of the merger has been filed with and accepted for processing by the Federal Reserve on or
before March 31, 2017, and (ii) increase the cap on Civic’s transaction expenses from $650,000 to $775,000. FFN and Civic have
determined that additional time will be required to obtain regulatory approvals and to satisfy various closing conditions necessary to
complete the merger. FFN has learned that federal bank regulators have identified concerns during the course of routine supervisory
activities regarding the robustness of the Bank’s procedures, systems and processes related to certain of its compliance programs,
given the rapid growth and increasing complexity of the Bank. The Bank is proactively reviewing and supplementing its procedures,
systems and processes related to its compliance programs and recruiting experienced compliance personnel to address such concerns.
New Offices and Branches
During 2016, the Bank opened a new branch in Nolensville, Tennessee in Williamson County, located at 7177 Nolensville Pike,
Suite A-3, Nolensville, Tennessee 37135, relocated a loan production office to Music Row at 33 Music Square West, Unit 110B,
Nashville, Tennessee 37203, and opened a new mortgage loan operations facility, on the campus of its headquarters at 722 Columbia
Avenue, Franklin, Tennessee 37064.
Available Information
Our website is located at www.franklinsynergybank.com. We make available free of charge through this website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after they are electronically filed with or furnished to the SEC. Reference to our website does not constitute incorporation
by reference of the information contained on the site and should not be considered part of this document.
All filings made by us with the SEC may be copied or read at the SEC’s Public Reference Room at 100 F Street NE,
Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC as we do. The website is http://www.sec.gov.
ITEM 1A.
RISK FACTORS.
Our business and its future performance may be affected by various factors, the most significant of which are discussed below.
Risks Related to Our Business
We May Not Be Able to Implement Our Growth Strategy Effectively
Our business has grown quickly. Furthermore, our strategy focuses on organic growth, supplemented by opportunistic
acquisitions. We may not be able to execute aspects of our growth strategy to sustain our historical rate of growth or may not be able
to grow at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense
tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors,
such as economic conditions and competition, may impede or prohibit the growth of our operations, the opening of new branches and
the consummation of acquisitions.
13
Competition For Deposits and Loans Is Expected To Be Intense, and No Assurance Can Be Given That We Will Be Successful in
Our Efforts to Compete with Other Financial Institutions
The commercial banking industry in Williamson County, Tennessee consists of 33 banks and two savings and loan institutions,
with 102 total offices and total deposits of $7.8 billion as of June 30, 2016, which is the most recent date such information has been
released by the FDIC. The commercial banking industry in Rutherford County, Tennessee consists of 22 banks and no savings and
loan institutions, with 76 total offices and total deposits of $3.7 billion as of June 30, 2016, which is the most recent date such
information has been released by the FDIC. Offices affiliated with out-of-state financial institutions have entered Tennessee in recent
years to offer all financial services, including lending and deposit gathering activities. Also, changes to laws on interstate banking and
branching now permit banks and bank holding companies headquartered outside Tennessee to move into Williamson County and
Rutherford County more easily. In addition, there are credit unions, finance companies, securities brokerage firms, and other types of
businesses offering financial services. Technological advances and the growth of e-commerce have made it possible for non-financial
institutions to offer products and services that traditionally have been offered by banking institutions. Competition for deposit and loan
opportunities in our market area is expected to be intense because of existing competitors and the geographic expansion into the
market area by other institutions. See “BUSINESS—Supervision and Regulation.” No assurance can be given that we will be
successful in our efforts to compete with other such institutions.
There Can Be No Assurance That the Bank Will Not Incur Excessive Loan Losses
An allowance for loan losses account is accumulated through monthly provisions against income. This account is a valuation
allowance established for probable incurred credit losses inherent in the loan portfolio. Banks are susceptible to risks associated with
their loan portfolios. The Bank’s loan customers may include a disproportionate number of individuals and entities seeking to
establish a new banking relationship because they are dissatisfied with the amount or terms of credit offered by their current banks, or
they may have demonstrated less than satisfactory performance in previous banking relationships. If the Bank lends to individuals who
have demonstrated less than satisfactory performance in previous banking relationships, the Bank could experience disproportionate
loan losses, which could have a significantly negative impact on the Bank’s earnings. Although management is aware of the potential
risks associated with extending credit to customers with whom they have not had a prior lending relationship, there can be no
assurance that the Bank will not incur excessive loan losses. Bank regulators may disagree with the Bank’s characterization of the
collectability of loans and may require the Bank to downgrade credits and increase our provision for loan losses that would negatively
impact results of operations and capital levels.
Changes in Interest Rates May Reduce the Bank’s Profitability
We incur interest rate risk. The Bank’s profitability is dependent, to a large extent, upon net interest income, which is the
difference between its interest income on interest-earning assets, such as loans and investment securities and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The Bank will continue to be affected by changes in interest rates and
other economic factors beyond its control, particularly to the extent that such factors affect the overall volume of our lending and
deposit activities. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities
are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative
gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income. Furthermore, an increase in interest rates may negatively affect the market value of
securities in our investment portfolio. A reduction in the market value of our portfolio will increase the unrealized loss position of our
available-for-sale investments. Any of these events could materially adversely affect our results of operations or financial condition.
If We Fail to Effectively Manage Credit Risk and Interest Rate Risk, Our Business and Financial Condition Will Suffer
We must effectively manage credit risk. There are risks inherent in making any loan, including risks with respect to the period
of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in
economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the
future value of collateral. There is no assurance that our credit risk monitoring and loan approval procedures are, or will be, adequate
or will reduce the inherent risks associated with lending. Our credit administration personnel, policies and procedures may not
adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. Any failure
to manage such credit risks may materially adversely affect our business and our consolidated results of operations and financial
condition.
14
The Bank Depends on Its Ability to Attract Deposits
The acquisition of local deposits is a primary objective of the Bank. If customers move money out of bank deposits and into
other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest
income and net income. In addition to the traditional deposit accounts solicited in its community, the Bank also solicits local deposits
through the Internet and will offer Internet-only deposit accounts to supplement traditional depository accounts. The Bank is a
member of the FHLB for use as a general funding source and may use Internet funds and brokered deposits to balance funding needs.
The ability of the Bank to accept brokered deposits is dependent on its ability to remain “well capitalized.”
The Bank May Be Required to Rely on Secondary Sources of Liquidity to Meet Withdrawal Needs or Fund Operations, and There
Can Be No Assurance That These Sources Will Be Sufficient to Meet Future Liquidity Demands
The primary source of the Bank’s funds is customer deposits and loan repayments. While scheduled loan repayments are a
relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans
can be adversely affected by a number of factors, including changes in general economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters
and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors,
general interest rate levels, returns available to customers on alternative investments and general economic conditions. Accordingly,
the Bank may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund
operations. These sources include Internet funds, brokered certificates of deposit, investment securities, borrowings from the Federal
Reserve, FHLB advances, and federal funds lines of credit from correspondent banks. While management believes that these sources
are currently adequate, there can be no assurance that they will be sufficient to meet future liquidity demands. The Bank may be
required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should these sources not be
adequate.
Economic Challenges, Especially Those Affecting the Local Economy Where We Operate, Could Affect Our Financial Condition
and Results of Operations
If the communities in which we operate do not grow or if prevailing local or national economic conditions are unfavorable, our
business may not succeed. Adverse economic conditions to the extent they develop in our primary market area, which currently is
limited to Williamson County and Rutherford County, Tennessee and the surrounding areas, could reduce our growth rate, affect the
ability of our customers to repay their loans, and generally affect our financial condition and results of operations. Moreover,
management cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary
market area if they do occur. Continued adverse market or economic conditions may increase the risk that the Bank’s borrowers will
be unable to timely make their loan payments. Furthermore, even if the Bank’s borrowers continue to make timely loan payments, a
deterioration in the real estate market could cause a decline in the appraised values of such mortgaged properties. In the event of such
a deterioration, the Bank may be forced to write down the value of the loans, which could have a negative effect on the Bank’s capital
ratios and earnings.
The Bank’s loan portfolio is real-estate focused. While real estate lending is the expertise of our lending staff and management,
risks associated with this type of lending are heavily influenced by the economic environment. In addition, the market value of the real
estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions.
As of December 31, 2016, approximately 78% of the Bank’s total loans were real-estate secured. One-to-four family residential
properties accounted for 23% of the Bank’s portfolio, owner-occupied commercial real estate was 9% and other commercial real
estate was 9% of the total loan portfolio. Total construction and land development lending accounted for 35% of total loans with
residential construction lending totaling 16%, commercial construction lending totaling 5% and land development lending totaling
7%. Other real estate lending, including multi-family and farmland, accounted for 2% of the total loan portfolio. A sustained period of
increased payment delinquencies, foreclosures, or losses caused by adverse market or economic conditions in the state of Tennessee,
or more specifically the Bank’s market area in Williamson County and Rutherford County in Middle Tennessee, could adversely
affect the value of our assets, revenues, results of operations, and financial condition.
15
Our Financial Condition and Results of Operations Could be Affected if Long-Term Business Strategies Are Not Effectively
Executed
Although the Bank’s primary focus in the near term will be organically growing its balance sheet, over the longer term,
management may pursue a growth strategy for the Bank’s business through de novo branching. The Bank’s prospects must be
considered in light of the risks, expenses, and difficulties occasionally encountered by financial services companies in growth stages,
which may include the following:
•
•
•
Operating Results: There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan
balances, or other operating results necessary to avoid losses or produce profits. The Bank’s growth strategy necessarily
entails growth in overhead expenses as it routinely adds new offices and staff. Historical results may not be indicative of
future results or results that may be achieved as the Bank continues to increase the number and concentration of the
Bank’s branch offices.
Development of Offices: There are considerable costs involved in opening branches, and new branches generally do not
generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly,
de novo branches may be expected to negatively impact earnings during this period of time until the branches reach
certain economies of scale.
Regulatory and Economic Factors: Growth and expansion plans may be adversely affected by a number of regulatory and
economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations,
or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may
prevent or adversely affect continued growth and expansion. Failure to successfully address the issues identified above
could have a material adverse effect on the Bank’s business, future prospects, financial condition, or results of operations,
and could adversely affect the Bank’s ability to successfully implement its longer term business strategy.
The Accuracy of Our Financial Statements and Related Disclosures Could be Affected if the Judgments, Assumptions or Estimates
Used in Our Critical Accounting Policies are Inaccurate
The preparation of financial statements and related disclosure in conformity with accounting principles generally accepted in the
United States requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our critical accounting policies, which are included in the section entitled “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in this report, describe those
significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical”
because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related
disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting
policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures.
Negative Public Opinion or Failure to Maintain Our Reputation in the Communities We Serve Could Adversely Affect Our
Business and Prevent Us from Growing Our Business
As a community bank, our reputation within the communities we serve is critical to our success. We have set ourselves apart
from our competitors by building strong personal and professional relationships with our customers and by being an active member of
the communities we serve. As such, we strive to enhance our reputation by recruiting, hiring and retaining employees who share our
core values of being an integral part of the communities we serve and delivering superior service to our customers. If our reputation is
negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new customers, and our
business, financial condition, results of operations and prospects could be materially and adversely affected. Further, negative public
opinion can expose us to litigation and regulatory action as we seek to implement our growth strategy, such as delays in regulatory
approval based on unfounded complaints, which could impede the timeliness of regulatory approval for acquisitions we may make.
The Obligations Associated with Being a Public Company Require Significant Resources and Management Attention, Which
Could Increase Our Costs of Operations and May Divert Focus from Our Business Operations
As a public company, we are required to file periodic reports containing our consolidated financial statements with the SEC
within a specified time following the completion of quarterly and annual periods. As a public company, we also incur significant legal,
accounting, insurance and other expenses. Compliance with these reporting requirements and other rules of the SEC and the rules of
the New York Stock Exchange (“NYSE”) or any exchange on which our common stock may be listed in the future could increase our
legal and financial compliance costs and make some activities more time consuming and costly. Furthermore, the need to maintain the
corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy,
which could prevent us from successfully implementing our strategic initiatives and improving our business, results of operations and
financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting
16
and accounting systems to meet our reporting obligations as a public company. However, we cannot predict or estimate the amount of
additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our
general and administrative expenses.
If We Fail to Correct Any Material Weakness That We Identify in Our Internal Control over Financial Reporting or Otherwise
Fail to Maintain Effective Internal Control over Financial Reporting, We May Not Be Able to Report Our Financial Results
Accurately and Timely
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for
evaluating and reporting on our system of internal control. Our internal control processes are designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles (“GAAP”). As a public company, we are required to comply with the Sarbanes-Oxley Act
and other rules that govern public companies. We are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act,
which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In
addition, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth
companies, our independent registered public accounting firm will be required to report on the effectiveness of our internal control
over financial reporting, beginning as of the first annual report after ceasing to be an emerging growth company.
If we identify material weaknesses in our internal control over financial reporting in the future and we cannot comply with the
requirements of the Sarbanes-Oxley Act in a timely manner or attest that our internal control over financial reporting is effective, or if
our independent registered public accounting firm cannot express an opinion as to the effectiveness of our internal control over
financial reporting when required, we may not be able to report our financial results accurately and timely. As a result, investors,
counterparties and customers may lose confidence in the accuracy and completeness of our financial reports; our liquidity, access to
capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could
decline. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the
Federal Reserve, the FDIC, or other regulatory authorities, which could require additional financial and management resources. These
events could have an adverse effect on our business, financial condition and results of operations.
A Failure in, or Breach of, Our Operational or Security Systems or Infrastructure, or Those of Our Third Party Vendors and
Other Service Providers or Other Third Parties, Including as a Result of Cyber Attacks, Could Disrupt Our Businesses, Result in
the Disclosure or Misuse of Confidential or Proprietary Information, Damage Our Reputation, Increase Our Costs, and Cause
Losses
We rely heavily on communications and information systems to conduct our business. Information security risks for financial
institutions such as us have generally increased in recent years in part because of the proliferation of new technologies, the use of the
Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of
organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations
regarding operational and information security have increased, our operating systems and infrastructure must continue to be
safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data
processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result
of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or
telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from
local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.
Our business relies on its digital technologies, computer and email systems, software and networks to conduct its operations.
Although we have information security procedures and controls in place, our technologies, systems and networks and our customers’
devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release,
gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third
parties with whom we do business or who facilitate our business activities, including financial intermediaries, or vendors that provide
service or security solutions for our operations, and other unaffiliated third parties, could also be sources of operational and
information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. In addition,
hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other
problems that could unexpectedly compromise information security.
17
While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure,
interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security
breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remain
heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and
enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from
attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional
resources to continue to modify or enhance our protective measures or to investigate and remediate information security
vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or
cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services, could
result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs,
and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.
Furthermore, if such attacks are not detected immediately, their effect could be compounded. To date, to our knowledge, we have not
experienced any material impact relating to cyber-attacks or other information security breaches.
The Bank Is Subject to General Banking Risks
Several risks are inherent in the business of banking. Factors outside the Bank’s control, such as instability in interest rates, a
depressed economy, government regulation, and federal monetary policy, for example, could adversely impact the banking industry.
Banks are also exposed to risk of loss as a result of fraud, embezzlement, insider abuse, and mismanagement. Extensions of credit
create a risk that loans cannot, or will not, be repaid.
Earnings are affected by the ability of the Bank to properly originate, underwrite and service loans. The Bank could sustain
losses if it incorrectly assesses the creditworthiness of its borrowers or fails to detect or respond to deterioration in asset quality in a
timely manner. Rapid changes in loan and deposit terms could result in a risk of loss from changes in interest rates. In managing its
loans and investments (assets) and its borrowings and deposits (liabilities), the Bank will run the risk of having insufficient liquid
assets to meet withdrawal requests.
Beyond general banking risk, we will take limited risk in mortgage banking, wealth management, trust services or other
financial services being offered. Such risks could have a material adverse effect on our business, financial condition, results of
operations and prospects.
18
Because We Engage in Lending Secured By Real Estate and May Be Forced to Foreclose on the Collateral Property and Own The
Underlying Real Estate, We May Be Subject to the Increased Costs and Risk Associated with the Ownership of Real Property,
Which Could Have an Adverse Effect on Our Business or Results of Operations
A significant portion of our loan portfolio is secured by real estate property. During the ordinary course of business, we may
foreclose on and take title to properties securing certain loans, in which case, we are exposed to the risks inherent in the ownership of
real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
•
•
•
•
•
•
•
•
•
•
•
general or local economic conditions;
environmental cleanup liability;
neighborhood values;
interest rates;
real estate tax rates;
operating expenses of the mortgaged properties;
supply of and demand for rental units or properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental rules, regulations and fiscal policies; and
tornadoes or other natural or man-made disasters.
Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may also
adversely affect our operating expenses.
We Are Subject to Environmental Liability Risk Associated with Lending Activities
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities
with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to
properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If
hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal
injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first
affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and
may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or
more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on
nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs
and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
Our Loan Portfolio Includes a Meaningful Amount of Real Estate Construction and Development Loans, Which Have a Greater
Credit Risk Than Residential Mortgage Loans
The percentage of loans in real estate construction and development in our portfolio was approximately 28% of total loans at
December 31, 2016. These loans make up approximately 32% of our non-performing loans at December 31, 2016. This type of
lending is generally considered to have relatively high credit risks because the principal is concentrated in a limited number of loans
with repayment dependent on the successful completion and operation of the related real estate project. The credit quality of many of
these loan types deteriorated during the challenging economic period of 2008 to 2012 due to the adverse conditions in the real estate
market during that period and that type of deterioration could occur again. Weakness in residential real estate market prices in the
Middle Tennessee area as well as demand could result in price reductions in home and land values adversely affecting the value of
collateral securing the construction and development loans that we hold. Should we experience the return of these adverse economic
and real estate market conditions we may experience increases in non-performing loans and other real estate owned, increased losses
and expenses from the management and disposition of non-performing assets (“NPAs”), increases in provision for loan losses, and
increases in operating expenses as a result of the allocation of management time and resources to the collection and work out of loans,
all of which would negatively impact our financial condition and results of operations.
19
We Are Dependent on Key Personnel
We are materially dependent on the performance of our executive management team, loan officers, and other support personnel.
The loss of the services of any of these employees could have a material adverse effect on our business, results of operations, and
financial condition. Many of these key officers have important customer relationships, which are instrumental to the Bank’s
operations. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse
effect on our business, financial condition, and results of operations. Management believes that future results also will depend, in part,
upon attracting and retaining highly skilled and qualified management, especially in the new market areas into which we may enter, as
well as in sales and marketing personnel. Competition for such personnel is intense, and management cannot be sure that we will be
successful in attracting or retaining such personnel.
The Amount of Interest Payable on the March 2016 Notes Will Vary Beginning on March 30, 2021
On March 31, 2016, we completed the public offering of $40,000,000 aggregate principal amount of fixed-to-floating rate
subordinated Notes due 2026 (the “March 2016 Notes”). The net proceeds from the offering of the March 2016 Notes was used, in
part, to pay down a line of credit, which we used on March 25, 2016 to redeem 10,000 outstanding shares of our Series A Preferred
Stock issued to the Treasury pursuant to our participation in the Small Business Lending Fund program.
The interest rate on the March 2016 Notes will vary beginning on March 30, 2021. From and including the date of issuance of
the March 2016 Notes, to but excluding March 30, 2021, the March 2016 Notes will bear interest at an initial rate of 6.875% per
annum. From and including March 30, 2021 and thereafter, the March 2016 Notes will bear interest at a floating rate equal to three-
month LIBOR as calculated on each applicable date of determination, plus a spread of 5.636%. If interest rates rise, the cost of the
March 2016 Notes may increase, thereby negatively affecting our net income.
The Amount of Interest Payable on the June 2016 Notes Will Vary Beginning on July 1, 2021
On June 30, 2016, we completed the private offering of $20,000,000 aggregate principal amount of fixed-to-floating rate
subordinated Notes due 2026 (the “June 2016 Notes”). The net proceeds from the offering of the June 2016 Notes were used to inject
capital into Franklin Synergy Bank, the Company’s primary subsidiary, to fund growth and for other corporate purposes.
The interest rate on the June 2016 Notes will vary beginning on July 1, 2021. From and including the date of issuance of
the June 2016 Notes, to and including June 30, 2021, the June 2016 Notes will bear interest at an initial rate of 7.00% per annum.
From and including July 1, 2021 and thereafter, the June 2016 Notes will bear interest at a floating rate equal to three-month LIBOR
as calculated on each applicable date of determination, plus a spread of 6.04%. If interest rates rise, the cost of the June 2016 Notes
may increase, thereby negatively affecting our net income.
Risks Related to the Regulation of Our Business
We Are Subject to Extensive Regulation
We are subject to extensive governmental regulation and control. Compliance with state and federal banking laws has a material
effect on our business and operations. Our operations will at all times be subject to state and federal banking laws, regulations, and
procedures. The laws and regulations applicable to the banking industry could change at any time and are subject to interpretation, and
management cannot predict the effects of these changes on our business and profitability. Because government regulation greatly
affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely
affect our ability to operate profitably. Non-banking financial institutions, such as securities brokerage firms, insurance companies,
and money market funds are now permitted to offer services which compete directly with services offered by banks. See
“BUSINESS—Supervision and Regulation.”
The Regulatory Environment for the Financial Services Industry Is Being Significantly Impacted by Financial Regulatory Reform
Initiatives, Which May Adversely Impact Our Business, Results of Operations and Financial Condition.
The Dodd-Frank Act contains comprehensive provisions governing the practices and oversight of financial institutions and other
participants in the financial markets. See “BUSINESS—Supervision and Regulation.” The Dodd-Frank Act established, among other
requirements, a new financial industry regulator, the CFPB, to centralize responsibility for consumer financial protection with broad
rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws and to prevent
evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers, including deposit
products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as
steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. The CFPB is also authorized to
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prescribe rules applicable to any covered person or service provider, identifying and prohibiting “unfair, deceptive, or abusive acts or
practices” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer
financial product or service (“UDAAP authority”). The ongoing broad rulemaking powers of the CFPB and its UDAAP authority have the
potential to have a significant impact on the operations of financial institutions offering consumer financial products or services. The CFPB
has indicated that they are examining proposing new rules on overdrafts and other consumer financial products or services and if any such
rule limits our ability to provide such financial products or services it may have an adverse effect on our business. Additional legislative or
regulatory action that may impact our business may result from the multiple studies mandated under the Dodd-Frank Act. Although the
applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there can be no
guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such
requirements on institutions with less than $10 billion in assets. Finally, President Donald Trump and the Congressional majority have
indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act rules promulgated
thereunder may be revised, repealed or amended. We cannot predict with any degree of certainty what impact, if any, these or future reforms
will have on our business, financial condition, or results of operations.
The evolving regulatory environment causes uncertainty with respect to the manner in which we conduct our businesses and
requirements that may be imposed by our regulators. Regulators have implemented and continue to propose new regulations and issue
supervisory guidance and have been increasing their examination and enforcement action activities. We expect that regulators will continue
taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public
supervisory actions or findings. We are unable to predict the nature, extent or impact of any additional changes to statutes or regulations,
including the interpretation, implementation or enforcement thereof, which may occur in the future.
The impact of the evolving regulatory environment on our business and operations depends upon a number of factors including final
implementing regulations, guidance and interpretations of the regulatory agencies, supervisory priorities and actions, the actions of our
competitors and other marketplace participants, and the behavior of consumers. The evolving regulatory environment could require us to
limit or change our business practices, limit our product offerings, require continued investment of management time and resources in
compliance efforts, limit fees we can charge for services, require us to meet more stringent capital, liquidity and leverage ratio requirements,
increase costs, impact the value of our assets, or otherwise adversely affect our businesses. The regulatory environment and enhanced
examination and supervisory expectations and scrutiny can also potentially impact our ability to pursue business opportunities and obtain
required regulatory approvals for potential investments and acquisitions.
Compliance and other regulatory requirements and expenditures have increased significantly for us and other financial services firms,
and we expect them to continue to increase as regulators adopt new rules, interpret existing rules and increase their scrutiny of financial
institutions, including controls and operational processes. We may face additional compliance and regulatory risk to the extent that we enter
into new lines of business or new business arrangements with third-party service providers, alternative payment providers or other industry
participants, including providers or participants that may not be regulated financial institutions. The additional expense, time and resources
needed to comply with ongoing regulatory requirements may adversely impact our business and results of operations. In addition, regulatory
findings and ratings could negatively impact our business strategies.
We Are Affected by Governmental Monetary Policies
Like all regulated financial institutions, we are affected by monetary policies implemented by the Federal Reserve and other federal
instrumentalities. A primary instrument of monetary policy employed by the Federal Reserve is the restriction or expansion of the money
supply through open market operations. This instrument of monetary policy frequently causes volatile fluctuations in interest rates, and it can
have a direct, adverse effect on the operating results of financial institutions. Borrowings by the United States government to finance the
government debt may also cause fluctuations in interest rates and have similar effects on the operating results of such institutions. See
“BUSINESS—Supervision and Regulation.”
The Impact of the Changing Regulatory Capital Requirements and Capital Rules Is Uncertain
Under rules adopted by the Federal Reserve and FDIC, the leverage and risk-based capital ratios of bank holding companies may not
be lower than the leverage and risk-based capital ratios for insured depository institutions. These rules became effective as to FFN and the
Bank on January 1, 2015 and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what
constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements now applicable to bank holding
companies and banks subject to the rules are: (i) a Common Equity Tier 1 Capital ratio of 4.5%; (ii) a Tier 1 Risk-Based Capital ratio of 6%;
(iii) a total Risk-Based Capital ratio of 8%; and (iv) a Tier 1 Leverage ratio of 4% for all institutions. The rules also establish a “capital
conservation buffer” of 2.5% (being phased in over three years) above the new regulatory minimum capital ratios, and result in the following
minimum ratios once the capital conservation buffer is fully phased in: (i) a Common Equity Tier 1 Risk-Based Capital ratio of 7.0%, (ii) a
Tier 1 Risk-Based Capital ratio of 8.5%, and (iii) a total Risk-Based Capital ratio of 10.5%. The capital conservation buffer requirement
began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in
January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary
bonuses if its capital levels fall below the buffer amounts. These limitations establish a maximum percentage of eligible retained income that
could be utilized for such actions.
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The application of these more stringent capital requirements to FFN and the Bank could, among other things, result in lower
returns on invested capital, require the raising of additional capital, and result in regulatory actions if FFN or the Bank were to be
unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the
implementation of the final rules could result in FFN or the Bank having to lengthen the term of their funding, restructure their
business models and/or increase their holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based
capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could
result in management modifying its business strategy and could limit FFN’s and the Bank’s ability to make distributions, including
paying dividends or buying back shares. See “BUSINESS—Supervision and Regulation.”
The Expanding Body of Federal, State and Local Regulation and/or the Licensing of Loan Servicing, Collections or Other Aspects
of Our Business May Increase the Cost of Compliance And the Risks of Noncompliance
We service our own loans, and loan servicing is subject to extensive regulation by federal, state and local governmental
authorities as well as to various laws and judicial and administrative decisions imposing requirements and restrictions on those
activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual
municipalities have begun to enact laws that restrict loan servicing activities including delaying or temporarily preventing foreclosures
or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional
significant costs to comply with such requirements which may further adversely affect us. In addition, our failure to comply with these
laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry;
fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes
could materially and adversely affect our business, financial condition, results of operations and prospects.
Federal and State Regulators Periodically Examine Our Business and We May Be Required to Remediate Adverse Examination
Findings
The Federal Reserve, the FDIC, and the TDFI periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset
quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we
were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These
actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to
restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions
cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership
or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of
operations.
We are Required to Comply with the Terms of a Memorandum of Understanding (“MOU”) that the Bank has Entered into with
the Federal Reserve Bank of Atlanta (“Reserve Bank”) and the TDFI, and Lack of Compliance Could Result in Additional
Regulatory Actions.
On November 3, 2016, the Bank entered into an MOU with the Reserve Bank and the TDFI. Under the terms of the MOU, the
Bank agreed, among other things, to enhance its policies, practices and processes to reflect the Bank’s increasingly complex business
model and risk profile. The Bank has also agreed that it will seek prior written approval of the Reserve Bank and the TDFI to pay
dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s subordinated debt.
The MOU will remain in effect until stayed, modified, terminated or suspended by the Reserve Bank and the TDFI.
Management has been actively implementing plans and processes to comply with the requirements of the MOU. The Reserve Bank
and the TDFI may determine in their sole discretion that the matters covered by the MOU have not been addressed satisfactorily,
which could result in limitations on our business, including restricting growth and requiring increased capital, and negatively affect
our ability to implement our business plan or the value of our common stock, as well as our financial condition, liquidity and results of
operations.
Our Growth May Be Limited by Regulatory Restrictions
In addition to the MOU discussed above, the Company has executed an agreement with the Board of Governors of the Federal
Reserve System under section 4(m)(2) of the Bank Holding Company Act (the “Agreement”), which includes specific actions
designed to address the Bank’s risk profile and to strengthen the underlying condition of the Bank. Until FFN and the Bank satisfy the
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requirements of the MOU and the Agreement, any plans for business combinations, including our ability to close our pending merger
with Civic, or location expansion will be limited and subject to prior written approval from the appropriate regulatory body. In the
future, we may become subject to additional supervisory actions and/or enhanced regulation that could have a material negative effect
on business, operating flexibility, financial condition, and the value of our common stock.
Our FDIC Deposit Insurance Premiums and Assessments May Increase
The deposits of our subsidiary bank are insured by the FDIC up to legal limits and, accordingly, subject our bank subsidiary to
the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are based on its average consolidated total assets
minus average tangible equity as well as by risk classification, which includes regulatory capital levels and the level of supervisory
concern. High levels of bank failures since the beginning of the financial crisis and increases in the statutory deposit insurance limits
have increased resolution costs to the FDIC and put significant pressure on the DIF. In order to maintain a strong funding position and
restore the reserve ratios of the DIF, the FDIC has, in the past, increased deposit insurance assessment rates and charged a special
assessment to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the
future, especially if there are significant additional financial institution failures. Any future special assessments, increases in
assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue
certain business opportunities, which could have an adverse effect on our business, financial condition and results of operations.
We Are Required to Act As a Source of Financial and Managerial Strength For Our Bank in Times of Stress
Under federal law and longstanding Federal Reserve policy, we are expected to act as a source of financial and managerial
strength to our bank, and to commit resources to support our bank if necessary. We may be required to commit additional resources to
our bank at times when we may not be in a financial position to provide such resources or when it may not be in our, or our
shareholders’ or creditors’, best interests to do so. Providing such support is more likely during times of financial stress for us and our
bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise be. In
addition, any capital loans we make to our bank are subordinate in right of payment to depositors and to certain other indebtedness of
our bank. In the event of our bankruptcy, any commitment by us to a federal banking regulator to maintain the capital of our bank will
be assumed by the bankruptcy trustee and entitled to priority of payment. See “BUSINESS—Supervision and Regulation—Bank
Holding Company Regulation.”
Future Acquisitions Generally Will Require Regulatory Approvals and Failure to Obtain Them Would Restrict Our Growth
We may decide to explore complementing and expanding our products and services by pursuing strategic acquisitions.
Generally, any acquisition of target financial institutions, branches or other banking assets by us will require approval by and
cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, and the FDIC, as well as
state banking regulators. In acting on applications, federal banking regulators consider, among other factors:
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The effect of the acquisition on competition;
The financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the bank(s)
involved;
The quantity and complexity of previously consummated acquisitions;
The managerial resources of the applicant and the bank(s) involved;
The convenience and needs of the community, including the record of performance under the CRA;
The effectiveness of the applicant in combating money-laundering activities;
The applicant’s regulatory compliance record; and
The extent to which the acquisition would result in greater or more concentrated risk to the stability of the United States
banking or financial system.
Such regulators could deny our application based on the above criteria or other considerations, which would restrict our growth,
or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell branches
as a condition to receiving regulatory approvals and such a condition may not be acceptable to us or may reduce the benefit of any
acquisition.
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We Face a Risk of Noncompliance and Enforcement Action with the Bank Secrecy Act and Other Anti-Money Laundering Statutes and
Regulations
The Bank Secrecy Act (the “BSA”), the USA PATRIOT Act of 2001 (the “Patriot Act”) and other laws and regulations require
financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity
and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil
money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal
banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also
subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and
systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our
ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our
acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have
serious reputational consequences for us. Any of these results could have an adverse effect on our business, financial condition and results of
operations.
Risks Related to the Civic Merger
Regulatory Approvals May Not Be Received, May Continue to Take Longer Than Expected or May Impose Conditions That Are Not
Presently Anticipated or Cannot Be Met
We have not received the regulatory approvals required to consummate the Civic Merger. Before the transactions contemplated in the
Merger Agreement may be completed, including the Civic Merger, prior approval of our applications and notices filed with the FRB and
TDFI must be obtained. These governmental agencies may impose additional conditions on the completion of the Civic Merger or require
changes to the terms of the Merger Agreement. Such conditions or changes could have the effect of further delaying completion of the
transactions contemplated in the Merger Agreement or imposing additional costs on or limiting the Bank’s or Civic’s revenues, any of which
might have a material adverse effect on FFN following the Civic Merger. There can be no assurance as to whether the regulatory approvals
will be received, the timing of those approvals, or whether any conditions will be imposed.
We Have Incurred and Will Incur Substantial Expenses Related to Our Pending Acquisition of Civic
We have incurred and will incur substantial expenses in connection with our pending acquisition of Civic and integrating the
operations of the acquired business of Civic with our operations. There are a number of factors beyond our control that could affect the total
amount or the timing of our transaction and integration expenses and such expenses may exceed our initial projections. Many of the expenses
that will be incurred, by their nature, are difficult to accurately estimate at the present time. As a result, the transaction and integration
expenses associated with our pending acquisition of Civic could exceed the savings that we expect to achieve from the realization of
economies of scale and cost savings related to the integration of the acquired business of Civic following the completion of the acquisition.
Fluctuations in the Trading Price of FFN Common Stock Preceding the Effective Time of the Civic Merger Will Change the Number of
Shares of FFN Common Stock That Civic Shareholders Will Receive in the Civic Merger.
At the effective time of the Civic Merger, all outstanding shares of common stock of Civic will be exchanged for that number of shares
of common stock of FFN with an aggregate value of $28,625,000, calculated by dividing this aggregate value by the volume weighted
average closing price of FFN’s common stock for the 20 consecutive trading days ending on and including the 10th trading day preceding the
effective date of the Civic Merger; provided, however, that the market value per share of FFN’s common stock used to determine the number
of shares of FFN common stock to be issued will be no more than $29.50 per share, and no less than $26.50 per share. Accordingly, the value
of the shares of FFN common stock Civic shareholders will receive will not change, although the number of shares of common stock
received will vary with the market price for FFN common stock, within the $26.50 to $29.50 range of market value, such that the number of
shares of FFN common stock issued in the Civic Merger to holders of Civic common stock will be between 970,338 and 1,080,188 shares.
The market price of FFN’s common stock at the time the Civic Merger is completed may vary from the price of FFN’s common stock
on the date the Merger Agreement was executed and/or on the date of the Civic special meeting as a result of various factors that are beyond
the control of FFN and Civic, including but not limited to general market and economic conditions, changes in our respective businesses,
operations and prospects, and regulatory considerations. In addition to the approval of the Merger Agreement by Civic shareholders,
completion of the Civic Merger is subject to satisfaction of other conditions that may not occur until after the Civic special meeting.
Therefore, at the time of the Civic special meeting Civic shareholders will not know or be able to calculate the precise consideration they will
receive at the effective time of the Civic Merger.
Before or after the Civic Merger, the market value of FFN common stock may decrease and be lower than the FFN market price that is
used in calculating the consideration to be received by holders of Civic common stock in the Civic Merger.
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FFN May Not Be Able to Successfully Integrate Civic or to Realize the Anticipated Benefits of the Civic Merger
The Civic Merger involves the combination of two banks that previously have operated independently. A successful
combination of the operations of the two entities will depend substantially on FFN’s ability to consolidate operations, systems and
procedures and to eliminate redundancies and costs. FFN also intends to utilize most if not all of Civic’s employees, a plan that may or
may not be completely feasible as the growth of the banks and FFN continues and the demands of the marketplace dictate. FFN may
not be able to combine the operations of Civic and FSB without encountering difficulties, such as:
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disruption of operations and business;
inability to maintain and increase competitive presence;
deposit attrition, customer loss and revenue loss;
possible inconsistencies and disruptions during the period needed to integrate standards, control procedures and policies;
unexpected problems with costs, operations, personnel, technology and credit; and/or
problems with the assimilation of new operations, sites or personnel, which could divert resources from regular banking
operations.
Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may
inhibit the successful integration of Civic and the Bank.
Further, FFN, the Bank and Civic entered into the Merger Agreement with the expectation that the Civic Merger will result in
various benefits including, among other things, benefits relating to enhanced revenues, a strengthened market position for the
combined company, cross-selling opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated
benefits of the Civic Merger is subject to a number of uncertainties, including whether FFN integrates Civic in an efficient and
effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in
increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially
impact FFN’s business, financial condition and operating results. Finally, any cost savings that are realized may be offset by losses in
revenues or other charges to earnings.
The Combined Company Will Incur Significant Transaction and Merger-Related Costs in Connection With the Merger
FFN and Civic expect to incur costs associated with combining the operations of Civic and the Bank. FFN and Civic will need
to collect additional information in order to formulate detailed integration plans to deliver planned synergies. Additional unanticipated
costs may be incurred in the integration of the businesses of FFN and Civic. Although FFN and Civic expect that the elimination of
duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental
transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.
Whether or not the Civic Merger is consummated, FFN and Civic will incur substantial expenses, such as legal, accounting and
financial advisory fees, in pursuing the Civic Merger. Completion of the Civic Merger is conditioned upon the receipt of all material
governmental authorizations, consents, orders and approvals, including approval by federal and state banking regulators.
Directors and Officers of Civic have Potential Conflicts of Interest in the Merger
You should be aware that some directors and officers of Civic have interests in the Civic Merger that are different from, or in
addition to, the interests of Civic shareholders generally.
For example, certain of the executive officers of Civic have been offered change in control agreements by the Bank that provide
the executive officer with payments upon a change in control of FFN or the Bank. Also, FFN has agreed to add Anil Patel, MD, to the
boards of FFN and the Bank, and Dr. Patel will receive compensation for serving on these boards. These agreements may create
potential conflicts of interest by creating vested interests in those persons in the completion of the Civic Merger. In addition, FFN
agreed in the Merger Agreement to provide liability insurance to Civic officers and directors. These and certain other additional
interests of Civic’s directors and officers may cause some of these persons to view the proposed transaction differently than you view
it, although Civic’s board and officers currently have comparable director and officer insurance coverages.
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Failure to Complete the Civic Merger Could Cause FFN’s Stock Price to Decline
If the Civic Merger is not completed for any reason, FFN’s stock price may decline because costs related to the Civic Merger,
such as legal, accounting and financial advisory fees, must be paid even if the Civic Merger is not completed. In addition, if the Civic
Merger is not completed, FFN’s stock price may decline to the extent that the current market price reflects a market assumption that
the Civic Merger will be completed or due to questions about why (or whose “fault” it was that) the Civic Merger was not completed.
Risks Related to an Investment in Our Common Stock
Shares of Our Common Stock Are Not Insured
Shares of our common stock are not deposits and are not insured by the FDIC or any other entity and you will bear the risk of
loss if the value or market price of our common stock is adversely affected.
An Active, Liquid Market for Our Common Stock May Not Develop or Be Sustained, Which May Impair the Ability of Our
Shareholders to Sell Their Shares
We listed our common stock on the NYSE on March 26, 2015 under the symbol “FSB” in connection with our initial public
offering. Even though our common stock is now listed , there is limited trading volume and an active, liquid trading market for our
common stock may not develop or be sustained. A public trading market having the desired characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common
stock, over which we have no control. If an active, liquid trading market for our common stock does not develop, shareholders may
not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially
and adversely affect the value of our common stock. The market price of our common stock could decline significantly due to actual
or anticipated issuances or sales of our common stock in the future.
The Market Price of Our Common Stock May Fluctuate Significantly
The market price of our common stock could fluctuate significantly due to a number of factors, including, but not limited to:
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our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our operating results, financial condition or asset quality;
changes in economic or business conditions;
the public reaction to our press releases, other public announcements or statements and our filings with the SEC;
perceptions in the market place involving our competitors and/or us;
changes in business, legal or regulatory conditions, or other developments affecting participants in our industry, and
publicity regarding our business or any of our significant customers or competitors;
changes in governmental monetary policies, including the policies of the Federal Reserve;
regulatory actions that impact us, including actions taken by the Federal Reserve and the TDFI;
changes in financial estimates and recommendations by securities analysts following our stock, or the failure of securities
analysts to cover or continue to cover our common stock;
changes in earnings estimates by securities analysts or our performance as compared to those estimates;
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or
involving our competitors or us;
the trading volume of our common stock;
future sales of our common stock;
our treatment as an “emerging growth company” under federal securities laws;
additions or departures of key personnel;
changes in accounting standards, policies, guidance, interpretations or principles;
failure to integrate acquisitions or realize anticipated benefits from our acquisitions;
rapidly changing technology; and
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other news, announcements or disclosures (whether by us or others) related to us, our competitors, our core market or the
bank and non-bank financial services industries.
If any of the foregoing occurs, it could cause our stock price to fall and expose us to litigation that, even if our defense is
successful, could distract management and be costly to defend.
Shares of Our Common Stock Are Subject to Dilution and the Market Price of Our Common Stock Could Decline Due to the
Number of Outstanding Shares of Our Common Stock Eligible for Future Sale
Actual or anticipated issuances or sales of additional amounts of our common stock in the future could cause the market price of
our common stock to decline significantly and make it more difficult for us to sell equity securities in the future at a time and on terms
that we deem appropriate. The issuance of any shares of our common stock in the future also would dilute the percentage ownership
interest held by shareholders prior to such issuance. As of December 31, 2016, we had 13,036,954 shares of common stock issued and
outstanding. Of the outstanding shares of common stock, all of the 2,640,000 shares that were sold in our initial public offering are freely
tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act of 1933, as
amended (the “Securities Act”)), may be sold publicly only in compliance with certain limitations. In addition, 2,766,191 shares of our
outstanding common stock were issued pursuant to a registration statement on Form S-4 in connection with the acquisition of MidSouth
Bank in July 2014 and are freely tradable. On October 28, 2015, we filed a registration statement on Form S-8 under the Securities Act to
register an aggregate of 4,000,000 shares of our common stock for issuance under our 2007 Omnibus Equity Incentive Plan. In addition,
on November 30, 2015, we filed a registration statement on Form S-3 under the Securities Act to register, among other things, an
aggregate of 1,690,598 shares of our common stock held by our existing shareholders that are currently freely tradable. On November 21,
2016, we issued 2,242,500 shares of our common stock in an underwritten public offering pursuant to our effective shelf registration
statement on Form S-3. The remaining shares of our common stock may be sold in the market over time in accordance with Rule 144
under the Securities Act or otherwise in future public offerings. Accordingly, the market price of our common stock could be adversely
affected by actual or anticipated sales of a significant number of shares of our common stock in the future.
The Rights of Our Common Shareholders Are Subordinate to the Rights of the Holders of Our Outstanding Subordinated Notes
and Any Debt Securities That We May Issue in the Future and May Be Subordinate to the Holders of Any Class of Preferred Stock
That We May Issue in the Future
Shares of our common stock are equity interests and do not constitute indebtedness. As such, shares of our common stock rank
junior to all of our outstanding indebtedness, including our outstanding March 2016 Notes and our June 2016 Notes, and to other non-
equity claims against us and our assets available to satisfy claims against us, including in our liquidation. Additionally, our Board of
Directors has the authority to issue in the aggregate up to 1,000,000 shares of preferred stock and to determine the terms of each issue
of preferred stock without shareholder approval. Accordingly, you should assume that any shares of preferred stock that we may issue
in the future will also be senior to our common stock and could have a preference on liquidating distributions or a preference on
dividends that could limit our ability to pay dividends to the holders of our common stock. Upon our voluntary or involuntary
dissolution, liquidation, or winding up of affairs, holders of shares of our common stock will not receive a distribution, if any, until
after the payment in full of our debts and other liabilities, and the payment of any accrued but unpaid dividends and any liquidation
preference on outstanding shares of preferred stock. Because our decision to issue debt or equity securities or incur other borrowings
in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our
future capital-raising efforts is uncertain. Thus, common shareholders bear the risk that our future issuances of debt or equity
securities or our incurrence of other borrowings will negatively affect the market price of our common stock.
There Is No Certainty of Return on Investment
No assurance can be given that a holder of shares of our common stock will realize a substantial return on his or her investment,
or any return at all. Further, as a result of the uncertainty and risks associated with our operations as described in this “RISK
FACTORS” section, it is possible that an investor will lose his or her entire investment.
We Cannot Ensure When or If We Will Pay Dividends
Our ability to pay dividends is highly dependent on the Bank’s ability to pay dividends and may be limited based upon regulatory
restrictions and based upon our earnings and capital needs. The Bank is subject to various legal, regulatory and other restrictions on its
ability to pay dividends and make other distributions and payments to us. On November 3, 2016, the Bank entered into an informal
agreement with the Reserve Bank and the TDFI in the form of a MOU. Under the terms of the MOU, the Bank agreed, among other
things, to seek prior written approval of the Reserve Bank and the TDFI to pay dividends to FFN, which dividends are used primarily for
the purpose of servicing FFN’s subordinated debt. As a result, we cannot project or guarantee when dividends will be declared in the
future, if at all. Our Board of Directors has also decided to not pay dividends on common stock at this time.
27
We May Require Additional Capital
The Board of Directors believes that the current level of capital will be adequate at the present time to sustain the operations and
projected growth of FFN and the Bank and to enable FFN to service its debt. If FFN or the Bank fails to achieve sufficient financial
performance (including as a result of significant provision expense as a result of deterioration in asset quality) or if the assets of the
Bank grow more quickly than projected, management may determine, or government regulators may require, FFN or the Bank to raise
additional capital. In the event FFN or the Bank falls below certain regulatory capital adequacy standards, they may become subject to
regulatory intervention and restrictions. Although the Bank is currently “well capitalized,” under the terms of the MOU, the Bank
agreed, among other things, to enhance its capital and liquidity plans. We can give no assurance that such additional capital is
available at prices that will be acceptable to us, if at all. In the event of the issuance of additional shares, then current shareholders will
not have the first right to subscribe to new shares (preemptive rights), so their ownership percentage may be diluted in the future. In
addition, if FFN is not able to maintain sufficient capital at the holding company and the payment of dividends by the Bank to FFN is
not approved by the Reserve Bank and the TDFI, it may be unable to service its debt.
We Face Risks Related to Our Commercial Real Estate Loan Concentrations
Commercial real estate (“CRE”) is cyclical and poses risks of possible loss due to concentration levels and similar risks of the
asset class. As of December 31, 2016, approximately 56% of our loan portfolio consisted of CRE loans, including 28% of construction
and land development (“CLD”) loans, which present additional risks including underwriting risks, project risks and market risks. The
banking regulators give CRE lending greater scrutiny, and in connection with the MOU, has required us to implement improved
underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly requiring a re-assessment of
allowances for possible loan losses and capital levels as a result of CRE lending growth and exposures. In addition, while we believe
we have appropriate systems in place to underwrite and monitor the risks associated with CLD loans, if these systems do not
adequately protect us from these risks, we could incur losses that exceed our reserves for such losses, which could adversely impact
our earnings.
If We Are Unable to Decrease Our Use of Out of Market and Brokered Deposits, Our Costs May Be Higher Than Expected
Although we are increasing our effort to decrease our use of non-core funding sources, we can offer no assurance that we will be
able to increase our market share of core-deposit funding in our highly competitive service areas. If we are unable to do so, we may be
forced to accept increased amounts of out of market or brokered deposits. As of December 31, 2016, we had approximately
$466.4 million in out of market brokered deposits, which represented approximately 19.5% of our total deposits. The cost of out of
market and brokered deposits typically exceeds the cost of deposits in our local markets which will decrease our net income. In
addition, the cost of out of market and brokered deposits can be volatile, and if we are unable to access these types of deposits or if our
costs related to out of market and brokered deposits increases, our liquidity and ability to support demand for loans could be adversely
affected.
We Are an Emerging Growth Company and We Cannot Be Certain if the Reduced Disclosure Requirements Applicable to
Emerging Growth Companies Will Make Our Common Stock Less Attractive to Investors
We are an emerging growth company. For as long as we continue to be an emerging growth company, among other things, we
may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not
emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and
proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater
obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements
applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will
remain an emerging growth company for up to five years following the effectiveness of our Registration Statement on Form S-4,
which was declared effective by the SEC on May 14, 2014, though we may cease to be an emerging growth company earlier under
certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of
the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of
$700 million) or if our total annual gross revenues equal or exceed $1 billion in a fiscal year. We cannot predict if investors will find
our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as
a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
28
Anti-Takeover Provisions Could Adversely Affect Our Shareholders
Tennessee law and provisions contained in our charter, as amended, and our amended and restated bylaws could make it
difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. For example, our charter, as amended,
authorizes our Board of Directors to determine the designation, preferences, limitations and relative rights of unissued preferred stock,
without any vote or action by our shareholders. As a result, our Board of Directors could authorize and issue shares of preferred stock
with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock or with other
terms that could impede the completion of a merger, tender offer or other takeover attempt. In addition, certain provisions of
Tennessee law, including a provision which restricts certain business combinations between a Tennessee corporation and certain
interested shareholders, may delay, discourage or prevent an attempted acquisition or change in control of our company that some or
all of our shareholders might consider to be desirable. As a result, efforts by our shareholders to change the direction or management
of our company may be unsuccessful.
The ability of a third party to acquire us is also limited under applicable banking regulations. With certain limited exceptions,
federal regulations prohibit a person, a company or a group of persons deemed to be “acting in concert” from, directly or indirectly,
acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to
control in any manner the election of a majority of our directors or otherwise direct our management or policies without prior notice or
application to and the approval of the Federal Reserve. Companies investing in banks and bank holding companies receive additional
review and may be required to become bank holding companies, subject to regulatory supervision. Accordingly, prospective investors
must be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market
price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
FFN’s and the Bank’s main office and headquarters operation is located at 722 Columbia Avenue, Franklin, Tennessee 37064.
This location is leased by the Bank. The Bank operates branches at the following locations: 3359 Aspen Grove Drive, Suite 100,
Franklin, Tennessee 37067; 134 Pewitt Drive, Suite 100, Brentwood, Tennessee 37027; 1015 Westhaven Blvd., Suite 150, Franklin,
Tennessee 37064; 40 Moss Lane, Suite 100, Franklin, Tennessee 37064; 2035 Wall Street, Spring Hill, Tennessee 37174; 7177
Nolensville Road, Suite A3, Nolensville, Tennessee 37135; One East College Street, Murfreesboro, Tennessee 37130; 724 President
Place, Smyrna, Tennessee 37167; 2415 Memorial Boulevard, Murfreesboro, Tennessee 37129; 2782 South Church Street,
Murfreesboro, Tennessee 37127; and 2610 Old Fort Parkway, Murfreesboro, Tennessee 37128. The Bank also operates a mortgage
loan office at 123 East College Street, Murfreesboro, Tennessee 37130, and a loan production office at 33 Music Square West,
Nashville, Tennessee 37203. Twelve of these locations are leased by the Bank; two are owned. Certain lease agreements for these
properties are with entities owned by related parties of FFN and the Bank.
ITEM 3.
LEGAL PROCEEDINGS.
Neither we nor any subsidiary is aware of any pending or threatened material legal proceeding to which we or any such
subsidiary is a party. Similarly, none of the properties of us or any subsidiary is subject to such proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
29
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market Information and Holders
Our common stock began trading on the New York Stock Exchange (“NYSE”) on March 26, 2015, under the ticker symbol
“FSB”. Prior to March 26, 2015, our common stock traded on the OTCQB of the OTC Markets Group. The following table sets forth
the range of high and low sale prices of our common stock as reported on the NYSE and OTCQB, as applicable, for the periods
indicated since January 1, 2015. The OTCQB prices during the first quarter of 2015 as reflected in the table below reflect sporadic,
limited trading of our common stock, without retail mark-up, mark-down or commissions.
2016
First Quarter (January 1 to March 31)
Second Quarter (April 1 to June 30)
Third Quarter (July 1 to September 30)
Fourth Quarter (October 1 to December 31)
2015
First Quarter (January 1 to March 31)
Second Quarter (April 1 to June 30)
Third Quarter (July 1 to September 30)
Fourth Quarter (October 1 to December 31)
High
Low
$31.62
$33.53
$37.79
$42.80
$24.00
$23.10
$26.40
$33.26
$22.83
$24.80
$29.90
$29.85
$17.30
$19.25
$21.50
$21.79
As of February 28, 2017, we had 1,653 shareholders of record of our common stock.
Dividend Policy
We have not declared or paid any dividends on our common stock. We currently intend to retain all of our future earnings, if
any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future; however, our
Board of Directors may decide to declare dividends in the future. Payments of future dividends, if any, will be at the discretion of our
Board of Directors after taking into account various factors, including our business, operating results and financial condition, current
and anticipated cash needs, plans for expansion, tax considerations, general economic conditions and any legal or contractual
limitations on our ability to pay dividends. We are not obligated to pay dividends on our common stock.
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal
Reserve. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our
principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal,
regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us. The Bank currently
may not pay dividends without prior written approval from its primary regulatory agencies. See “BUSINESS—Supervision and
Regulation.” Under the terms of the MOU, the Bank agreed, among other things, to seek prior written approval of the Reserve Bank
and the TDFI to pay dividends to FFN. In addition, in the future we may enter into borrowing or other contractual arrangements that
restrict our ability to pay dividends.
30
Recent Sales of Unregistered Securities
Shares of the Company’s common stock were issued during the fourth quarter of 2016 pursuant to the exercise of warrants and
options issued by the Company, as follows:
Date of Sale
10/03/2016
10/13/2016
11/01/2016
11/16/2016
11/25/2016
12/05/2016
12/07/2016
12/08/2016
12/12/2016
12/13/2016
12/14/2016
12/15/2016
12/16/2016
Number of Shares of
Common Stock Sold
750
125
375
500
16,424
8,126
2,161
1,486
721
379
432
1,500
600
89
2,214
185
500
125
1,500
4,904
3,075
117
296
198
1,000
862
200
79
Type of Issuance
Warrants Exercised
Warrants Exercised
Warrants Exercised
Warrants Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Warrants Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Options Exercised
Price Per Share
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
12.00
12.00
12.00
12.00
10.00
12.00
13.00
13.50
20.69
13.50
20.69
10.00
12.50
13.00
13.50
20.69
10.00
12.00
10.00
12.00
10.00
13.00
13.50
20.69
10.00
10.00
13.50
20.69
Aggregate Price
$ 9,000.00
$ 1,500.00
$ 4,500.00
$ 6,000.00
$ 164,240.00
$ 97,512.00
$ 28,093.00
$ 20,061.00
$ 14,917.49
$ 5,116.50
$ 8,938.08
$ 15,000.00
$ 7,500.00
$ 1,157.00
$ 29,889.00
$ 3,827.65
$ 5,000.00
$ 1,500.00
$ 15,000.00
$ 58,848.00
$ 30,750.00
$ 1,521.00
$ 3,996.00
$ 4,096.62
$ 10,000.00
$ 8,620.00
$ 2,700.00
$ 1,634.51
Neither the exercises of the warrants and options nor their original issuances involved any underwriters, underwriting discounts
or commissions, or any public offering, and the Company believes that such transactions were exempt from the registration
requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act (or Rule 506 of Regulation D promulgated
thereunder) as transactions by an issuer not involving a public offering.
Equity Compensation Plan Information as of December 31, 2016
Plan Category
Equity Compensation
Plans Approved by
stockholders
Equity Compensation
Plans not approved by
stockholders
Total
Number of Securities to be
Issued upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights ($)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
1,411,873
$
16.64
2,014,652
0
1,411,873
$
$
0
16.64
0
2,014,652
31
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of
the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference
into any filing of Franklin Financial Network, Inc. under the Securities Act or the Exchange Act.
The following graph shows a comparison from March 26, 2015 (the date our common stock commenced trading on the NYSE)
through December 31, 2016 of the cumulative total return for our common stock, the NYSE Composite Index and the KBW Regional
Banks Index. The graph assumes that $100 was invested at the market close on March 26, 2015 in the common stock of Franklin
Financial Network, Inc., the NYSE Composite Index and the KBW Regional Banks Index and data assumes reinvestments of
dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Comparison of 22 Month Cumulative Total Return
Assumes Initial Investment of $100
December 2016
32
ITEM 6.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.
The following selected historical consolidated financial data as of and for the years ended December 31, 2016, 2015, 2014, 2013
and 2012, is derived from the audited consolidated financial statements of FFN.
(Amounts are in thousands, except ratios, per share data, banking locations and full time equivalent employees.)
SUMMARY OF OPERATIONS:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividend requirement
Net income available to common shareholders
PER COMMON SHARE DATA:
Basic earnings per share
Diluted earnings per share
Common equity per common share outstanding
Dividends per common share
Preferred shares outstanding
Actual common shares outstanding
Weighted average common shares outstanding,
including participating securities
Diluted weighted average common shares outstanding,
including participating securities
BALANCE SHEET DATA:
Assets
Loans held for sale
Loans, net of unearned income
Allowance for loan losses
Total securities
Total deposits
Federal Home Loan Bank advances
Other borrowed funds
Preferred shareholders’ equity
Common shareholders’ equity
Total shareholders’ equity
Noncontrolling interest in consolidated subsidiary
Total equity
Average total assets
Average loans(1)
Average interest-earning assets
Average deposits
Average interest-bearing deposits
Average interest-bearing liabilities
Average total shareholders’ equity
2016
2015
2014
2013
2012
Year ended December 31,
$ 99,907
18,323
81,584
5,240
76,344
15,140
51,681
39,803
11,746
28,057
(23)
$ 28,034
$
$
$
$
2.56
2.42
20.73
—
—
13,037
$ 68,721
9,306
59,415
5,030
54,385
12,830
42,114
25,101
9,021
16,080
(100)
$ 15,980
$
$
$
$
1.62
1.54
16.92
—
10
10,571
$ 43,432
5,739
37,693
2,374
35,319
10,051
31,822
13,548
5,134
8,414
(100)
8,314
$
$
$
$
$
1.32
1.27
14.41
—
10
7,756
$ 24,982
3,937
21,045
907
20,138
6,819
19,662
7,295
2,734
4,561
(109)
$ 4,452
1.13
$
$
1.10
$ 11.34
$ —
10
4,863
$ 20,004
4,048
15,956
1,548
14,408
8,645
16,857
6,196
2,056
4,140
(458)
$ 3,682
1.03
$
$
1.02
$ 11.42
$ —
10
3,621
10,933
9,885
6,320
3,934
3,561
11,608
10,390
6,557
4,038
3,624
$2,167,792
14,079
1,303,826
11,587
734,038
1,814,039
57,000
101,086
10,000
178,816
188,816
—
188,816
1,750,697
1,009,130
1,685,073
1,478,801
1,314,517
1,409,753
168,933
$1,355,827
18,462
787,188
6,680
449,037
1,172,233
19,000
39,078
10,000
111,799
121,799
—
121,799
1,049,689
609,714
1,008,156
896,674
796,569
848,993
97,567
$796,374
10,694
421,304
4,900
325,090
681,300
23,000
24,291
10,000
55,163
65,163
—
65,163
637,176
354,248
616,880
542,716
488,849
525,906
55,355
$577,762
15,355
299,483
3,983
219,933
514,643
8,000
1,602
10,000
41,356
51,356
—
51,356
517,091
274,816
503,215
450,133
410,387
425,786
49,540
$2,943,189
23,699
1,773,592
16,553
983,649
2,391,818
132,000
141,638
—
270,258
270,258
103
270,361
2,557,268
1,554,482
2,496,361
2,153,712
1,942,932
2,125,986
207,763
33
SELECTED FINANCIAL RATIOS:
Return on average assets
Return on average equity
Average equity to average total assets
Dividend payout
Efficiency ratio(2)
Net interest margin(3)(5)
Net interest spread(4)(5)
CAPITAL RATIOS:(6)
Common equity Tier 1 ratio
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
ASSET QUALITY RATIOS:
Net charge-offs to average loans
Allowance to period end loans(7)
Allowance for loan losses to non-performing loans
Non-performing assets to total assets
OTHER DATA:
Banking locations
Full-time equivalent employees
Year ended December 31,
2016
2015
2014
2013
2012
1.10%
13.50%
8.12%
— %
53.43%
3.42%
3.29%
0.92%
9.52%
9.65%
— %
58.29%
3.62%
3.51%
0.80%
8.62%
9.29%
— %
66.65%
3.74%
3.63%
0.72%
8.24%
8.69%
— %
70.56%
3.41%
3.30%
0.80%
8.36%
9.58%
— %
68.52%
3.17%
3.02%
11.75%
9.28%
11.75%
15.09%
10.08%
8.48%
10.51%
11.21%
N/A
8.57%
11.58%
12.30%
N/A
9.78%
13.83%
14.81%
N/A
9.27%
14.29%
15.45%
0.02%
0.93%
267.76%
0.21%
0.01%
0.89%
352.62%
0.16%
0.10%
0.85%
580.36%
0.14%
0.00%
1.16%
188.39%
0.35%
0.37%
1.33%
148.79%
0.82%
12
268
11
225
11
216
4
123
4
98
(2)
(5)
(1) Average loans include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred
origination fees and costs.
Efficiency ratio is non-interest expense divided by the sum of net interest income before the provision for loan losses plus non-
interest income.
(3) Net interest margin is net interest income (annualized for interim periods) divided by total average earning assets.
(4) Net interest spread is the difference between the average yield on interest-earning assets and the average yield on interest-
bearing liabilities.
Interest income and rates for 2016 and 2015 include the effects of tax-equivalent adjustments, which adjust tax-exempt interest
income on tax-exempt loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates
for 2014 and prior exclude the effects of tax-equivalent adjustments.
(6) Capital ratios calculated on consolidated financial statements for December 31, 2016, 2015, 2014 and 2013. Prior capital ratios
calculated on bank-only data.
Period end loans exclude loans held for sale and exclude deferred fees and costs.
(7)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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. We encourage you to read this discussion and analysis in
conjunction with Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” as well as other information included in
this Annual Report on Form 10-K. Unless otherwise noted, all amounts in this discussion are stated in thousands, with the exception of
number of shares or per share amounts.
34
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the
United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity
with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures
provided, and actual results could differ.
The Company’s accounting policies are integral to understanding the results reported. Accounting policies are described in
detail in Note 1 of the notes to the consolidated financial statements included elsewhere in this report. The critical accounting policies
require judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Management has established policies
and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to
period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief summary of the more significant policies:
Principles of Consolidation
The consolidated financial statements include Franklin Financial Network, Inc. and its wholly owned subsidiaries, Franklin
Synergy Bank and Franklin Synergy Risk Management, Inc., together referred to as “the Company.” The consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually
classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been
modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired.
35
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 potential designation as impaired. If a
loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash
flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of
estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral
dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default,
the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history
from the Bank’s peer group. This actual loss experience is supplemented with other economic factors based on the risks present for
each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and
impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk
selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of
changes in credit concentrations.
Mortgage Servicing Rights
When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect
recorded in gain on sale of loans. Fair value is based on market prices for comparable servicing contracts. All classes of servicing
assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest
income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.
Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type
and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is
less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular
grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with
loan servicing fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of
changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement as loan servicing fees, is recorded for fees earned for servicing
loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as
income when earned. The amortization of mortgage servicing rights is netted against mortgage loan servicing fee income.
Overview
The Company reported net income of $28,057 for the year ended December 31, 2016, compared to $16,080 for the year ended
December 31, 2015, and $8,414 for the year ended December 31, 2014. After the payment of preferred dividends on the senior
preferred stock issued to the Treasury pursuant to Small Business Lending Fund (“SBLF”), which shares of preferred stock the
Company redeemed on March 25, 2016, the Company’s net earnings available to common shareholders for the years ended
December 31, 2016, 2015 and 2014 were $28,034, $15,980, and $8,314, respectively. The primary reason for the increase in net
earnings available to common shareholders was increased interest income on loans and investment securities due to significant organic
growth in each of these portfolios during 2016 and 2015.
Net Interest Income/Margin
Net interest income consists of interest income generated by earning assets, less interest expense. Net interest income for the
years ended December 31, 2016, 2015 and 2014 totaled $81,584, $59,415, and $37,693, respectively, which are increases of $22,169,
or 37.3%, and 21,722, or 57.6%, respectively.
36
For the years ended December 31, 2016 and 2015, interest income increased $31,186 and $25,289 due to growth in both the
loan and investment securities portfolios. These were offset by increases of $9,017 and $3,567 in interest expense, which totaled
$18,323, $9,306 and $5,739, respectively, for the years ended December 31, 2016, 2015 and 2014, as a result of increases in interest-
bearing deposits and borrowings, with 2016 borrowing increases in Federal Home Loan Bank advances and subordinated notes.
Interest-earning assets averaged $2,496,361, $1,685,073, and $1,008,156 during the years ended December 31, 2016, 2015 and
2014, which are increases of $843,635, or 50.1%, and $676,917, or 67.1%, respectively. The increases in 2016 and 2015 were
primarily due to significant organic growth in loans and investment securities.
For the years ended December 31, 2016 and 2015, average loans increased 54.0% and 65.5%, respectively, and investment
securities increased 38.9% and 71.6%, respectively. The yield on average interest-earning assets decreased two basis points to 4.15%
during the year ended December 31, 2016, decreased 14 basis points to 4.17% during the year ended December 31, 2015, compared to
4.31% for the year ended December 31, 2014. The yields on average loans decreased 28 basis points during the year ended
December 31, 2016 and 19 basis points during the year ended December 31, 2015. These decreases were due to the reduced accretion
of discounts on purchased loans and due to lower interest rates on loans added to the loan portfolio.
For the years ended December 31, 2016, 2015 and 2014, the yield on available for sale securities was 2.49%, 2.44% and 2.59%,
respectively. The increase in yield in 2016 is due to the increased volume of tax-exempt municipal securities that were purchased in
2016 combined with the slowing of prepayment amortization during 2016.The primary driver for the decrease during 2015 was the
decline in coupon rate on the Company’s securities. During 2015, the yield related to coupon rate declined from 4.45% in 2014 to
4.14% in 2015.
For the years ended December 31, 2016, 2015 and 2014, the yield on held to maturity securities was 3.90%, 3.57% and 2.74%,
respectively. The increase in yields in 2016 and in 2015 was attributable to the increased volume of tax-exempt municipal securities
that have been purchased over the past two years, which increased the tax equivalent yield of the held to maturity portion of the
securities portfolio, combined with the slowing of prepayment amortization during 2016.
Interest-bearing liabilities averaged $2,125,986, $1,409,753, and $848,993, respectively, during the years ended December 31,
2016, 2015 and 2014, which are increases of $716,233, or 50.8%, during 2016 and $560,760, or 66.1%, during 2015. The increase for
2016 was primarily due to growth of average interest-bearing deposits and due to growth in Federal Home Loan Bank advances and
subordinated notes. The increase during 2015 was primarily attributed to growth of average interest-bearing deposits.
During 2016, total average interest-bearing deposits grew $628,415, which included increases in average interest checking of
$63,540, average money market accounts of $152,448, and average time deposits outstanding of $398,681. During 2015, total average
interest-bearing deposits grew $517,948, which included increases in average interest checking of $69,913, average money market
accounts of $163,945, and average time deposits outstanding of $272,399.
Rapid growth in the loan portfolio also resulted in an increase in average Federal Home Loan Bank advances of $48,490 and
$17,937, respectively in 2016 and 2015. The Company’s 2016 average borrowings increased by $39,276 due to two subordinated note
issuances during 2016, and average Federal funds purchased and other borrowings, including securities sold under agreement to
repurchased, increased by $24,875 during 2015.
The cost of average interest-bearing liabilities increased by 20 basis points to 0.86% during 2016 and decreased two basis points
to 0.66% during 2015. The increase in 2016 cost of interest-bearing liabilities was due to increases in rates on interest checking,
money market accounts, Federal Home Loan Bank advances and the subordinated notes that were added during 2016. The favorable
decline in 2015 was attributable to decreases in rates paid on money market accounts, time deposits, Federal Home Loan Bank
advances and Federal funds purchase and other borrowings.
37
The tables below summarize average balances, yields, cost of funds, and the analysis of changes in interest income and interest
expense for the years ended December 31, 2016, 2015, and 2014:
Average Balances(7)—Yields & Rates
(Dollars in thousands)
Year Ended December 31,
Average
Balance
2016
Interest
Inc/Exp
Average
Yield/Rate
Average
Balance
2015
Interest
Inc/Exp
Average
Yield/Rate
Average
Balance
2014
Interest
Inc/Exp
Average
Yield/Rate
ASSETS:
INTEREST-EARNING
ASSETS
Loans(1)(6)
Securities available for sale(6)
Securities held to maturity(6)
Restricted equity securities
Certificates of deposit at other
financial institutions
Federal funds sold and other(2)
TOTAL INTEREST
EARNING ASSETS
Allowance for loan losses
All other assets
TOTAL ASSETS
LIABILITIES & EQUITY:
INTEREST-BEARING
LIABILITIES
Deposits:
Interest checking
Money market
Savings
Time deposits
Federal funds purchased and
other(3)
Federal Home Loan Bank
advances
Subordinated notes and other
borrowings
TOTAL INTEREST BEARING
LIABILITIES
Demand deposits
Other liabilities
Total equity
TOTAL LIABILITIES AND
EQUITY
NET INTEREST SPREAD(4)
NET INTEREST INCOME
NET INTEREST MARGIN(5)
$ 1,554,482
666,745
203,884
9,904
$ 78,329
16,593
7,943
500
827
60,519
15
241
5.04%
2.49%
3.90%
5.05%
1.81%
0.40%
$ 1,009,130
545,878
80,932
6,940
$ 53,647
13,314
2,887
350
250
41,943
6
99
5.32%
2.44%
3.57%
5.04%
2.40%
0.24%
$ 609,714
307,723
57,576
4,368
$33,585
7,961
1,579
227
126
28,649
3
77
5.51%
2.59%
2.74%
5.20%
2.38%
0.27%
$ 2,496,361
(13,923 )
74,830
$ 2,557,268
$103,621
4.15%
$ 1,685,073
(8,398 )
74,022
$ 1,750,697
$ 70,303
4.17%
$1,008,156
(5,655 )
47,188
$1,049,689
$43,432
4.31%
$ 332,285
617,036
49,525
944,086
$ 1,411
3,853
162
8,808
0.42%
0.62%
0.33%
0.93%
$ 268,745
464,588
35,779
545,405
$
806
2,616
164
5,102
0.30%
0.56%
0.46%
0.94%
$ 198,832
300,643
24,088
273,006
$ 510
2,037
117
2,637
48,841
94,937
303
884
0.62%
48,789
0.93%
46,447
306
312
0.63%
23,914
0.67%
28,510
176
262
0.26%
0.68%
0.49%
0.97%
0.74%
0.92%
39,276
2,902
7.39%
—
—
— %
—
—
— %
$ 2,125,986
210,780
12,739
207,763
$ 2,557,268
$ 18,323
0.86%
$ 1,409,753
164,284
7,727
168,933
$ 1,750,697
$ 9,306
0.66%
$ 848,993
100,105
3,024
97,567
$1,049,689
$ 5,739
0.68%
$ 85,298
3.29%
3.42%
$ 60,997
3.51%
3.62%
$37,693
3.63%
3.74%
(1)
(2)
(7)
Loan balances include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred origination fees and
costs. Non-accrual loans are included in total loan balances.
Includes federal funds sold and interest-bearing deposits at the Federal Reserve Bank, the Federal Home Loan Bank and other financial
institutions.
Includes repurchase agreements.
Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(3)
(4)
(5) Represents net interest income divided by total average earning assets.
(6)
Interest income and rates for 2016 and 2015 include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt
loans and investment securities to a fully taxable basis. Due to immateriality, interest income and rates for years prior to 2015 exclude the effects
of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt loans and investment securities to a fully taxable basis.
Average balances are average daily balances.
38
The tables below detail the components of the changes in net interest income for the periods indicated. For each major category
of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volume and
changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute
changes in each category. The changes noted in the table below include tax equivalent adjustments, and as a result, will not agree to
the amounts reflected on the Company’s consolidated statements of income for the categories that have been adjusted to reflect tax
equivalent income.
Analysis of Changes in Interest Income and Expenses
INTEREST INCOME
Loans
Securities available for sale
Securities held to maturity
Restricted equity securities
Certificates of deposit at other financial
institutions
Federal funds sold and other
Net change year ended
December 31, 2016 versus
December 31, 2015
Net change year ended
December 31, 2015 versus
December 31, 2014
Volume
Rate
Net Change
Volume
Rate
Net Change
$ 29,035
2,946
4,383
149
$ (4,353)
333
673
1
$ 24,682
3,279
5,056
150
$ 22,001
6,161
641
134
$ (1,939)
(808)
667
(11)
$ 20,062
5,353
1,308
123
14
45
(5)
97
9
142
3
36
—
(14)
3
22
TOTAL INTEREST INCOME
$ 36,572
$ (3,254)
$ 33,318
$ 28,976
$ (2,105)
$ 26,871
INTEREST EXPENSE
Deposits
Interest checking
Money market accounts
Savings
Time deposits
Federal funds purchased and other
Federal Home Loan Bank advances
Subordinated notes and other borrowings
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provision for Loan Losses
$
206
867
62
3,800
2
325
2,902
$ 399
370
(64)
(94)
(5)
247
—
$
605
1,237
(2)
3,706
(3)
572
2,902
$
179
1,111
57
2,631
183
165
—
$ 117
(532)
(10)
(166)
(53)
(115)
—
$
296
579
47
2,465
130
50
—
$ 8,164
$ 853
$ 9,017
$ 4,326
$ (759)
$ 3,567
$ 28,408
$ (4,107)
$ 24,301
$ 24,650
$ (1,346)
$ 23,304
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in
management’s evaluation, should be adequate to provide coverage for probable losses incurred in the loan portfolio. The allowance is
increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.
The provision for loan losses was $5,240, $5,030 and $2,374 for the years ended December 31, 2016, 2015 and 2014,
respectively. The increase in provision amounts for 2016 and 2015 are due primarily to loan growth during 2016 and 2015.
Nonperforming loans at December 31, 2016, 2015 and 2014 totaled $6,182, $3,286, and $1,151, representing 0.3%, 0.3% and 0.1% of
total loans, respectively.
39
Non-Interest Income
Non-interest income for the years ended December 31, 2016, 2015 and 2014 was $15,140 $12,856 and $9,955, respectively. The
following is a summary of the components of non-interest income (in thousands):
Service charges on deposit accounts
Other service charges and fees
Net gains on sale of loans
Wealth management
Loan servicing fees, net
Gain on sales and calls of securities
Net (gain) loss on foreclosed assets
Other
Total non-interest income
Years Ended
December 31,
2016
2015
$
185
3,041
7,183
1,894
22
2,172
40
603
$
113
2,644
6,959
1,283
227
833
26
771
2016-2015
Percent
Increase
(Decrease)
Year Ended
December 31,
2014
2015-2014
Percent
Increase
(Decrease)
$
63.7%
15.0%
3.2%
47.6%
(90.3%)
160.7%
53.8%
(21.8%)
53
1,777
5,814
639
254
259
(96)
1,255
113.2%
48.8%
19.7%
100.8%
(10.6%)
221.6%
(127.1%)
(38.6%)
$ 15,140
$ 12,856
17.8%
$
9,955
29.1%
Service charges on deposit accounts increased 63.7% in 2016 and 113.2% in 2015 due to changes made to the Company’s
schedule of service charges and to the reduction of the amount of service charges waived.
Other service charges and fees for the year ended December 31, 2016 increased 15.0% from 2015, primarily due to increases in
unused commitment fees, other loan-related fees and ATM surcharge income. Other service charges and fees for the year ended
December 31, 2015 increased 48.8% from 2014, due to increased ATM surcharge income and increased nonsufficient funds charges
collected during the year.
Net gains on the sale of loans include net gains realized from the sales of mortgage loans and SBA loans. Net gains on the sale
of mortgage loans are based, in part, on differences between the carrying value of loans being sold to third-party investors and the
selling price. Also included are changes in the fair value of mortgage banking derivatives entered into by the Company to hedge the
change in interest rates on loan commitments prior to their sale in the secondary market. Fluctuations in mortgage interest rates,
changes in the demand for certain loans by investors, and whether servicing rights associated with the loans being sold are retained or
released all affect the net gains on mortgage loan sales. Net gains for the year ended December 31, 2016 were $7,183, an increase of
$224, or 3.2%, when compared to the year ended December 31, 2015. Net gains for the year ended December 31, 2015 were $6,959,
an increase of $1,145, or 19.7%, from the year ended December 31, 2014, primarily attributed to the volume of mortgage loans sold
during 2015. The increase was primarily due to improved pricing spread on mortgage loans sold. The Company recognized $5,636 in
pricing adjustment gains during 2015, compared to $3,455 during 2014, an increase of $2,181 or 63.1%.
Wealth management income is the commission earned based on the investment brokerage activities and volume related to the
Company’s wealth management clients. These commissions are also impacted by market conditions and will fluctuate from time to
time due to rises and declines in the investment markets. Wealth management income for 2016 was $1,894, an increase of 47.6%
when compared with 2015. Wealth management income for 2015 was $1,283, an increase of 100.8% when compared with 2014. The
increases in wealth management income for 2016 and 2015 are attributable to the growth in assets under management and the growth
in the investment markets during 2016 and 2015.
Loan servicing fees are fees earned for servicing residential mortgages and SBA loans offset by the amortization of the related
servicing rights. These servicing rights are initially recorded at fair value and then amortized in proportion to, and over the period of,
the estimated life of the underlying loans. In addition, impairment to the mortgage servicing rights may be recognized through a
valuation allowance, and adjustments to the allowance can affect the net loan servicing fees. For the year ended December 31, 2016,
net loan servicing fees were $22 compared to $227 for the year ended December 31, 2015. For the year ended December 31, 2015, net
loan servicing fees were $227 compared to $254 for the year ended December 31, 2014. The decrease in servicing fees in 2016 and
2015 is attributable to the increase in amortization during both years.
Gains on sales and calls of securities for the year ended December 31, 2016 amounted to $2,172, an increase of $1,339, or
160.7%, when compared with the same period in 2015. For the year ended December 31, 2015, gains on sales and calls of securities
increased $259, or 221.6%, when compared with the year ended December 31, 2014. The increases for 2016 and 2015 are attributed to
the repositioning of the Company’s investment portfolio over the past two years, during which time management has increased
investments in tax-exempt municipal securities in a strategic initiative related to the Company’s tax position.
40
Other non-interest income decreased $168, or 21.8%, when comparing the years ended December 31, 2016 and 2015, and it
decreased $484, or 38.6%, when comparing the years ended December 31, 2015 and 2014. The decrease in other non-interest income
for 2016 is attributable to the $98 loss on the sale of two properties of the Bank on College Street in downtown Murfreesboro,
Tennessee, and to the reduction of investment services income due to the Company no longer offering that service to other banks. The
decrease in other non-interest income for 2015 is primarily attributed to the decrease in compliance fee income due to the Company’s
2014 sale of its subsidiary that provided compliance services.
Non-interest Expense
Non-interest expense for the years ended December 31, 2016, 2015 and 2014 was $51,681, $42,140 and $31,726, respectively.
This increase was the result of the following components listed in the table below (in thousands):
Salaries and employee benefits
Occupancy and equipment
FDIC assessment expense
Marketing
Professional fees
Other
Total non-interest expense
Years Ended
December 31,
2016
$ 30,029
7,627
2,068
762
3,546
7,649
2015
$ 24,040
6,589
1,167
956
2,425
6,963
2016-2015
Percent
Increase
(Decrease)
24.9%
15.8%
77.2%
(20.3%)
46.2%
9.9%
$
Year Ended
December 31,
2014
19,160
4,729
600
728
2,040
4,469
$ 51,681
$ 42,140
22.6%
$
31,726
2015-2014
Percent
Increase
(Decrease)
25.5%
39.3%
94.5%
31.3%
18.9%
55.8%
32.8%
The increase in non-interest expense noted in the table above is relative to the Company’s overall current growth. One of the
major increases was in salaries and employee benefits. When comparing 2016, 2015 and 2014, salaries and employee benefits
increased as a result of the increasing the Company’s full-time equivalent employees from 218 as of December 31, 2014 to 225 as of
December 31, 2015, and then significantly to 268 as of December 31, 2016. The increase in 2016 is attributable to the Company’s
building infrastructure to support the Company’s growth and to support the Company’s ongoing compliance initiatives.
During 2016, salaries and employee benefits expense increased 24.9%, with increases in salary expense and mortgage
commissions being the largest attributes of the increase. Salary expense increased due to the addition of a variety of personnel, i.e.,
experienced lenders, compliance and operational personnel, etc. During 2015, salaries and employee benefits expense increased
25.5%, with increases in salary expense and mortgage commissions being the largest attributes of the increase. Salary expense
increased due to the addition of experienced lenders and their related support personnel, including a lending team that specialized in
healthcare and other types of commercial lending. Mortgage commissions increased in 2016 and 2015 due to increased volume of
mortgage loans originated during those two years.
The increase in occupancy and equipment expense during 2016 is attributable to the addition of a new branch location in
Nolensville, Tennessee, the addition of the loan production office in Nashville, Tennessee and the addition of the mortgage loan
operations facility on the campus of the Company’s headquarters in Franklin, Tennessee. The increase in occupancy and equipment
expense during 2015 is attributable to increases in building rent expense from the expansion of the Company’s headquarters in
Franklin, Tennessee and the Rutherford County properties sold and leased back during 2015; and increased depreciation expenses
related to the furniture, equipment and leasehold improvements that have been added as a result of the Company’s facilities growth.
The Company’s FDIC assessment increased in 2016 due to the Company’s growth in assets during the year coupled with the
new assessment calculation model instituted by the FDIC during 2016 which, due to the Company’s asset growth, loan mix and use of
brokered deposits, increased the Company’s FDIC assessment expenses beginning in the third quarter of 2016. The Company’s FDIC
assessement increased in 2015 due to the Company’s growth in assets during the year.
The decrease in marketing expenses during 2016 is attributed to the Company’s scaling back of some of its marketing initiatives
while assessing the benefits and uses for various media sources. The increase in marketing expenses during 2015 is attributed to
increased marketing and public relations efforts to further the growth of the Company.
The 46.2% increase in professional fees during 2016 is related to increases in several types of expenses, as follows: other
professional fees ($703) regulatory compliance expense ($211), merger expenses ($188), and brokerage settlement expenses ($137).
The following types of expenses are included in other professional fees: consulting engagements that include design and
implementation of subsidiary companies and lending process optimization initiatives, asset/liability management services, human
resources services, talent recruitment services, information technology security, trust operations outsourcing, and corporate
41
communications. The 18.9% increase in professional fees during 2015 is attributed to increases in legal fees ($255), audit/accounting
fees ($283) and brokerage settlement expenses ($188). These increases were offset by a decrease of $429 in other professional fees
due to the volume of expenses incurred in 2014 related to an acquisition.
Other noninterest expense increased $686, or 9.9%, during 2016 and $2,494, or 55.8%, during 2015 due to a number of different
types of expenses. During 2016, the larger increases included the following: insurance expense ($256); franchise taxes ($194);
regulatory compliance expense ($119); electronic banking expense ($118); and ATM-related expenses ($112). These were offset by a
decrease in deposit account losses of $124. During 2015, the larger increases included the following: loan-related expenses ($434);
insurance expense ($366); indirect costs associated with the Company’s initial public offering ($326); amortization of core deposit
intangible ($293); ATM-related expenses ($196); franchise taxes ($177); and telecommunications ($122).
Income Tax Expense
The Company recognized an income tax expense for the years ended December 31, 2016, 2015, and 2014 of $11,746, $9,021,
and $5,134, respectively. The Company’s year-to-date income tax expense for the years ended December 31, 2016, 2015, and 2014
reflects effective income tax rates 29.5%, 35.9%, and 37.9%, respectively. The decrease in the effective tax rate for 2016 is attributed
to adoption of Accounting Standard Update 2016-09, which decreased the Company’s income tax expense for 2016 by just over
$1 million. In addition, the increase in the Company’s tax-exempt investment securities played a part in decreasing the Company’s
effect tax rate for 2016. The decrease in the effective tax rate for 2015 is attributed to the increase in the Company’s tax-exempt
investment securities, and the increase in the effective tax rate in 2014 resulted from unfavorable permanent differences arising from
expenses associated with the MidSouth acquisition and from stock-based compensation expense incurred from the vesting of incentive
stock options as a result of employee retirement.
Return on Equity and Assets
The following schedule details selected key ratios for the years ended December 31, 2016, 2015 and 2014:
Return on assets
(net income divided by average total assets)
Return on equity
(Net income divided by average equity)
Dividend payout ratio
2016
2015
2014
1.10%
0.92%
0.80%
13.50%
9.52%
8.62%
(Dividends declared per share divided by net income per share)
— %
— %
— %
Equity to asset ratio
(Average equity divided by average total assets)
8.12%
9.65%
9.29%
Leverage capital ratio
(Equity divided by fourth quarter average total assets, excluding
accumulated other comprehensive income)
9.28%
8.48%
8.57%
The minimum leverage capital ratio required by the regulatory agencies is 4.00%.
42
Under guidelines developed by regulatory agencies a “risk weight” is assigned to various categories of assets and commitments
ranging from 0% to 300% based on the risk associated with the asset. The following schedule details the Bank’s risk-based capital at
December 31, 2016 excluding the net unrealized gain on available-for-sale securities which is shown as an addition in stockholders’
equity in the consolidated financial statements:
Common Equity Tier 1 capital:
Stockholders’ equity, excluding accumulated other
comprehensive income, disallowed goodwill, other disallowed
intangible assets and disallowed servicing assets
$
263,693
In Thousands,
Except
Percentages
Tier 1 capital:
Common Equity Tier 1 capital plus additional tier 1 capital
instruments and related surplus, less additional tier 1 capital
deductions
Tier 2 capital:
Tier 2 capital instruments plus related surplus
Total capital minority interest that is not included in tier 1 capital
Allowable allowance for loan losses (limited to 1.25% of gross
risk-weighted assets)
Total risk-based capital
Risk-weighted assets, gross
Less: Excess allowance for loan and lease losses
Risk-weighted assets, net
Risk-based capital ratios:
Common Equity Tier 1 risk-based capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
$
263,693
58,337
92
16,553
$
338,675
$ 2,244,932
—
$ 2,244,932
11.75 %
11.75 %
15.09 %
The minimum Common Equity Tier 1 risk-based capital ratio required by the regulatory agencies is 4.50%. Tier 1 risk-based
capital ratio required by the regulatory agencies is 6.00%, and the minimum total risk-based capital ratio required is 8.00%. At
December 31, 2016, the Company was in compliance with these requirements.
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 2016 and DECEMBER 31, 2015
Overview
The Company’s total assets increased by $775,397, or 35.8%, from December 31, 2015 to December 31, 2016. The increase in
total assets was funded by the Company’s subordinated debt offerings in the first and second quarters of 2016 and its secondary public
offering that was completed in the fourth quarter of 2016, which allowed for organic growth in both the loan portfolio and the
investment portfolio.
The following table presents the growth experienced by the Company when comparing selected balance sheet totals from
December 31, 2016 and 2015:
In Thousands
Total Loans
Total Securities
Total Assets
Total Deposits
Total Liabilities
Total Equity
Dec 31, 2016
$ 1,773,592
983,649
2,943,189
2,391,818
2,672,828
270,361
Dec 31, 2015
$ 1,303,826
734,038
2,167,792
1,814,039
1,978,976
188,816
Growth
$469,766
249,611
775,397
577,779
693,852
81,545
Growth
Percentage
36.0%
34.0%
35.8%
31.9%
35.1%
43.2%
43
Loans Held For Sale
At December 31, 2016, the Company had $23,699 in mortgage loans held for sale, compared to $14,079 as of December 31,
2015, an increase of 68.3%. The increase is attributable to the volume of loans closed and in the process of being sold to investors at
December 31, 2016 as compared to December 31, 2015. For the years ended December 31, 2016, 2015 and 2014, the Company
recorded gains from sales of mortgage loans totaling $7,183, $6,959, and $5,814, respectively.
Loans
Lending-related income is the most important component of the Company’s net interest income and is a major contributor to
profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues.
The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest
margin as loans are expected to produce higher yields than securities and other earning assets. Total loans, net of deferred fees, at
December 31, 2016 and 2015 were $1,773,592 and $1,303,826, respectively, an increase of $469,766, or 36.0%. This growth in the
loan portfolio is due to increased market penetration and a healthy local economy, as well as the addition of several experienced
lending officers.
The table below provides a summary of the loan portfolio composition for the periods noted.
Types of Loans
Total loans, excluding PCI loans
Real estate:
Construction and land development
Commercial
Residential
Commercial and industrial
Consumer and other
2016
2015
2014
2013
2012
As of December 31,
$ 489,562
497,140
404,989
376,476
3,359
$ 372,767
364,223
274,934
283,888
6,577
$239,225
246,352
213,760
76,570
8,025
$113,710
125,202
138,466
36,397
8,250
$ 83,767
77,682
106,589
20,280
11,758
Total loans—gross, excluding PCI loans
1,771,526
1,302,389
783,932
422,025
300,076
Total PCI loans(1)
Total gross loans
Less: deferred loan fees, net
Allowance for loan losses
2,859
3,913
4,315
—
—
1,774,385
(793)
(16,553)
1,306,302
(2,476)
(11,587)
788,247
(1,059)
(6,680)
422,025
(721)
(4,900)
300,076
(593)
(3,983)
Total loans, net allowance for loan losses
$1,757,039
$1,292,239
$780,508
$416,404
$295,500
(1)
PCI accounted for pursuant to ASC Topic 310-30.
As presented in the above table, gross loans increased $468,083, or 35.8%, during 2016. During 2016, the Company
experienced growth in real estate loans of 37.3%, with the growth occurring in the construction and land development (31.3%),
commercial real estate (36.1%) and residential real estate (47.2%) segments. The Company also experienced solid growth of 32.5% in
the commercial and industrial segment during 2016.
Real estate loans comprised 78.5% of the loan portfolio at December 31, 2016. The largest portion of the real estate segments of
the portfolio as of December 31, 2016, was commercial real estate loans, which totaled $497,534 at December 31, 2016, comprising
35.7% of real estate loans and 28.0% of the total loan portfolio. The commercial real estate loan classification primarily includes
commercial-based mortgage loans that are secured by nonfarm, nonresidential real estate properties and multi-family residential
properties.
Construction and land development loans totaled, $489,562, or 36.8%, of real estate loans and comprised 27.6% of the total loan
portfolio at December 31, 2016. Loans in this classification provide financing for the construction and development of residential
properties and commercial income properties, multi-family residential development, and land designated for future development.
The residential real estate classification primarily includes 1-4 family residential loans which are typically conventional first-
lien home mortgages or junior lien mortgages, not including loans held-for-sale in the secondary market. Residential real estate loans
totaled $405,485 and comprised 29.1% of real estate loans and 22.9% of total loans at December 31, 2016.
44
Commercial and industrial loans consist of commercial loans, including healthcare loans, to various sizes of businesses that are
primarily secured by commercial assets, such as inventories, business equipment, receivables and other commercial assets. At
December 31, 2016, commercial and industrial loans made up 21.3% of the total loan portfolio, and healthcare loans comprised 41.0%
of the Company’s commercial and industrial loans at December 31, 2016.
The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the loans maturing
within specific intervals at December 31, 2016, excluding unearned net fees and costs.
Real estate:
Construction and land development
Commercial
Residential
Commercial and industrial
Consumer and other
Total
Fixed interest rate
Variable interest rate
Total
Loan Maturity Schedule
December 31, 2016
One year
or less
$254,953
31,247
26,788
53,573
1,624
$368,185
$216,469
151,716
$368,185
Over one
year to five
years
$ 161,590
125,384
108,780
271,253
1,581
$ 668,588
$ 341,690
326,898
$ 668,588
Over five
years
$ 73,019
340,903
269,917
53,619
154
$737,612
$284,482
453,130
$737,612
Total
$ 489,562
497,534
405,485
378,445
3,359
$ 1,774,385
$ 842,641
931,744
$ 1,774,385
The information presented in the above table is based upon the contractual maturities of the individual loans, including loans
which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well
as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure
of the loan portfolio.
Allowance for Loan Losses
•
The Company maintains an allowance for loan losses that management believes is adequate to absorb the probable incurred
losses in the Company’s loan portfolio. The allowance is increased by provisions for loan losses charged to earnings and is decreased
by loan charge-offs net of recoveries of prior period loan charge-offs. The level of the allowance is determined on a quarterly basis,
although management is engaged in monitoring the adequacy of the allowance on a more frequent basis. In estimating the allowance
balance, the following factors are considered:
past loan experience;
the nature and volume of the portfolio;
risks known about specific borrowers;
underlying estimated values of collateral securing loans;
current and anticipated economic conditions; and
other factors which may affect the allowance for probable incurred losses.
•
•
•
•
•
The allowance for loan losses consists of two primary components: (1) a specific component which relates to loans that are
individually classified as impaired and (2) a general component which covers non-impaired loans and is based on historical loss
experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on a
combination of the Company’s loss history and loss history from a peer group. This actual loss experience is supplemented with other
economic factors based on the risks present for each portfolio segment.
The following loan portfolio segments have been identified: (1) Construction and land development loans, (2) Commercial real
estate loans, (3) Residential real estate, (4) Commercial and industrial loans, and (5) Consumer and other loans. Management
evaluates the risks associated with these segments based upon specific characteristics associated with the loan segments. These risk
characteristics include, but are not limited to, the value of the underlying collateral, adverse economic conditions, and the borrower’s
cash flow. While the total allowance consists of a specific portion and a general portion, both portions of the allowance are available
to provide for probable incurred loan losses in the entire portfolio.
45
In the table below, the components, as discussed above, of the allowance for loan losses are shown at December 31, 2016 and
2015.
December 31, 2016
December 31, 2015
Increase (Decrease)
Loan
Balance
ALLL
Balance
%
Loan
Balance
ALLL
Balance
%
Loan
Balance
ALLL
Balance
$ 1,687,244
$ 15,506
0.92%
$ 1,198,891
$ 11,465
0.96%
$ 488,353
$4,041
-4 bps
74,373
9,909
1,771,526
2,859
23
1,024
16,553
—
0.03%
10.33%
0.93%
— %
99,328
4,170
1,302,389
3,913
—
113
11,578
9
— %
2.71%
0.89%
0.23%
(24,955)
5,739
469,137
(1,054)
23
911
4,975
(9)
3 bps
762 bps
4 bps
-23 bps
Non impaired
loans
Non-PCI
acquired
loans(1)
Impaired loans
Non-PCI loans
PCI loans
Total loans
$ 1,774,385
$ 16,553
0.93%
$ 1,306,302
$ 11,587
0.89%
$ 468,083
$4,966
4 bps
(1)
Loans acquired pursuant to the July 1, 2014 acquisition of MidSouth that are not PCI loans. These are performing loans
recorded at estimated fair value at the acquisition date. This fair value discount established at acquisition is accreted into interest
income over the remaining lives of the related loans on a level yield basis. The remaining fair value discount balance at
December 31, 2016 related to the non-PCI acquired loans was $2,006, or 2.7% of the outstanding aggregate loan balances. At
December 31, 2015, one of the PCI loans was identified as impaired beyond the extent of its recorded discount, and an
allowance for loan loss of $9 was recorded related to the acquired loans.
At December 31, 2016, the allowance for loan losses was $16,553, compared to $11,587 at December 31, 2015. The allowance
for loan losses as a percentage of total loans was 0.93% and 0.89% at December 31, 2016 and 2015, respectively. Loan growth in
addition to an increase in impaired loans during the period is the primary reason for the increase in the allowance for loan losses.
The table below sets forth the activity in the allowance for loan losses for the years presented.
Beginning balance
Loans charged-off:
Construction & land development
Commercial real estate
Residential real estate
Commercial & industrial
Consumer
Total loans charged-off
Recoveries on loans previously charged-off:
Construction & land development
Commercial real estate
Residential real estate
Commercial & industrial
Consumer
Total loan recoveries
Net recoveries (charge-offs)
Provision for loan losses charged to expense
2016
$ 11,587
2015
$
6,680
2014
$ 4,900
2013
$ 3,983
2012
$ 3,413
(11)
—
(40)
(255)
(42)
(348)
—
—
66
1
7
74
(274)
5,240
—
—
(32)
(48)
(135)
(215)
—
—
26
1
65
92
(123)
5,030
—
(540)
(61)
(58)
—
—
—
(107)
(19)
—
(25)
(575)
(443)
—
(7)
(659)
(126)
(1,050)
—
—
65
—
—
65
(594)
2,374
—
—
136
—
—
136
10
907
58
—
14
—
—
72
(978)
1,548
Total allowance at end of period
$ 16,553
$ 11,587
$ 6,680
$ 4,900
$ 3,983
Total loans, gross, at end of period(1)
$1,774,385
$1,306,302
$788,247
$422,025
$300,076
Average gross loans(1)
Allowance to total loans
Net charge-offs to average loans
$1,574,387
$ 997,873
$594,974
$343,697
$266,326
0.93%
0.02%
0.89%
0.01%
0.85%
0.10%
1.16%
0.00%
1.33%
0.37%
(1)
Loan balances exclude loans held for sale
46
While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is
available to absorb losses from any and all loans, the following table summarizes the allocation of allowance for loan losses by loan
category and loans in each category as a percentage of total loans, for the periods presented.
Real estate loans:
Construction and land development
Commercial
Residential
Total real estate
Commercial and industrial
Consumer and other
2016
2015
2014
2013
2012
$ 3,776
4,266
2,398
10,440
6,068
45
$ 3,186
3,146
1,861
8,193
3,358
36
$ 2,690
1,494
1,791
5,975
650
55
$ 1,552
1,511
1,402
4,465
337
98
$ 1,342
1,267
893
3,502
275
206
$ 16,553
$ 11,587
$ 6,680
$ 4,900
$ 3,983
Fluctuations in the allocations during the periods presented are due, in part, to changes in the specific reserve factors assigned to
each category of loans. The Corporation has relied heavily on the loss history of peer groups due to the lack of its own history of
losses; therefore, reserve factors have been adjusted in accordance with the loss performance experienced by a select group of local
peer banks. Allocations between categories of loans have also been affected by the change in the mix of loans among the categories.
As of December 31, 2016, the largest component of the allowance for loan losses was associated with commercial and industrial
loans, followed by commercial real estate loans and construction and land development loans. The increase on these reserves as a
percentage of the total allowance in these categories was primarily due to significant loan growth in these portfolio segments and, in
the commercial and industrial loans, the specific allowance related to impaired loans. Commercial and industrial loans grew 32.5%
from $285,700, or 21.9% of total loans at the end of 2015, to $378,445, or 21.3% of total loans at year-end 2016. During 2016,
construction and land development loans increased from $372,845 at December 31, 2015 to $489,562 at December 31, 2016, an
increase of 31.3%. During the same period, commercial real estate loans increased 36.1%, from $365,683 at December 31, 2015 to
$497,534 at December 31, 2016.
Nonperforming Assets
Nonperforming loans consist of non-accrual loans and loans that are past due 90 days or more and still accruing interest.
Nonperforming assets consist of nonperforming loans plus OREO (i.e. real estate acquired through foreclosure or deed in lieu of
foreclosure). Loans are placed on non-accrual status when they are past due 90 days and management believes the borrower’s
financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is
doubtful. When a loan is placed on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against
current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
The primary component of nonperforming loans is non-accrual loans, which as of December 31, 2016 totaled $3,630. The other
component of nonperforming loans are loans past due greater than 90 days and still accruing interest. Loans past due greater than
90 days are placed on non-accrual status unless they are both well-secured and in the process of collection. There were outstanding
loans totaling $2,552 that were past due 90 days or more and still accruing interest at December 31, 2016.
47
The table below summarizes nonperforming loans and assets for the periods presented.
Non-accrual loans
Past due loans 90 days or more and still accruing interest
Total nonperforming loans
Foreclosed real estate (“OREO”)
Total nonperforming assets
2016
$3,630
2,552
6,182
—
$6,182
2015
$ 908
2,378
3,286
200
$3,486
December 31,
2014
$ 835
316
1,151
715
$1,866
2013
$2,601
—
2,601
181
$2,782
2012
$2,677
—
2,677
2,089
$4,766
Total nonperforming loans as a percentage of total loans
Total nonperforming assets as a percentage of total assets
Allowance for loan losses as a percentage of nonperforming loans
0.3%
0.2%
268%
0.3%
0.2%
353%
0.1%
0.1%
580%
0.6%
0.3%
188%
0.9%
0.8%
149%
As of December 31, 2016, there were five loans on non-accrual status. The amount and number are further delineated by
collateral category and number of loans in the table below.
Construction & land development
Commercial real estate
Residential real estate
Commercial & industrial
Consumer
Total non-accrual loans
Total Amount
—
$
835
121
2,674
—
$
3,630
Percentage of Total
Non-Accrual Loans
Number of
Non-Accrual
Loans
— %
23.0%
3.3%
73.7%
—
100.0%
—
1
1
3
—
5
Troubled debt restructurings (TDRs) are modified loans in which a concession is provided to a borrower experiencing financial
difficulties. Loan modifications are considered TDRs when the concession provided is not available to the borrower through either
normal channels or other sources; however, not all loan modifications are TDRs. Our standards relating to loan modifications
consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations; however, each
potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific
circumstances at a point in time. TDRs can be classified as either accrual or non-accrual loans. Non-accrual TDRs are included in non-
accrual loans whereas accruing TDRs are excluded because the borrower remains contractually current. The Company had one loan
for $698 classified as an accrual TDR as of December 31, 2016, and Company had no TDRs as of December 31, 2015.
Generally, loans that are current as to principal and interest are not included in our nonperforming assets categories; however, a
loan that is current may be classified as a potential problem loan if doubts arise about the borrower’s future performance under the
terms of the loan contract. Loans are assigned 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. Loans are analyzed individually when classifying the loans as to credit risk.
The following definitions are used for assigning risk ratings to loans:
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.
48
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.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
“Pass” rated loans. All loans in all loan categories are assigned risk ratings. As of December 31, 2016, and based on the most recent
analysis performed, the risk category of loans by class of loans is as follows:
Real estate loans:
Construction and land development
Commercial
Residential
Total real estate
Commercial and industrial
Consumer and other
Total
Investment Securities
(Dollars in Thousands)
Pass
Special
Mention
Substandard
Doubtful
Total
$ 488,287
487,944
401,423
$ —
1,847
—
$
1,275
7,743
4,062
$ —
—
—
$ 489,562
497,534
405,485
1,377,654
1,847
13,080
—
1,392,581
373,243
3,359
—
—
5,202
—
—
—
378,445
3,359
$ 1,754,256
$ 1,847
$
18,282
$ —
$1,774,385
The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability
management and a source of stable income. The portfolio is structured with the goal of minimizing credit exposure to the Company
and consists of both securities classified as available-for-sale and securities classified as held-to-maturity. All available-for sale
securities are carried at fair value and may be used for liquidity purposes should management deem it to be in the Company’s best
interest. Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and mortgage-backed securities,
were $754,755 at December 31, 2016, compared to $575,838 at December 31, 2015, an increase of $178,917, or 31.1%. The increase
in available-for-sale securities was primarily attributed to the Company’s leverage program, which was used to invest funds received
in the Company’s subordinated debt offerings in the first and second quarters of 2016 and its secondary public offering in November
2016. The growth in available for sale securities was also used as a strategy to provide tax-exempt income for the Company and to
provide for pledging related to the Company’s public funds deposits.
The Company’s held-to-maturity securities are carried at amortized cost. This portfolio, consisting of U.S. government
sponsored enterprises, mortgage-backed securities and municipal securities, totaled $228,894 at December 31, 2016, compared to
$158,200 at December 31, 2015, an increase of $70,694, or 44.7%, also as a part of the Company’s leverage program and to provide
for pledging related to the Company’s public funds deposits.
The combined portfolios represented 33.4% and 33.9% of total assets at December 31, 2016, and December 31, 2015,
respectively. At December 31, 2016, the Company had no securities that were classified as having other than temporary impairment.
49
The following table summarizes the fair value of the available for sale securities portfolio at December 31, 2016, 2015 and
2014:
U.S. government sponsored entities and agencies
U.S. Treasury securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total
December 31,
2016
December 31,
2015
$
—
—
607,085
19,334
128,336
$
6,817
—
500,955
19,835
48,231
$ 754,755
$ 575,838
$
December 31,
2014
30,173
20,000
339,067
6,465
—
$ 395,705
The following table summarizes the amortized cost of the held to maturity securities portfolio at December 31, 2016, 2015 and
2014:
U.S. government sponsored entities and agencies
Mortgage-backed securities: residential
State and political subdivisions
Total
December 31,
2016
$
203
106,170
122,522
December 31,
2015
$
3,300
30,398
124,502
December 31,
2014
$
5,550
38,587
9,195
$ 228,894
$ 158,200
$
53,332
The table below presents the maturities and yield characteristics of the Company’s available-for-sale securities as of
December 31, 2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Mortgage-backed securities: residential(1)
Mortgage-backed securities: commercial(1)
State and political subdivisions
(Dollars in Thousands)
One Year
or Less
$ —
—
17,600
Over
One Year
Through
Five Years
$ 343,546
19,439
—
Over
Five Years
Through
Ten Years
$ 270,798
—
88,227
Over
Ten Years
$ —
—
27,453
Total
Maturities
$ 614,344
19,439
133,280
Fair
Value
$607,085
19,334
128,336
Total available-for-sale securities
$ 17,600
$ 362,985
$ 359,058
$ 27,453
$ 767,063
$754,755
Percent of total
Weighted average yield(2)
2.29%
1.15%
47.32%
2.25%
46.81%
3.26%
3.58%
4.59%
100.00%
2.78%
(1) Mortgage-backed securities are grouped into average lives based on December 2016 prepayment projections.
(2) The weighted average yields are based on amortized cost, and municipal securities are calculated on a fully tax-equivalent basis.
50
The table below presents the maturities and yield characteristics of the Company’s held-to-maturity securities as of
December 31, 2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
U.S. government sponsored entities and
agencies
Mortgage-backed securities: residential(1)
State and political subdivisions
(Dollars in Thousands)
Over
One Year
Through
Five Years
Over
Five Years
Through
Ten Years
Over
Ten Years
Total
Maturities
Fair
Value
$ —
72,729
6,263
$ —
19,082
89,061
$ —
13,794
27,198
203
$
106,169
122,522
209
$
104,154
123,529
One Year
or Less
$
203
564
—
Total held-to-maturity securities
$
767
$ 78,992
$ 108,143
$ 40,992
$ 228,894
$ 227,892
Percent of total
Weighted average yield(2)
0.33%
2.68%
34.51%
2.46%
47.25%
5.34%
17.91%
4.94%
100.0%
4.27%
(1) Mortgage-backed securities are grouped into average lives based on December 2016 prepayment projections.
(2) The weighted average yields are based on amortized cost and municipal securities are calculated on a fully tax-equivalent basis.
Securities pledged at December 31, 2016 and 2015 had a carrying amount of $808,224 and $595,523, respectively, and were
pledged to secure public deposits and repurchase agreements.
At December 31, 2016 and 2015, 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.
Restricted Equity Securities
The Company also had other investments of $11,843 and $7,998 at December 31, 2016, and December 31, 2015, respectively,
consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank
System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in
that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no
ready market or quoted market value, and are carried at cost.
Bank Premises and Equipment
Bank premises and equipment totaled $9,551 at December 31, 2016 compared to $7,640 at December 31, 2015, an increase of
$1,911, or 25.0%. This increase was primarily due to the addition of a new branch location in Nolensville, Tennessee and a new
mortgage loan operations facility on the campus of the Company headquarters in downtown Franklin, Tennessee.
Bank Owned Life Insurance
As of December 31, 2016, the Company had $23,267 in bank owned life insurance (“BOLI”), compared to $22,619 at
December 31, 2015. The increase in BOLI is primarily attributed to increase in value due to earnings on the BOLI during 2016.
Goodwill and Intangible Assets
As of December 31, 2016 and 2015, the Company had $9,124 in goodwill. The goodwill is related to the acquisition of
MidSouth Bank that occurred in 2014. At December 31, 2016, there were no circumstances or significant changes that have occurred
related to that acquisition that, in management’s assessment, would necessitate recording impairment of goodwill.
As of December 31, 2016 and 2015, the Company had net core deposit intangible of $1,480 and $2,043, respectively, all of
which is attributed to the acquisition of MidSouth Bank. At the time of the acquisition, the Company recorded a core deposit
intangible of $3,060, and that intangible is being amortized over 8.2 years. Through December 31, 2016, the Company has recognized
amortization of $1,580 related to the core deposit intangible.
51
The following table represents acquired intangible assets at December 31, 2016 and 2015:
Acquired intangible assets:
Core deposit intangibles
2016
2015
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
3,060
$
(1,580)
$
3,060
$
(1,017)
Aggregate amortization expense was $563, $655 and $362 for 2016, 2015 and 2014, respectively.
The following table presents estimated amortization expense for each of the next five years:
2017
2018
2019
2020
2021
Deposits
$473
382
291
201
110
Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for
deposits, as well as with a growing number of non-deposit investment alternatives available to depositors, such as mutual funds,
money market funds, annuities, and other brokerage investment products. Challenges to deposit growth include price changes on
deposit products given movements in the rate environment and other competitive pricing pressures, and customer preferences
regarding higher-costing deposit products or non-deposit investment alternatives.
At December 31, 2016, total deposits were $2,391,818, an increase of $577,779, or 31.9%, compared to $1,814,039 at
December 31, 2015. Included in the Company’s funding strategy are brokered deposits and public funds deposits. Total brokered
deposits decreased by 1.2%, to $472,515, at December 31, 2016 when compared with $478,257 at December 31, 2015. Public funds
deposits increased 99.4% from $327,766 at December 31, 2015 to $653,572 at December 31, 2015, due to Company’s focus on
providing banking services to the municipalities in the counties in our primary service areas, Williamson County and Rutherford
County, Tennessee.
Time deposits, excluding brokered deposits, as of December 31, 2016, amounted to $555,732, as compared to $470,284 as of
December 31, 2015.
The average amounts for deposits for 2016, 2015 and 2014 are detailed in the following schedule.
In thousands, except percentages
Non-interest-bearing deposits
Interest-bearing checking accounts
Money market deposit accounts
Other savings
Time deposits
2016
2015
2014
Average
Balance
$ 210,780
332,285
617,036
49,525
944,086
Average
Rate
— %
0.42
0.62
0.33
0.93
Average
Balance
$ 164,284
268,745
464,588
35,779
545,405
Average
Rate
— %
0.30
0.56
0.46
0.94
Average
Balance
$ 100,105
198,832
300,643
24,088
273,006
Average
Rate
— %
0.26
0.68
0.49
0.97
$ 2,153,712
0.66%
$ 1,478,801
0.59%
$ 896,674
0.59%
52
The following table shows time deposits, excluding brokered deposits, of $100 or more by category based on time remaining
until maturity.
Three months or less
Over three months through six months
Over six months through 12 months
Over one year through three years
Over three years through five years
Over five years
Total
December 31, 2016
148,737
$
43,684
54,048
69,657
78,248
—
$
394,374
Liquidity, Other Borrowings, and Capital Resources
Federal Funds Purchased and Repurchase Agreements
As of December 31, 2016, the Company had Federal funds purchased from correspondent banks totaling $46,805 compared to
$39,825 outstanding as of December 31, 2015. The weighted average Federal funds rate at December 31, 2016 was 1.06%.
Securities sold under agreements to repurchase had an outstanding balance of $36,496 as of December 31, 2016, compared to
$61,261 as of December 31, 2015. Securities sold under agreements to repurchase are financing arrangements that typically mature
daily. At maturity, the securities underlying the agreements are returned to the Company. The Company’s repurchase agreements at
December 31, 2016 were composed of customer repurchase agreements, compared with the Company’s repurchase agreements at
December 31, 2015, which were composed of two types of agreements: customer repurchase agreements and a correspondent bank
repurchase agreement, the latter of which served as a short-term funding instrument for the Company. The weighted average rate for
repurchase agreements was 0.56% as of December 31, 2016.
Federal Home Loan Bank Advances
The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of
1-4 family residential mortgages and home equity lines of credit. At December 31, 2016, advances totaled $132,000 compared to
$57,000 as of December 31, 2015.
At December 31, 2016, the scheduled maturities of these and advances and interest rates were as follows:
Scheduled Maturities
2017
2018
2019
Total
Subordinated Notes
Amount
$ 10,000
87,000
35,000
$132,000
Weighted
Average Rates
1.27%
1.12%
1.30%
1.18%
The Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate issuances. In March
2016, $40,000 of 6.875% fixed-to-floating rate subordinated notes were issued in a public offering to accredited institutional investors,
and in June 2016, $20,000 of 7.00% fixed-to-floating rate subordinated notes were issued to certain accredited institutional investors
in a private offering. At December 31, 2016, the Company’s subordinated notes, net of issuance costs, totaled $58,337. The Company
had no subordinated notes outstanding at December 31, 2015. 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 15 of the consolidated financial statements.
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.
53
The following table summarizes the terms of each subordinated note offering:
Principal amount issued
Maturity date
Initial fixed interest rate
Initial interest rate period
First interest rate change date
Interest repricing index and margin
Repricing frequency
March 2016
Subordinated
Notes
$40,000
March 30, 2026
6.875%
5 years
March 30, 2021
3-month LIBOR
plus 5.636%
Quarterly
June 2016
Subordinated
Notes
$20,000
July 1, 2026
7.00%
5 years
July 1, 2021
3-month LIBOR
plus 6.04%
Quarterly
For more detail related to the subordinated notes, please see Note 10 of the consolidated financial statements.
Capital
Shareholders’ equity was $270,258 at December 31, 2016, an increase of $81,442, or 43.1%, from $188,816 at December 31,
2015. No common dividends were paid during 2016.
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 the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules)
became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-
year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, in order to avoid limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a
capital conservation buffer composed of Common Equity Tier 1 capital above its minimum risk-based capital requirements. The
buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements began on January 1, 2016 and the
requirements will be fully phased in on January 1, 2019. The capital conservation buffer threshold for 2016 is 0.625%. A banking
organization with a buffer greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on
capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be
subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making
distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its
capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. Effectively, the Basel III framework will require
us to meet minimum capital ratios of (i) 7% for Common Equity Tier 1 capital, (ii) 8.5% Tier 1 capital, and (iii) 10.5% Total Capital.
The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current
calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not
already reflected in net income. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation
buffer will exceed the prompt corrective action (“PCA”) well-capitalized thresholds.
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 December 31, 2016, the most
recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the institution’s category.
54
Management believes as of December 31, 2016, the Company and Bank meet all capital adequacy requirements to which they
are subject. Actual and required capital amounts and ratios are presented below as of December 31, 2016 and 2015 for the Company
and Bank.
December 31, 2016
Company common equity Tier 1 capital to risk-weighted
assets
Company Total Capital to risk weighted assets
Company Tier 1 (Core) Capital to risk weighted assets
Company Tier 1 (Core) Capital to average assets
Bank common equity Tier 1 capital to risk-weighted
assets
Bank Total Capital to risk weighted assets
Bank Tier 1 (Core) Capital to risk weighted assets
Bank Tier 1 (Core) Capital to average assets
December 31, 2015
Company common equity Tier 1 capital to risk-weighted
assets
Company Total Capital to risk weighted assets
Company Tier 1 (Core) Capital to risk weighted assets
Company Tier 1 (Core) Capital to average assets
Bank common equity Tier 1 capital to risk-weighted
assets
Bank Total Capital to risk weighted assets
Bank Tier 1 (Core) Capital to risk weighted assets
Bank Tier 1 (Core) Capital to average assets
Required
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 263,693
$ 338,675
$ 263,693
$ 263,693
$ 319,005
$ 335,650
$ 319,005
$ 319,005
$ 167,562
$ 186,243
$ 174,656
$ 174,656
$ 172,205
$ 183,792
$ 172,205
$ 172,205
11.75%
15.09%
11.75%
9.28%
14.18%
14.92%
14.18%
11.22%
10.08%
11.21%
10.51%
8.48%
10.36%
11.06%
10.36%
8.36%
$101,022 4.50%
$179,595 8.00%
$134,696 6.00%
$113,697 4.00%
N/A N/A
N/A N/A
N/A N/A
N/A N/A
$101,216 4.50%
$179,939 8.00%
$134,954 6.00%
$113,697 4.00%
$146,201
6.50%
$224,924 10.00%
8.00%
$179,939
5.00%
$142,122
$ 74,768 4.50%
$132,922 8.00%
$ 99,696 6.00%
$ 82,362 4.00%
N/A N/A
N/A N/A
N/A N/A
N/A N/A
$ 74,772 4.50%
$132,928 8.00%
$ 99,696 6.00%
$ 82,357 4.00%
$108,004
6.50%
$166,160 10.00%
8.00%
$132,928
5.00%
$102,946
Note: Minimum ratios presented exclude the capital conservation buffer.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of
December 31, 2016:
(Dollars in Thousands)
More Than
One Year but
Less Than
Three years
More Than
Three Years
but Less
Than Five
Years
One Year or
Less
Five Years
or More
Total
As of December 31, 2016
Time deposits
Federal funds purchased and repurchase agreements
FHLB advances
Subordinated notes
Lease commitments
Total
$ 516,233
83,301
10,000
—
3,636
$ 234,604
—
122,000
—
8,068
$ 89,485
—
—
—
8,109
$
35
—
—
60,000
39,074
$ 840,357
83,301
132,000
60,000
58,887
$ 613,170
$ 364,672
$ 97,594
$ 99,109
$ 1,174,545
FHLB advances include arrangements under various FHLB credit programs. Long-term FHLB debt is more fully described under
the caption “Federal Home Loan Bank Advances” in Note 9 of our Consolidated Financial Statements. Subordinated notes include two
issuances that occurred in the first and second quarters of 2016. The subordinated notes are more fully described in Note 10,
“Subordinated Notes” of our Consolidated Financial Statements. Lease commitments include the leases in place for certain branch sites.
55
Interest Rate Sensitivity
The following schedule details the Company’s interest rate sensitivity at December 31, 2016:
Repricing Within
(In Thousands, Except Percentages)
Total
1-90 Days
Earning assets:
3 months
to 12
months
Loans, net of unearned income†
Available for sale securities
Held to maturity securities
Loans held for sale
Interest-bearing deposits at other
financial institutions
Certificates of deposit at other
financial institutions
$1,770,755
754,755
228,894
23,699
$ 471,996
—
—
—
$ 208,400
17,537
—
—
61,421
61,421
1,055
—
—
165
1 to 5 years
$ 514,863
44,160
705
—
—
640
Over 5
years
$ 575,496
693,058
228,189
23,699
—
250
Total earning assets
2,840,579
533,417
226,102
560,368
1,520,692
Interest-bearing liabilities:
Deposits:
Interest-bearing checking
accounts
Money market deposit
accounts
Other savings
IRA’s and certificates of
deposit, $250,000 and over
IRA’s and certificates of
deposit, under $250,000
Federal funds purchased
Securities sold under agreement to
repurchase
FHLB borrowings
Subordinated notes
Total interest- bearing
liabilities
Interest-sensitivity gap
Cumulative gap
Interest-sensitivity gap as % of
total average assets
Cumulative gap as % of total
average assets
634,805
634,805
631,242
51,634
631,242
51,634
—
—
—
—
—
—
370,009
37,063
199,694
133,217
470,348
46,805
36,496
132,000
58,337
164,793
46,805
36,496
5,000
—
114,682
—
—
5,000
—
190,873
—
—
122,000
58,337
2,431,676
1,607,838
319,376
504,427
—
—
—
35
—
—
—
—
—
35
$ (1,074,421)
$
(93,274)
$
55,941
$ 1,520,657
$ (1,074,421)
$ (1,167,695)
$ (1,111,754)
$ 408,903
(42.01)%
(3.65)%
2.19%
59.46%
(42.01)%
(45.66)%
(43.47)%
15.99%
† Loans, net of unearned income excludes non-accrual loans.
56
Liquidity
Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit
withdrawals at a reasonable cost and on a timely basis.
Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as
the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to
fund operations cost-effectively and to meet current and future potential obligations such as loan commitments, lease obligations, and
unexpected deposit outflows. In this process, management focuses on both assets and liabilities and on the manner in which they
combine to provide adequate liquidity to meet the Company’s needs. Our source of funds to pay interest on our March 2016 Notes and
June 2016 Notes is generally in the form of a dividend from the Bank to the Company, or those payments may be serviced from cash
balances held by the Company. Under the terms of the informal agreement with the Reserve Bank, described in “Other Events” in
Management’s Discussion and Analysis and in “ITEM 1A. RISK FACTORS,” the Bank is required to receive prior written approval
from its regulatory agencies to pay dividends to the Company.
Funds are available from a number of basic banking activity sources including the core deposit base, the repayment and maturity
of loans, payments of principal and interest as well as sales of investments classified as available-for-sale, and sales of brokered
deposits. As of December 31, 2016, $754,755 of the investment securities portfolio was classified as available-for-sale and is reported
at fair value on the consolidated balance sheet. Another $228,894 of the portfolio was classified as held-to-maturity and is reported at
amortized cost. Approximately $808,224 of the total $983,649 investment securities portfolio on hand at December 31, 2016, was
pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal
funds purchased, and borrowings from the Federal Home Loan Bank.
Effects of Inflation and Changing Prices
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating results in terms of historical dollars without considering
the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant
impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have
resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased,
the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally
decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity.
Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce the Company’s
earnings from such activities.
Off Balance Sheet Arrangements
The Company generally does not have any off-balance sheet arrangements other than approved and unfunded loans and lines
and letters of credit to customers in the ordinary course of business. At December 31, 2016, the Company had unfunded loan
commitments outstanding of $42,689, unused lines of credit of $515,987, and outstanding standby letters of credit of $24,994.
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial data included in our selected historical consolidated financial information are not measures of financial
performance recognized by GAAP. Our management uses these non-GAAP financial measures in its analysis of our performance:
•
•
•
•
•
“Common shareholders’ equity” is defined as total shareholders’ equity at end of period less the liquidation preference
value of the preferred stock;
“Tangible common shareholders’ equity” is common shareholders’ equity less goodwill and other intangible assets;
“Total tangible assets” is defined as total assets less goodwill and other intangible assets;
“Other intangible assets” is defined as the sum of core deposit intangible and SBA servicing rights;
“Tangible book value per share” is defined as tangible common shareholders’ equity divided by total common shares
outstanding. This measure is important to investors interested in changes from period-to-period in book value per share
exclusive of changes in intangible assets;
57
•
•
•
•
•
•
“Tangible common shareholders’ equity ratio” is defined as the ratio of tangible common shareholders’ equity divided by
total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in
relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets;
“Return on Average Tangible Common Equity” is defined as net income available to common shareholders divided by
average tangible common shareholders’ equity;
“Efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest
income plus noninterest income;
“Adjusted yield on loans” is our yield on loans after excluding loan accretion from our acquired loan portfolio. Our
management uses this metric to better assess the impact of purchase accounting on our yield on loans, as the effect of loan
discount accretion is expected to decrease as the acquired loans mature or roll off of our balance sheet;
“Net interest margin” is defined as annualized net interest income divided by average interest-earning assets for the
period; and
“Adjusted net interest margin” is net interest margin after excluding loan accretion from the acquired loan portfolio and
premiums for acquired time deposits. Our management uses this metric to better assess the impact of purchase accounting
on net interest margin, as the effect of loan discount accretion and accretion of net discounts and premiums related to
deposits is expected to decrease as the acquired loans and deposits mature or roll off of our balance sheet.
We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to
our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-
GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results
determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.
The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
(Amounts in thousands, except share/per share data and percentages)
Total shareholders’ equity
Less: Preferred stock
Total common shareholders’ equity
Less: Goodwill and other intangible assets
Tangible common shareholders’ equity
Common shares outstanding
Tangible book value per common share
Net income available to common shareholders
Average tangible common equity
Return on average tangible common equity
Efficiency Ratio:
Net interest income
Noninterest income
Operating revenue
Expense
Total noninterest expense
Efficiency ratio
Reported yield on loans(1)
Effect of accretion income on acquired loans
Adjusted yield on loans
Reported net interest margin(1)
Effect of accretion income on acquired loans
Effect of premium amortization of acquired deposits
Adjusted net interest margin
As of or for the Years Ended
$
December 31,
2016
270,258
—
270,258
10,633
$
259,625
13,036,954
19.91
$
$
28,034
194,529
$
December 31,
2015
188,816
10,000
178,816
11,231
$
167,585
10,571,377
15.85
$
$
15,980
147,374
$
14.41%
10.84%
81,584
15,140
96,724
51,681
53.43%
4.94%
(0.07%)
4.87%
3.42%
(0.05%)
(0.00%)
3.37%
$
59,415
12,830
72,245
42,114
58.29%
5.32%
(0.27%)
5.05%
3.62%
(0.16%)
(0.00%)
3.46%
December 31,
2014
$ 121,799
10,000
111,799
11,886
$
99,913
7,756,411
12.88
$
$
$
8,314
82,504
10.08%
37,693
10,051
47,744
31,822
66.65%
5.51%
(0.24%)
5.27%
3.74%
(0.15%)
(0.01%)
3.58%
(1) Calculation of this item for 2014 does not include tax-equivalent adjustments due to immateriality.
58
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that
are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company
complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of
the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an
emerging growth company. The Company will continue to be an emerging growth company until the earliest to occur of: (1) the end
of the fiscal year following the fifth anniversary of the effectiveness of our Form S-4, which was declared effective by the SEC on
May 14, 2014; (2) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (3) the date on which we
are deemed to be a “large accelerated filer” under the Exchange Act; or (4) the date on which we have, during the previous three-year
period, issued publicly or privately, more than $1.0 billion in non-convertible debt securities. Management cannot predict if investors
will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s
common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock
price may be more volatile.
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective
and do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with
the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has
elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different
application dates for public or private companies, it adopts the new or revised standard at the time public companies adopt the new or
revised standard. This election is irrevocable.
Impact of Recent Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers. ASU 2014-09 created a new topic in
the FASB Accounting Standards Codification® (“ASC”), Topic 606. In addition to superseding and replacing nearly all existing U.S.
GAAP revenue recognition guidance, including industry-specific guidance, ASU 2014-09 established a new control-based revenue
recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more
detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 added a new
Subtopic to the ASC, Other Assets and Deferred Costs: Contracts with Customers (“ASC 340-40”), to provide guidance on costs
related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of
another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease
contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and
non-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2017. Since most of the Company’s
revenues come from financial instruments which are not included in the scope of this ASU, adoption of this guidance is not expected
to have a material impact on the Company’s financial statements.
In January 2016, FASB issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial
Assets and Financial Liabilities, which amends prior guidance to require an entity to measure its equity investments (except those
accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net
income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar
investment of same issuer. The new guidance simplifies the impairment assessment of equity investments without readily
determinable fair values, requires public entities to use the exit price notion when measuring fair value of financial instruments for
disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in fair value
of a liability resulting from changes in the instrument-specific credit risk when the entity has selected fair value option for financial
59
instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset.
The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.
Management has not yet determined the impact that adoption of this guidance will have on the Company’s financial statements.
On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU
2016-02 is intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among
organizations. Under the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their
balance sheet as lease liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting,
requiring leases to be classified as either operating or finance, with lease classification determined in a manner similar to existing lease
guidance. The new guidance will be effective for public companies for fiscal years beginning on or after December 15, 2018, and for
private companies for fiscal years beginning on or after December 15, 2019. Early adoption is permitted for all entities. At the time
this ASU is adopted, the Company will recognize a right-of-use asset and a lease liability for all leases, which will initially be
measured at the present value of lease payments, and a single lease cost calculated so that the costs of the leases are allocated over the
terms of the Company’s leases on a generally straight-line basis. Since an asset will be recognized at the time of adoption, the
Company’s regulatory capital ratios will likely be impacted. Management is evaluating the impact ASU 2016-02 will have on the
Company’s financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment
awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur.
Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was
available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the
treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have
previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income
tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an
entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current
GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than
as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the
applicable jurisdictions. The Company elected to adopt this ASU in the fourth quarter of 2016 effective as of January 1, 2016. The
adoption of this ASU decreased income tax expense for the year by $1,013. The adoption of this ASU also impacted previously
reported quarterly earnings and/or earnings per share in 2016, as follows: (1) first quarter 2016 – decreased diluted earnings per share
by $0.01; (2) second quarter 2016 – decreased income tax expense by $509 and increased diluted earnings per share by $0.04; and
(3) third quarter 2016 – decreased income tax expense by $107 and increased diluted earnings per share by $0.01.
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. The Company is
currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most
importantly, the Company is gathering as much data as possible to enable review scenarios and to determine which calculations will
produce the most reliable results. The impact of adopting ASU 2016-13 is not currently known.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business
combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance
policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees;
beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a
material impact on the Company’s financial statements.
60
Other Events
On November 3, 2016, the Bank entered into an informal agreement with the Reserve Bank and the TDFI in the form of a
Memorandum of Understanding (“MOU”). Under the terms of the MOU, the Bank agreed, among other things, to (1) enhance and
periodically update its Commercial Real Estate (“CRE”) concentration risk management policy; (2) augment credit risk management
practices; and (3) enhance capital and liquidity plans. The Bank has also agreed that it will seek prior written approval of the Reserve
Bank and the TDFI to pay dividends to the Company, which dividends are used primarily for the purpose of servicing the Company’s
subordinated debt. In addition, the Company currently may not make interest payments on its subordinated debt without prior written
approval from its primary regulatory agencies.
The Company has also executed an agreement with the Board of Governors of the Federal Reserve System (the “Agreement”)
under section 4(m)(2) of the Bank Holding Company Act, which includes specific actions designed to address the Bank’s risk profile
and to strengthen the underlying condition of the Bank. Until the Bank and Company satisfy the requirements of the MOU and the
Agreement, any plans for business combinations or location expansion will be limited and subject to prior written approval from the
appropriate regulatory body.
Management believes the effect of these regulatory actions will not have a material impact on the Bank’s ability to continue to
serve its customers and communities. In addition, the Company’s ongoing investment in its people and technology has and will
continue to support solid growth, asset quality measures, and safety and soundness standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the
level of income and expense recorded on a large portion of our assets and liabilities, and the market value of all interest-earning assets
and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of our operations, we
are not subject to foreign currency exchange or commodity price risk.
Management seeks to maintain profitability in both immediate and long-term earnings through funds management/interest rate
risk management. Interest rate risk (sensitivity) management deals with the potential impact on earnings associated with changing
interest rates using various rate change (shock) scenarios. Our rate sensitivity position has an important impact on earnings. Senior
management monitors our rate sensitivity position throughout each month, and the Asset Liability Committee (“ALCO”) of the Bank
meets on a quarterly basis to analyze the rate sensitivity position and other aspects of asset/liability management. These meetings
cover the spread between the cost of funds and interest yields generated primarily through loans and investments, rate shock analyses,
liquidity and dependency positions, and other areas necessary for proper balance sheet management.
Management believes interest rate risk is best measured by earnings simulation modeling. The simulation is run using the prime
rate as the base with the assumption of rates increasing 100, 200, 300 and 400 basis points or decreasing 100 and 200 basis points. All
rates are increased or decreased parallel to the change in prime rate. As a result of the simulation, over a 12-month time period ending
December 31, 2016, net interest income was estimated to decrease 0.87% and 2.18% if rates were to increase 100 basis points and 200
basis points, respectively, and was estimated to decrease 2.02% and 14.70% in a 100 basis points and 200 basis points declining rate
assumption, respectively. These results are in line with the Company’s guidelines for rate sensitivity.
The following chart reflects the Company’s sensitivity to changes in interest rates as indicated as of December 31, 2016.
Projected Interest Rate
Change
Net Interest
Income
Net Interest Income $
Change from Base
-200
-100
Base
+100
+200
+300
+400
66,487
76,377
77,948
77,266
76,249
76,024
74,730
(11,461)
(1,571)
—
(682)
(1,699)
(1,924)
(3,218)
% Change from Base
(14.70)
(2.02)
0.00
(0.87)
(2.18)
(2.47)
(4.13)
The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates
based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and
61
securities, rates on loans and deposits, reinvestments of pay downs and maturities of loans, investments and deposits, changes in
spreads between key market rates, and other assumptions. In addition, there is no input for growth or a change in asset mix. While
assumptions are developed based on the current economic and market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions, including how customer preferences or competitor influences might change. As market
conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, these results do not include any
management action that might be taken in responding to or anticipating changes in interest rates. The simulation results are one
indicator of interest rate risk, and actual net interest income is largely impacted by the allocation of assets, liabilities, and product mix.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item are included as a separate section of this report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective as of
December 31, 2016, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the
Exchange Act.
Management’s Report on Internal Control Over Financial Reporting
The management of Franklin Financial Network, Inc. is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Franklin Financial Network, Inc.’s internal
control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the
preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Franklin Financial Network, Inc.’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on our assessment we believe that, as of December 31, 2016, the Company’s internal control over financial reporting was
effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm
due to a transition period established by rules of the SEC for an emerging growth company.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fourth quarter of 2016 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
62
ITEM 9B. OTHER INFORMATION.
None.
63
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for our Annual Meeting
of Stockholders to be held on May 25, 2017, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
ITEM 11.
EXECUTIVE COMPENSATION.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for our Annual Meeting
of Stockholders to be held on May 25, 2017, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for our Annual Meeting
of Stockholders to be held on May 25, 2017, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for our Annual Meeting
of Stockholders to be held on May 25, 2017, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement for our Annual Meeting
of Stockholders to be held on May 25, 2017, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
64
ITEM 15.
Financial Statements
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The list of financial statements contained herein is set forth on page F-1 hereof.
PART IV
Financial Statement Schedules
None
Exhibits
Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the Exhibit Index below.
Exhibit
No.
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
EXHIBIT INDEX
Description of Exhibit
Agreement and Plan of Reorganization and Bank Merger, dated as of November 21, 2013, between Franklin Financial
Network, Inc., Franklin Synergy Bank and MidSouth Bank (incorporated herein by reference to Appendix A to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014) (schedules and exhibits
to which have been omitted pursuant to Item 601(b)(2) of Regulations S-K).
Agreement and Plan of Reorganization and Bank Merger, dated as of December 14, 2015 among Franklin Financial
Network, Inc., Franklin Synergy Bank and Civic Bank & Trust (incorporated herein by reference to Exhibit 2.1 to
Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on December 14, 2015)
(schedules and exhibits to which have been omitted pursuant to Item 601(b)(2) of Regulations S-K).
Amendment No. 1 to the Agreement and Plan of Reorganization and Bank Merger, dated May 9, 2016 among Civic
Bank & Trust, Franklin Financial Network, Inc. and Franklin Synergy Bank (incorporated herein by reference to
Exhibit 2.1 to Form 10-Q (File No. 001-36895) filed with the Securities and Exchange Commission on May 10, 2016).
Charter of Franklin Financial Network, Inc. (incorporated herein by reference to Exhibit 3.1 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Articles of Amendment to the Charter of Franklin Financial Network, Inc., dated November 15, 2007 (incorporated herein
by reference to Exhibit 3.2 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on
February 14, 2014).
Articles of Amendment to the Charter of Franklin Financial Network, Inc., dated June 17, 2010 (incorporated herein by
reference to Exhibit 3.3 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on
February 14, 2014).
Articles of Amendment to the Charter of Franklin Financial Network, Inc., dated September 27, 2011 (incorporated herein
by reference to Exhibit 3.4 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on
February 14, 2014).
Articles of Amendment to the Charter Designating Senior Non-Cumulative Perpetual Preferred Stock, Series A of
Franklin Financial Network, Inc., dated September 27, 2011 (incorporated herein by reference to Exhibit 3.5 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Articles of Amendment to the Charter of Franklin Financial Network, Inc., dated March 10, 2015 (incorporated herein by
reference to Exhibit 3.6 to Form 10-K (File No. 001-36895) filed with the Securities and Exchange Commission on
March 11, 2015).
65
Exhibit
No.
3.7
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Description of Exhibit
Amended and Restated Bylaws of Franklin Financial Network, Inc. (incorporated herein by reference to Exhibit 3.7 to
Form 10-K (File No. 001-36895) filed with the Securities and Exchange Commission on March 11, 2015).
Specimen Stock Certificate of Franklin Financial Network, Inc. (incorporated herein by reference to Exhibit 4.1
to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
See Exhibits 3.1 through 3.4 and Exhibits 3.6 through 3.7 for provisions of the Charter and Bylaws defining rights of
holders of the Registrant’s Common Stock.
Indenture, dated March 31, 2016, by and between Franklin Financial Network, Inc. and U.S. Bank National Association,
as Trustee (incorporated herein by reference to Exhibit 4.1 to Form 8-K (File No. 001-36895) filed with the Securities and
Exchange Commission on March 31, 2016).
First Supplemental Indenture, dated March 31, 2016, by and between Franklin Financial Network, Inc. and U.S. Bank
National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to Form 8-K (File No. 001-36895) filed
with the Securities and Exchange Commission on March 31, 2016).
Global Note representing Franklin Financial Network, Inc.’s Fixed-to-Floating Rate Subordinated Notes due 2026
(incorporated herein by reference to Exhibit 4.3 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange
Commission on March 31, 2016).
Form of 7.00% Fixed-to-Floating Rate Subordinated Note Due 2026 (incorporated herein by reference to Exhibit 4.1 to
Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on June 30, 2016).
Retail Lease Agreement, dated as of December 21, 2011 by and between Westhaven Town Center Fund I, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.1 to Form S-4 (File No. 333-193951) filed with
the Securities and Exchange Commission on February 14, 2014).
Triple Net Office Lease Agreement, dated as of June 12, 2012 by and between Berry Farms Real Estate Partners, LLC
and Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.2 to Form S-4 (File No. 333-193951) filed
with the Securities and Exchange Commission on February 14, 2014).
Lease Agreement, dated as of December 12, 2012 by and between First Farmers and Merchants Bank and Franklin
Synergy Bank (incorporated herein by reference to Exhibit 10.3 to Form S-4 (File No. 333-193951) filed with the
Securities and Exchange Commission on February 14, 2014).
First Amendment to Lease Agreement, dated as of February 1, 2016 by and between Overlook Center, LLC as successor
in interest to First Farmers and Merchants Bank and Franklin Synergy Bank (incorporated herein by reference to
Exhibit 10.4 to Form 10-K (File No. 001-36895) filed with the Securities and Exchange Commission on March 15, 2016).
Office Lease Agreement, dated as of May 11, 2007 by and between PCC Investments II, LLC and Franklin Financial
Network, Inc. (Aspen Brook Village Suites 201, 202 and 203) (incorporated herein by reference to Exhibit 10.4 to
Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Triple Net Office Lease Agreement, dated as of May 4, 2010 by and between Columbia Avenue Partners, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.5 to Form S-4 (File No. 333-193951) filed with
the Securities and Exchange Commission on February 14, 2014).
Amendment to Triple Net Lease Agreement, dated as of January 12, 2016 by and between Columbia Avenue Partners,
LLC and Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.7 to Form 10-K (File No. 001-36895)
filed with the Securities and Exchange Commission on March 15, 2016).
Lease, dated as of May 21, 2012 by and between CHHM Properties and Franklin Synergy Bank (incorporated herein by
reference to Exhibit 10.6 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on
February 14, 2014).
Lease Agreement, effective October 8, 2008 by and between UCM/ProVenture-Synergy Business Park, LLC and Franklin
Synergy Bank (incorporated herein by reference to Exhibit 10.12 to Form S-4 (File No. 333-193951) filed with the
Securities and Exchange Commission on February 14, 2014).
10.10
Lease Amendment No. 1, dated as of June 11, 2013 by and between Mooreland Investors, LP, successor in interest to
UCM/ProVenture-Synergy Business Park, LLC, and Franklin Synergy Bank (incorporated herein by reference to
Exhibit 10.13 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14,
2014).
66
Exhibit
No.
10.11
10.12
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
Description of Exhibit
Office Lease Agreement, dated as of May 11, 2007 by and between PCC Investments II, LLC and Franklin Financial
Network, Inc. (Aspen Brook Village Suites 106, 107 and 108) (incorporated herein by reference to Exhibit 10.14 to
Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Lease dated as of April 20, 2010 by and between Edwin B. Raskin Company, as agent for SIG, LLC, and Franklin
Synergy Bank (incorporated herein by reference to Exhibit 10.15 to Form S-4 (File No. 333-193951) filed with the
Securities and Exchange Commission on February 14, 2014).
Form of Franklin Financial Network, Inc.’s Organizers’ Warrant Agreement (incorporated herein by reference to
Exhibit 10.16 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14,
2014).
Form of Franklin Financial Network, Inc. Award Agreement for Non-Qualified Stock Options (incorporated herein by
reference to Exhibit 10.49 to Form S-4/A (File No. 333-193951) filed with the Securities and Exchange Commission on
April 29, 2014).
Form of Franklin Financial Network, Inc. Award Agreement for Restricted Stock (incorporated herein by reference to
Exhibit 10.50 to Form S-4/A (File No. 333-193951) filed with the Securities and Exchange Commission on April 29,
2014).
Form of Franklin Financial Network, Inc. Award Agreement for Incentive Stock Options (incorporated herein by
reference to Exhibit 10.51 to Form S-4/A (File No. 333-193951) filed with the Securities and Exchange Commission on
April 29, 2014).
Employment Agreement, dated as of January 29, 2014 by and between Franklin Synergy Bank and Richard E. Herrington
(incorporated herein by reference to Exhibit 10.17 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement, dated as of January 29, 2014 by and between Franklin Synergy Bank and Kevin A. Herrington
(incorporated herein by reference to Exhibit 10.18 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement, dated as of January 29, 2014 by and between Franklin Synergy Bank and Sally E. Bowers
(incorporated herein by reference to Exhibit 10.19 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement, dated as of January 29, 2014 by and Franklin Synergy Bank and Ashley P. Hill, III
(incorporated herein by reference to Exhibit 10.20 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement, dated as of January 29, 2014 by and between Franklin Synergy Bank and J. Myers Jones, III
(incorporated herein by reference to Exhibit 10.21 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement, dated as of January 29, 2014 by and between Franklin Synergy Bank and David J. McDaniel
(incorporated herein by reference to Exhibit 10.22 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Employment Agreement dated as of January 29, 2014 by and between Franklin Synergy Bank and Sally P. Kimble
(incorporated herein by reference to Exhibit 10.23 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Form of Employment Agreement by and between Franklin Financial Network, Inc. and Sarah Meyerrose (incorporated
herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission
on June 21, 2016).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and Richard E. Herrington (incorporated herein by reference to Exhibit 10.24 to
Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and Kevin A. Herrington (incorporated herein by reference to Exhibit 10.25 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
67
Exhibit
No.
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
10.38*
10.39*
Description of Exhibit
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and Sally E. Bowers (incorporated herein by reference to Exhibit 10.26 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by
and Franklin Synergy Bank and Ashley P. Hill, III (incorporated herein by reference to Exhibit 10.27 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and J. Myers Jones, III (incorporated herein by reference to Exhibit 10.28 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and David J. McDaniel (incorporated herein by reference to Exhibit 10.29 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement, dated as of January 29, 2014 by and
between Franklin Synergy Bank and Sally P. Kimble (incorporated herein by reference to Exhibit 10.30 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement by and between Franklin
Financial Network, Inc. and Sarah Meyerrose (incorporated herein by reference to Exhibit 10.2 to Form 8-K
(File No. 001-36895) filed with the Securities and Exchange Commission on June 21, 2016).
Form of Lee M. Moss Employment Agreement (incorporated herein by reference to Exhibit 10.34 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Lee M. Moss Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement (incorporated herein
by reference to Exhibit 10.35 to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on
February 14, 2014).
Form of Lee M. Moss Retention Bonus Agreement (incorporated herein by reference to Exhibit 10.36 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Kevin D. Busbey Employment Agreement (incorporated herein by reference to Exhibit 10.37 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Kevin D. Busbey Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement
(incorporated herein by reference to Exhibit 10.38 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Form of Kevin D. Busbey Retention Bonus Agreement (incorporated herein by reference to Exhibit 10.39 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Dallas G. Caudle, Jr. Employment Agreement (incorporated herein by reference to Exhibit 10.40 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
68
Exhibit
No.
10.40*
10.41*
10.42*
10.43*
10.44*
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
Description of Exhibit
Form of Dallas G. Caudle, Jr. Confidentiality, Non-Competition Agreement and Non-Solicitation Agreement
(incorporated herein by reference to Exhibit 10.41 to Form S-4 (File No. 333-193951) filed with the Securities and
Exchange Commission on February 14, 2014).
Form of Dallas G. Caudle, Jr. Retention Bonus Agreement (incorporated herein by reference to Exhibit 10.42 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of D. Edwin Jernigan, Jr. Retention Bonus Agreement (incorporated herein by reference to Exhibit 10.43 to
Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of D. Edwin Jernigan, Jr. Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.44 to
Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Franklin Financial Network, Inc. 2007 Omnibus Equity Incentive Plan (incorporated herein by reference to Exhibit 10.45
to Form S-4 (File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Form of Split Dollar Life Insurance Agreement (incorporated herein by reference to Exhibit 10.48 to Form S-4
(File No. 333-193951) filed with the Securities and Exchange Commission on February 14, 2014).
Contract for Sale of Real Estate, dated as of December 5, 2014 by and between Franklin Synergy Bank and Murfreesboro
Branches, LLC (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on December 11, 2014).
Triple Net Office Lease Agreement, dated as of December 5, 2014 by and between Murfreesboro Branches, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on December 11, 2014).
Triple Net Office Lease Agreement, dated as of December 5, 2014 by and between Murfreesboro Branches, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on December 11, 2014).
Triple Net Office Lease Agreement, dated as of December 5, 2014 by and between Murfreesboro Branches, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on December 11, 2014).
Asset Purchase and Sale Agreement, by and between BCG Consulting, LLC, Banc Compliance Group, Inc. and Franklin
Financial Network, Inc. (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on January 2, 2015).
Triple Net Office Lease Agreement, dated as of February 19, 2015 by and between Murfreesboro Branches, LLC and
Franklin Synergy Bank, for the property located at 2610 Old Fort Parkway, Murfreesboro, Tennessee (incorporated herein
by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on
February 25, 2015).
Triple Net Office Lease Agreement, dated as of February 19, 2015 by and between Murfreesboro Branches, LLC and
Franklin Synergy Bank, for the property located at 724 President Place, Smyrna, Tennessee (incorporated herein by
reference to Exhibit 10.2 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on
February 25, 2015).
69
Exhibit
No.
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
21.1†
23.1†
31.1†
31.2†
32††
101†
Description of Exhibit
Triple Net Office Lease Agreement, dated as of February 19, 2015 by and between Murfreesboro Branches, LLC and Franklin Synergy
Bank, for the property located at 2782 South Church Street, Murfreesboro, Tennessee (incorporated herein by reference to Exhibit 10.3
to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on February 25, 2015).
Triple Net Office Lease Agreement, dated as of June 11, 2015 by and between Columbia Avenue Partners, LLC and Franklin Synergy
Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36895) filed with
the Commission on June 12, 2015).
Lease Agreement, by and between The Grandview Eight, L.L.C. and Franklin Synergy Bank (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36895) filed with the Commission on July 29, 2015).
Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36895) filed with the
Commission on September 29, 2015).
Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36895) filed with the
Securities Exchange Commission on October 13, 2015).
Amendment to the Contract (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
(File No. 001-36895) filed with the Securities and Exchange Commission on October 13, 2015).
Amendment to the Contract, by and between Franklin Synergy Bank and Century Skanska (incorporated herein by reference to
Exhibit 10.57 to Form 10-K (File No. 001-36895) filed with the Securities and Exchange Commission on March 15, 2016).
Standard Form of Agreement Between Owner and Contractor, by and between Franklin Synergy Bank and Century Skanska
(incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange
Commission on July 13, 2016).
Form of Change of Control Agreement for Sarah Meyerrose, Richard Bobo and Terry Howell (incorporated herein by reference to
Exhibit 10.55 to Form S-4 filed with the Securities and Exchange Commission on February 12, 2016).
Amendment to Triple Net Office Lease Agreement, dated as of January 12, 2016 by and between Columbia Avenue Partners, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.59 to Form 10-K (File No. 001-36895) filed with the Securities
and Exchange Commission on March 15, 2016).
Amendment to Triple Net Office Lease Agreement, dated as of January 12, 2016 by and between Columbia Avenue Partners, LLC and
Franklin Synergy Bank (incorporated herein by reference to Exhibit 10.60 to Form 10-K (File No. 001-36895) filed with the Securities
and Exchange Commission on March 15, 2016).
Triple Net Office Lease Agreement, by and between Gateway Real Estate Partners, LLC and Franklin Synergy Bank (incorporated
herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on April 4,
2016).
Form of Subordinated Note Purchase Agreement, dated as of June 30, 2016, by and among Franklin Financial Network, Inc. and the
several purchasers identified therein (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 001-36895) filed with the
Securities and Exchange Commission on June 30, 2016).
Subsidiaries of the Registrant.
Consent of Crowe Horwath LLP.
Certification of CEO pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
Certification of CFO pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
Certification Pursuant to 18 U.S.C. Section 1350.
The following financial information from Franklin Financial Network, Inc.’s Annual Report on Form 10-K for the period ended
December 31, 2016, filed with the SEC on March 16, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheet as of December 31, 2016 and December 31, 2015; (ii) the Consolidated Statements of Income for the years
ended December 31, 2016, 2015 and 2014; (iii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2016, 2015 and 2014; (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended
December 31, 2016, 2015 and 2014; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and
2014; and (vi) Notes to Consolidated Financial Statements.
†
††
*
Filed herewith.
Furnished herewith.
Indicates a management contract or compensatory plan or arrangement.
70
ITEM 16.
None.
FORM 10-K SUMMARY.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 16, 2017
FRANKLIN FINANCIAL NETWORK, INC.
By: /s/ Richard E. Herrington
Richard E. Herrington
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacity and on the dates indicated.
Signature
Title
Date
/s/ Richard E. Herrington
Richard E. Herrington
/s/ Sarah Meyerrose
Sarah Meyerrose
/s/ Jimmy E. Allen
Jimmy E. Allen
Henry W. Brockman, Jr.
David H. Kemp
/s/ Pamela J. Stephens
Pamela J. Stephens
/s/ Melody J. Sullivan
Melody J. Sullivan
/s/ Gregory E. Waldron
Gregory E. Waldron
/s/ Benjamin Wynd
Benjamin Wynd
Chairman, President & CEO
(Principal Executive Officer)
March 16, 2017
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2017
March 14, 2017
March 15, 2017
March 16, 2017
March 14, 2017
March 14, 2017
Director
Director
Director
Director
Director
Director
Director
72
The following financial statements are included in Part II, Item 8:
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2016 and 2015
Consolidated Statements of Income – Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income – Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes in Equity – Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows – Years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-10
F-1
Crowe Horwath LLP
Independent Member Crowe Horwath International
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Franklin Financial Network, Inc.
Franklin, Tennessee
We have audited the accompanying consolidated balance sheets of Franklin Financial Network, Inc. (“Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in
equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting
principles.
/s/ Crowe Horwath LLP
Franklin, Tennessee
March 16, 2017
F-2
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(Dollar amounts in thousands, except share and per share data)
ASSETS
Cash and due from financial institutions
Certificates of deposit at other financial institutions
Securities available for sale
Securities held to maturity (fair value 2016—$227,892 and 2015—$161,969)
Loans held for sale, at fair value
Loans
Allowance for loan losses
Net loans
Restricted equity securities, at cost
Premises and equipment, net
Accrued interest receivable
Bank owned life insurance
Deferred tax asset
Assets held for sale
Foreclosed assets
Servicing rights, net
Goodwill
Core deposit intangible, net
Other assets
Total assets
LIABILITIES AND EQUITY
Deposits
Non-interest bearing
Interest bearing
Total deposits
Federal funds purchased and repurchase agreements
Federal Home Loan Bank advances
Subordinated notes, net
Accrued interest payable
Other liabilities
Total liabilities
Equity
Preferred stock, no par value: 1,000,000 shares authorized; Senior non-cumulative preferred stock, no
par value, $10,000 liquidation value: Series A, 10,000 shares authorized; no shares outstanding at
December 31, 2016; 10,000 shares issued and outstanding at December 31, 2015
Common stock, no par value: 20,000,000 shares authorized; 13,036,954 and 10,571,377 issued at
December 31, 2016 and 2015, respectively
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Noncontrolling interest in consolidated subsidiary
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
F-3
2016
2015
$
90,927
1,055
754,755
228,894
23,699
1,773,592
(16,553)
$
52,394
250
575,838
158,200
14,079
1,303,826
(11,587)
1,757,039
1,292,239
11,843
9,551
9,931
23,267
15,013
—
—
3,621
9,124
1,480
2,990
7,998
7,640
7,299
22,619
9,430
1,640
200
3,455
9,124
2,043
3,344
$ 2,943,189
$ 2,167,792
$ 233,781
2,158,037
2,391,818
83,301
132,000
58,337
1,924
5,448
$ 176,742
1,637,297
1,814,039
101,086
57,000
—
644
6,207
2,672,828
1,978,976
—
10,000
218,354
59,386
(7,482)
270,258
103
147,784
31,352
(320)
188,816
—
$ 270,361
$ 188,816
$ 2,943,189
$ 2,167,792
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2016, 2015 and 2014
(Dollar amounts in thousands, except share and per share data)
Interest income and dividends
Loans, including fees
Securities:
Taxable
Tax-exempt
Dividends on restricted equity securities
Federal funds sold and other
Total interest income
Interest expense
Deposits
Federal funds purchased and repurchase agreements
Federal Home Loan Bank advances
Subordinated notes and other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges on deposit accounts
Other service charges and fees
Net gain on sale of loans
Wealth management
Loan servicing fees, net
Gain on sales and calls of securities
Net gain (loss) on foreclosed assets
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
FDIC assessment expense
Marketing
Professional fees
Other
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Dividends paid on Series A preferred stock
Earnings attributable to noncontrolling interest
Net income available to common shareholders
Earnings per share:
Basic
Diluted
2016
2015
2014
$ 78,236
$ 53,574
$ 33,585
15,306
5,609
500
256
12,362
2,331
350
104
9,459
81
227
80
99,907
68,721
43,432
14,234
303
884
2,902
8,688
306
312
—
5,301
176
262
—
18,323
9,306
5,739
81,584
5,240
59,415
5,030
37,693
2,374
76,344
54,385
35,319
185
3,041
7,183
1,894
22
2,172
40
603
113
2,644
6,959
1,283
227
833
26
771
53
1,777
5,814
639
254
259
(96)
1,255
15,140
12,856
9,955
30,029
7,627
2,068
762
3,546
7,649
24,040
6,589
1,167
956
2,425
6,963
19,160
4,729
600
728
2,040
4,469
51,681
42,140
31,726
39,803
11,746
28,057
(23)
—
25,101
9,021
$ 16,080
(100)
—
13,548
5,134
$ 8,414
(100)
—
$ 28,034
$ 15,980
$ 8,314
$ 2.56
2.42
$ 1.62
1.54
$ 1.32
1.27
See accompanying notes to consolidated financial statements.
F-4
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2016, 2015 and 2014
(Dollar amounts in thousands, except share and per share data)
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities:
Unrealized holding gain (loss) arising during the period
Reclassification adjustment for gains on sales, calls, and prepayments of securities
included in net income
Net unrealized gains (losses)
Tax effect, includes $852, $327, and $102, respectively, income tax expense from gains
on sales of securities
Total other comprehensive income (loss)
Comprehensive income
NOTE: No other comprehensive income is allocated to noncontrolling interest.
2016
$ 28,057
2015
$ 16,080
2014
$ 8,414
(9,609)
(3,220)
11,131
(2,172)
(833)
(259)
(11,781)
(4,053)
10,872
4,619
1,557
(4,163)
(7,162)
(2,496)
6,709
$ 20,895
$ 13,584
$ 15,123
See accompanying notes to consolidated financial statements.
F-5
Balance at December 31, 2013
Exercise of common stock options
Dividends paid on Series A
preferred stock
Issuance of restricted stock, net of
forfeitures
Stock based compensation expense
Stock issued in conjunction with
401(k) employer match
Stock and stock options (137,280
options) issued related to
MidSouth Bank acquisition, net
of stock issuance costs of $514
Excess tax benefit from exercise of
stock options
Net income
Other comprehensive income
Balance at December 31, 2014
Exercise of common stock options,
includes net settlement of shares
Exercise of common stock warrants
Dividends paid on Series A
preferred stock
Issuance of restricted stock, net of
forfeitures
Stock based compensation expense,
net of forfeitures
Stock issued related to initial public
offering, net of stock issuance
costs of $5,017
Stock issued in conjunction with
401(k) employer match, net of
distributions
Excess tax benefit from exercise of
stock options and vesting of
restricted shares
Net income
Other comprehensive loss
Balance at December 31, 2015
Exercise of common stock options,
includes net settlement of shares
Exercise of common stock warrants
Redemption of Series A preferred
stock
Dividends paid on Series A
preferred stock
Issuance of restricted stock, net of
forfeitures
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years ended December 31, 2016, 2015 and 2014
(Dollar amounts in thousands, except share and per share data)
Preferred
Stock
$ 10,000
—
Common Stock
Shares
4,862,875
23,809
Amount
$ 52,638
236
Retained
Earnings
$ 7,058 $
—
Noncontrolling
Interest
Total
Equity
(4,533) $
—
— $
—
65,163
236
Accumulated
Other
Comprehensive
Income (Loss)
—
—
—
—
—
83,191
—
—
—
611
(100)
—
—
20,345
275
—
—
2,766,191
40,462
—
—
—
—
—
—
—
29
—
—
—
8,414
—
—
—
—
—
—
—
—
6,709
—
—
—
—
—
—
—
—
(100)
—
611
275
40,462
29
8,414
6,709
$ 10,000
7,756,411
$ 94,251
$ 15,372 $
2,176
$
— $
121,799
—
—
—
—
—
125,478
6,570
1,301
79
—
—
—
—
(100)
28,229
—
—
—
860
—
—
2,640,000
50,423
—
—
14,689
337
—
—
—
—
—
—
—
—
—
—
—
—
—
—
533
—
—
—
16,080
—
—
—
(2,496)
—
—
—
—
—
1,301
79
(100)
—
860
—
50,423
—
—
—
—
337
533
16,080
(2,496)
$ 10,000
10,571,377
$ 147,784
$ 31,352 $
(320) $
— $
188,816
—
—
190,389
8,450
1,571
101
—
—
(10,000)
—
—
—
—
—
—
—
(23)
34,001
—
—
—
—
—
—
—
—
—
—
—
—
1,571
101
(10,000)
(23)
—
F-6
Preferred
Stock
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
Equity
Stock based compensation expense,
net of forfeitures
Stock issued related to public
offering, net of stock issuance
costs of $4,203
Stock issued in conjunction with
401(k) employer match, net of
distributions
Issuance of preferred stock of
consolidated subsidiary to
noncontrolling interest, net of
issuance costs
Net income
Other comprehensive loss
Balance at December 31, 2016
$
—
—
1,641
—
—
—
1,641
—
2,242,500
67,557
—
—
—
67,557
—
(9,763)
(300)
—
—
—
(300)
—
—
—
—
—
—
—
—
—
—
—
28,057
—
—
—
(7,162)
13,036,954
$ 218,354
$ 59,386 $
(7,482) $
103
—
—
103
103
28,057
(7,162)
$ 270,361
See accompanying notes to consolidated financial statements.
F-7
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2016, 2015 and 2014
(Dollar amounts in thousands, except share and per share data)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment
Accretion of purchase accounting adjustments
Net amortization of securities
Amortization of loan servicing right asset
Amortization of core deposit intangible
Amortization of debt issuance costs
Provision for loan losses
Deferred income tax benefit
Excess tax benefit related to the exercise of stock options
Origination of loans held for sale
Proceeds from sale of loans held for sale
Net gain on sale of loans
Gain on sale of available for sale securities
Gain on call of held to maturity securities
Income from bank owned life insurance
(Gain) loss on sale of foreclosed assets
Loss on sale of assets held for sale
Stock-based compensation
Compensation expense related to common stock issued to 401(k) plan
Recognition of deferred gain on sale of loans
Recognition of deferred gain on sale of foreclosed assets
Loss on disposal of non-bank subsidiary
Net change in:
Accrued interest receivable and other assets
Accrued interest payable and other liabilities
Net cash from operating activities
Cash flows from investing activities
Available for sale securities:
Sales
Purchases
Maturities, prepayments and calls
Held to maturity securities:
Purchases
Maturities, prepayments and calls
Net change in loans
Purchase of bank owned life insurance
Proceeds from sale of buildings held for sale
Purchase of restricted equity securities
Proceeds from sale of foreclosed assets
Purchases of premises and equipment, net
Increase in certificates of deposits at other financial institutions
Net cash provided from sale of non-bank subsidiary
Net cash acquired from acquisition
2016
2015
2014
$ 28,057
$ 16,080
$
8,414
1,330
(1,175)
7,673
1,201
563
124
5,240
(964)
(1,013)
(371,173)
367,369
(7,183)
(2,172)
—
(648)
(28)
98
1,641
—
(64)
(12)
—
1,325
(1,897)
4,961
909
655
—
5,030
(1,058)
(533)
(301,190)
312,150
(6,959)
(684)
(149)
(611)
(16)
—
860
466
(36)
(10)
—
931
(1,589)
2,596
727
362
—
2,374
(130)
(29)
(262,955)
266,932
(5,814)
(259)
—
(288)
96
—
611
275
(50)
(5)
32
(2,278)
1,610
28,196
(5,599)
3,584
27,278
(82)
(219)
11,930
93,873
(391,036)
103,307
107,300
(498,977)
204,147
44,181
(198,452)
93,339
(94,749)
21,712
(468,973)
—
1,542
(3,845)
336
(3,241)
(805)
—
—
(116,322)
10,670
(515,837)
(10,344)
4,080
(2,649)
531
(941)
—
—
—
(8,601)
11,551
(181,928)
—
—
(745)
1,166
(3,887)
—
205
12,197
Net cash from investing activities
(741,879)
(818,342)
(230,974)
F-8
2016
2015
2014
Cash flows from financing activities
Increase in deposits
Increase (decrease) in federal funds purchased and repurchase agreements
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Proceeds from other borrowings
Repayment of other borrowings
Proceeds from issuance of subordinated notes, net of issuance costs
Proceeds from exercise of common stock warrants
Proceeds from exercise of common stock options
Proceeds from issuance of common stock, net of offering costs
Divestment of common stock issued to 401(k) plan
Redemption of Series A preferred stock
Dividends paid on preferred stock
Proceeds from issuance of preferred stock of consolidated subsidiary to
noncontrolling interest, net of issuance costs
Net cash from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information:
Interest paid
Income taxes paid
Non-cash supplemental information:
577,779
(17,785)
325,000
(250,000)
10,000
(10,000)
58,213
101
1,571
67,557
(300)
(10,000)
(23)
103
752,216
38,533
52,394
$ 90,927
$ 17,043
14,023
Fair value of stock and stock options issued related to MidSouth Bank acquisition
Transfers from loans to foreclosed assets
Transfers from premises and equipment to assets held for sale
$
—
108
—
641,867
62,008
157,000
(119,000)
—
—
—
79
1,834
50,423
—
—
(100)
—
794,111
3,047
49,347
$ 52,394
246,629
13,894
15,000
(25,000)
—
—
—
—
265
(514)
—
—
(100)
—
250,174
31,130
18,217
$ 49,347
$
$
9,083
9,738
$
5,540
5,692
—
—
1,640
$ 40,976
1,273
4,080
See accompanying notes to consolidated financial statements.
F-9
FRANKLIN FINANCIAL NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial statements include Franklin Financial Network, Inc.
and its wholly-owned subsidiaries, Franklin Synergy Bank (the “Bank”) and Franklin Synergy Risk Management, Inc., together
referred to as “the Company.” Intercompany transactions and balances are eliminated in consolidation.
Franklin Financial Network, Inc. was incorporated under the laws of the State of Tennessee on April 5, 2007. Franklin Synergy Bank
was incorporated under the laws of the State of Tennessee and received its Certificate of Authority from the Tennessee Department of
Financial Institutions and approval of FDIC insurance on November 2, 2007. Franklin Synergy Bank is also a Federal Reserve
member bank.
The Company provides financial services through its offices in Franklin, Brentwood, Spring Hill, Murfreesboro, Nashville,
Nolensville, and Smyrna, Tennessee. Its primary deposit products are checking, savings, and certificate of deposit accounts, and its
primary lending products are commercial and residential construction, commercial, installment loans and lines secured by home
equity. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business
assets, and consumer assets. Commercial loans are expected to be repaid by cash flow from operations of businesses. There are no
significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent
on the real estate and general economic conditions in the area. The Company also focuses on electronic banking products such as
internet banking, remote deposit capture and lockbox services.
The Company purchased the assets of Banc Compliance Group LLC in May 2008 forming a wholly-owned subsidiary, Banc
Compliance Group, Inc., which provided bank compliance and consulting services to community banks. The Company sold the assets
of Banc Compliance Group, Inc. at December 31, 2014.
On July 1, 2014 the Company completed its acquisition of MidSouth Bank (MidSouth”), which was merged with and became part of
the Bank.
On December 28, 2015, the Company invested in a wholly-owned subsidiary, Franklin Synergy Risk Management, Inc., which
provides risk management services to the Company in the form of enhanced insurance coverages.
On March 1, 2016, the Bank invested in a wholly-owned subsidiary, Franklin Synergy Investments of Tennessee, Inc. (“FSIT”), which
provides investment services to the Bank. Also on March 1, 2016, FSIT invested in a wholly-owned subsidiary, Franklin Synergy
Investments of Nevada, Inc. (“FSIN”), to provide investment services to FSIT related to certain municipal securities. In addition, on
March 1, 2016, FSIN invested in a subsidiary, Franklin Synergy Preferred Capital, Inc., to serve as a real estate investment trust
(“REIT”), to allow the Bank to sell real estate loans to obtain a tax benefit. FSIN has a controlling interest in the REIT, but the REIT
also has a group of investors that own a noncontrolling interest in the preferred stock of the REIT.
Use of Estimates: 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.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities under 90 days, and
federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial
institutions and federal funds purchased.
Interest-Bearing Deposits in Financial Institutions: Interest-bearing deposits in other financial institutions are carried at cost.
Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and
ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities
available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains
and losses on sales are recorded on the trade date and determined using the specific identification method.
F-10
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. Management assesses whether it intends to sell, or it is more likely than
not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities
that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to
credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other
comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be
collected and the amortized cost basis. No OTTI has been recognized for the years ended December 31, 2016, 2015 or 2014.
Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at fair value, as determined by
outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Certain loans held for sale are sold with servicing rights retained. The carrying value of loans sold with retained servicing is reduced
by the amount allocated to the servicing right. Gains and losses on sales of loans are based on the difference between the selling price
and the carrying value of the related loan sold.
Loans held for sale, for which the fair value option has been elected, are recorded at fair value as of each balance sheet date. The fair
value includes the servicing value of the loans.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at
the principal balance outstanding, net of purchase discounts, deferred loan fees and costs, and an allowance for loan losses. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-
secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. 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. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after
90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Concentration of Credit Risk: Most of the Company’s business activity is with customers located within Williamson County and
Rutherford County; therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in the
Williamson County and Rutherford County areas.
Purchased Credit Impaired Loans: The Company purchases individual loans and groups of loans, some of which have shown evidence
of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no
carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan
losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk
characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected
cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the
remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected
cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than
the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows in greater than the
carrying amount, it is recognized as part of future interest income.
F-11
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as
impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a
concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified
as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on 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 potential designation as impaired. If a loan
is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated
future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent
loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the
Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment and is based on a combination of the Bank’s loss history and loss history
from the Bank’s peer group over the past three years. This actual loss experience is supplemented with other economic factors based
on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of
any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience,
ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:
Construction and land development loans include loans to finance the process of improving loans preparatory to erecting new
structures or the on-site construction of industrial, commercial, residential or farm buildings. Construction and land development loans
also include loans secured by vacant land, except land known to be used or usable for agricultural purposes. Construction loans
generally are made for relatively short terms. They generally are more vulnerable to changes in economic conditions. Further, the
nature of these loans is such that they are more difficult to evaluate and monitor. The risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost
(including interest) of the project. Periodic site inspections are made on construction loans.
Commercial real estate loans include loans secured by non-residential real estate, including farmland and improvements thereon.
Often these loans are made to single borrowers or groups of related borrowers, and the repayment of these loans largely depends on
the results of operations and management of these properties. Adverse economic conditions may affect the repayment ability of these
loans.
Residential real estate loans include loans secured by residential real estate, including single-family and multi-family dwellings.
Mortgage title insurance and hazard insurance are normally required. Adverse economic conditions in the Company’s market area
may reduce borrowers’ ability to repay these loans and may reduce the collateral securing these loans.
F-12
Commercial and industrial loans include loans for commercial, industrial, healthcare or agricultural purposes to business enterprises
that are not secured by real estate. Commercial loans are typically made on the basis of the borrower’s ability to repay from the cash
flow of the borrower’s business. Commercial and Agriculture loans are generally secured by accounts receivable, inventory and
equipment. The collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on
the success of the business.
Consumer and other loans include loans to individuals for household, family and other personal expenditures that are not secured by
real estate. Consumer loans are generally secured by customer deposit accounts, vehicles and other household goods. The collateral
securing consumer loans may depreciate over time.
Servicing Rights: When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income
statement effect recorded in gain on sale of loans. Fair value is based on market prices for comparable servicing contracts. All classes
of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-
interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is
determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the
carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a
reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with loan
servicing fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes
in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement as loan servicing fees, is recorded for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income
when earned. The amortization of mortgage servicing rights is netted against mortgage loan servicing fee income. Late fees and
ancillary fees related to loan servicing are not material.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the
transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
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. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through
expense. Operating costs after acquisition are expensed.
Assets Held for Sale: Assets held for sale are stated at fair value less estimated costs to sell at the time the assets are determined to be
held for sale. If fair value declines subsequent to designation, a valuation allowance is recorded through expense. Operating costs after
designation are expensed.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and are depreciated using the
straight-line method. Depreciation periods are shorter of the asset’s useful life or lease period, ranging from three to fifteen years.
Restricted Equity Securities: The Bank is a member of the Federal Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB)
system. Members of the FHLB are required to own a certain amount of stock based on the level of borrowings and other factors, and
may invest in additional amounts. The stock ownership in FRB and FHLB are carried at cost, classified as restricted securities, and
periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
F-13
Company Owned Life Insurance/Bank Owned Life Insurance: The Company and the Bank have purchased life insurance policies on
certain key executives. Company owned life insurance/bank owned life insurance is recorded at the amount that can be realized under
the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that
are probable at settlement.
Goodwill and Other Intangible Assets: Goodwill is determined as the excess of the fair value of the consideration transferred, plus the
fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the
acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to
perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their
estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and
branch acquisitions are amortized on an accelerated method over their estimated useful lives, which range from 7 to 10 years.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are
recorded when they are funded.
Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and
forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of
the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected
exercise of the commitment before the loan is funded. Fair values of these mortgage derivatives are estimated based on changes in
mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future
delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its
commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sale of mortgage loans.
Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based
on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options,
while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is
recognized over the required service period, generally defined as the vesting period, reduced for estimated forfeitures. Accounting
Standards Codification (“ASC”) 718-20 “Compensation – Stock Compensation Awards Classified as Equity” requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For
awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire
award. Accounting Standards Update (“ASU”) 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting” requires all excess tax benefits and tax deficiencies related to share-based payment
awards to be recognized as income tax expense or benefit in the income statement during the period in which they occur.
Income Taxes: Income tax expense or benefit is the total of the current year income tax due or refundable and the change in deferred
tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
F-14
Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions. The matching
contributions are paid with employer stock.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available for sale which is recognized as a separate component of equity.
Earnings Per Common Share: Basic earnings per common share is net income available to common shareholders divided by the
weighted average number of common shares outstanding during the period. All outstanding unvested share-based payment awards that
contain rights to non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common
share includes the dilutive effect of additional potential common shares issuable under stock options and warrants.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not
believe there now are such matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing
requirements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to
the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are
managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating
results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be
aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
Reclassifications had no effect on prior year net income or equity.
Recently Adopted Accounting Pronouncements: In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under
ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax
expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool
of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer
recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per
share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital.
Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a
financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy
election to either estimate the number of awards that are expected to vest (current Generally Accepted Accounting Principle
(“GAAP”)) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather
than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case)
in the applicable jurisdictions. The Company elected to adopt this ASU in the fourth quarter of 2016 effective as of January 1, 2016
and has elected to not account for forfeitures as they occur. The adoption of this ASU decreased income tax expense for the year by
$1,013. The adoption of this ASU also impacted previously reported quarterly earnings and/or earnings per share in 2016, as follows:
(1) first quarter 2016 – no income tax benefit was recorded; decreased diluted earnings per share by $0.01; (2) second quarter 2016 –
decreased income tax expense by $509 and increased diluted earnings per share by $0.04; and (3) third quarter 2016 – decreased
income tax expense by $107 and increased diluted earnings per share by $0.01.
Recently Issued, Not Yet Effective Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers. ASU 2014-09
created a new topic in the FASB ASC, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue
recognition guidance, including industry-specific guidance, ASU 2014-09 established a new control-based revenue recognition model,
changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on
specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 added a new Subtopic to the ASC,
F-15
Other Assets and Deferred Costs: Contracts with Customers (“ASC 340-40”), to provide guidance on costs related to obtaining a contract
with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance
does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing
arrangements, financial instruments, guarantees other than product or service warranties, and non-monetary exchanges between entities in the
same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those
annual periods beginning after December 15, 2017. Since most of the Company’s revenues come from financial instruments which are not
included in the scope of this ASU, adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In January 2016, FASB issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and
Financial Liabilities, which amends prior guidance to require an entity to measure its equity investments (except those accounted for under
the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to
measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or similar investment of same issuer. The new guidance
simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit
price notion when measuring fair value of financial instruments for disclosure purposes, requires an entity to present separately in other
comprehensive income the portion of the total change in fair value of a liability resulting from changes in the instrument-specific credit risk
when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities
by measurement category and form of financial asset. The amendments are effective for annual periods and interim periods within those
annual periods beginning after December 15, 2017. Management has not yet determined the impact that adoption of this guidance will have
on the Company’s financial statements.
On February 25, 2016, FASB issued ASU 2016-02 which creates Topic 842, Leases and supersedes Topic 840, Leases. ASU 2016-02 is
intended to improve financial reporting about leasing transactions, by increasing transparency and comparability among organizations. Under
the new guidance, a lessee will be required to record all leases with lease terms of more than 12 months on their balance sheet as lease
liabilities with a corresponding right-of-use asset. ASU 2016-02 maintains the dual model for lease accounting, requiring leases to be
classified as either operating or finance, with lease classification determined in a manner similar to existing lease guidance. The new
guidance will be effective for public companies for fiscal years beginning on or after December 15, 2018, and for private companies for fiscal
years beginning on or after December 15, 2019. Early adoption is permitted for all entities. At the time this ASU is adopted, the Company
will recognize a right-of-use asset and a lease liability for all leases, which will initially be measured at the present value of lease payments,
and a single lease cost calculated so that the costs of the leases are allocated over the terms of the Company’s leases on a generally straight-
line basis. Since an asset will be recognized at the time of adoption, the Company’s regulatory capital ratios will likely be impacted.
Management is evaluating the impact ASU 2016-02 will have on the Company’s financial statements.
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. The Company is currently gathering information, reviewing possible vendors and has formed a
committee to formulate the methodology to be used. Most importantly, the Company is gathering as much data as possible to enable review
scenarios and to determine which calculations will produce the most reliable results. The impact of adopting ASU 2016-13 is not currently
known.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. This Accounting Standards Update addresses the following eight specific cash flow issues: Debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from
the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned
life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and
separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for the
Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. This ASU is not expected to have a material impact on the Company’s financial statements.
F-16
NOTE 2 - SECURITIES
The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at December 31, 2016
and 2015 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss.
December 31, 2016
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total
December 31, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$614,344
19,439
133,280
$
949
27
238
$ (8,208)
(132)
(5,182)
$607,085
19,334
128,336
$767,063
$ 1,214
$(13,522)
$754,755
U.S. government sponsored entities and agencies
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total
$ 6,792
502,916
19,993
46,664
$
72
2,386
22
1,570
$
(47)
(4,347)
(180)
(3)
$ 6,817
500,955
19,835
48,231
$576,365
$ 4,050
$ (4,577)
$575,838
The amortized cost and fair value of the held to maturity securities portfolio at December 31, 2016 and 2015 and the corresponding
amounts of gross unrecognized gains and losses were as follows:
December 31, 2016
U.S. government sponsored entities and agencies
Mortgage backed securities: residential
State and political subdivisions
$
203
106,169
122,522
$
6
328
1,214
$
—
(2,343)
(207)
$
209
104,154
123,529
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Total
December 31, 2015
$228,894
$
1,548
$
(2,550)
$227,892
U.S. government sponsored entities and agencies
Mortgage backed securities: residential
State and political subdivisions
Total
$ 3,300
30,398
124,502
$
11
410
3,841
$
$158,200
$
4,262
$
(72)
(408)
(13)
(493)
$ 3,239
30,400
128,330
$161,969
The mortgage backed securities in which the Company has invested, both available for sale and held to maturity, are either issued by
or guaranteed by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), or
Government National Mortgage Association (GNMA).
F-17
The proceeds from sales, calls, and prepayments of available for sale securities and the associated gains and losses were as follows:
Proceeds from sales
Proceeds from calls and prepayments
Gross gains
Gross losses
2016
$ 93,873
$ 11,805
2,557
(385)
2015
$107,300
$ 2,000
972
(288)
2014
$ 44,181
$ —
422
(163)
Calls of held to maturity securities resulted in gross gains of $148 during 2015. Gross proceeds from these calls totaled $2,300.
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.
Available for sale
Three months or less
Over three months through one year
Over one year through five years
Over five years through ten years
Over ten years
Mortgage-backed securities: commercial
Mortgage-backed securities: residential
Total
Held to maturity
Three months or less
Over three months through one year
Over one year through five years
Over five years through ten years
Over ten years
Mortgage-backed securities: residential
Total
December 31, 2016
Amortized
Cost
Fair
Value
$ —
17,600
—
2,857
112,823
19,439
614,344
$767,063
$ —
—
705
5,055
116,965
106,169
$228,894
$ —
17,536
—
2,853
107,947
19,334
607,085
$754,755
$ —
—
740
5,056
117,942
104,154
$227,892
Securities pledged at December 31, 2016 and 2015 had a carrying amount of $808,224 and $595,524 and were pledged to secure
public deposits and repurchase agreements.
At December 31, 2016 and 2015, 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.
F-18
The following table summarizes the securities with unrealized and unrecognized losses at December 31, 2016 and 2015, 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
December 31, 2016
Available for sale
Mortgage-backed securities: residential
Mortgage-backed securities:
$ 465,416
15,752
$
(7,833)
(132)
$ 9,907
—
$
(375)
—
$ 475,323
15,752
$
(8,208)
(132)
commercial
State and political subdivisions
100,020
(5,182)
—
—
100,020
(5,182)
Total available for sale
$ 581,188
$ (13,147)
$ 9,907
$
(375)
$ 591,095
$
(13,522)
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Held to maturity
Mortgage-backed securities: residential
State and political subdivisions
$ 89,523
18,907
$
(2,244)
(207)
$ 3,025
—
$
(99)
—
$ 92,548
18,907
$
(2,343)
(207)
Total held to maturity
$ 108,430
$
(2,451)
$ 3,025
$
(99)
$ 111,455
$
(2,550)
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2015
Available for sale
U.S. government sponsored entities
$ 2,703
$
(47)
$ —
$
—
$ 2,703
$
(47)
and agencies
Mortgage-backed securities: residential
Mortgage-backed securities:
313,570
15,980
(3,691)
(180)
23,319
—
(656)
—
336,889
15,980
(4,347)
(180)
commercial
State and political subdivisions
716
(3)
—
—
716
(3)
Total available for sale
$ 332,969
$
(3,921)
$ 23,319
$
(656)
$ 356,288
$
(4,577)
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Held to maturity
U.S. government sponsored entities
$ 1,957
$
(43)
$
971
$
(29)
$ 2,928
$
(72)
and agencies
Mortgage-backed securities: residential
State and political subdivisions
9,788
3,351
(97)
(13)
5,481
—
(311)
—
15,269
3,351
Total held to maturity
$ 15,096
$
(153)
$ 6,452
$
(340)
$ 21,548
$
(408)
(13)
(493)
Unrealized losses on debt securities have not been recognized into income because the issuers bonds are of high credit quality (rated
AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to
their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair
value is expected to recover as the bonds approach maturity. At December 31, 2016, the Company had 162 available for sale securities
in an unrealized loss position and 38 held to maturity securities in an unrecognized loss position.
F-19
NOTE 3 - LOANS
Loans at December 31, 2016 and 2015 were as follows:
Loans that are not PCI loans
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Other
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
Loans before net deferred loan fees
Deferred loan fees, net
Total loans that are not PCI loans
Total PCI loans
Allowance for loan losses
Total loans, net of allowance for loan losses
December 31,
2016
December 31,
2015
$ 489,562
$ 372,767
458,569
38,571
254,474
150,515
376,476
3,359
1,771,526
(793)
1,770,733
2,859
(16,553)
$1,757,039
353,268
10,955
162,933
112,001
283,888
6,577
1,302,389
(2,476)
1,299,913
3,913
(11,587)
$1,292,239
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016,
2015 and 2014:
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
December 31, 2016
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
$
$
3,186
601
(11)
—
3,146
1,120
—
—
$ 1,861
511
(40)
66
$
3,358
2,964
(255)
1
$
Total ending allowance balance
$
3,776
$
4,266
$ 2,398
$
6,068
$
36
44
(42)
7
45
$ 11,587
5,240
(348)
74
$ 16,553
December 31, 2015
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
$
$
2,690
496
—
—
1,494
1,652
—
—
$ 1,791
76
(32)
26
$
650
2,755
(48)
1
$
55
51
(135)
65
$ 6,680
5,030
(215)
92
Total ending allowance balance
$
3,186
$
3,146
$ 1,861
$
3,358
$
36
$ 11,587
F-20
December 31, 2014
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
$
$
$
1,552
1,138
—
—
1,511
523
(540)
—
1,402
385
(61)
65
$
$
337
371
(58)
—
98 $ 4,900
2,374
(43)
(659)
—
65
—
Total ending allowance balance
$
2,690
$
1,494
$
1,791
$
650
$
55 $ 6,680
For the years ended December 31, 2016 and 2015, there was $0 and $9, respectively, in allowance for loan losses for PCI loans.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based
on impairment method as of December 31, 2016 and 2015. Purchased and PCI loans are also included in the table. For purposes of this
disclosure, recorded investment in loans excludes accrued interest receivable and loan fees, net due to immateriality.
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit-impaired loans
Total ending allowance
balance
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit-impaired loans
Total ending loans balance
December 31, 2015
Allowance for loan losses:
Ending allowance balance attributable to
loans:
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit-impaired loans
Total ending allowance balance
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit-impaired loans
Total ending loans balance
$
—
$
—
$ —
$
1,024
$ —
$
1,024
3,776
—
4,266
—
2,398
—
5,044
—
45
—
15,529
—
$
3,776
$
4,266
$ 2,398
$
6,068
$
45
$
16,553
$
1,275
$
2,836
$ 2,190
$
3,608
$ —
$
9,909
488,287
—
$ 489,562
494,304
394
$ 497,534
402,799
496
$ 405,485
372,868
1,969
$ 378,445
3,359
—
$ 3,359
1,761,617
2,859
$ 1,774,385
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
$
—
$
—
$ —
$
113
$ —
$
113
3,186
—
3,186
$
3,137
9
3,146
1,861
—
$ 1,861
$
3,245
—
3,358
36
—
36
$
11,465
9
11,587
$
$
$
1,943
$
908
$ 1,185
$
134
$ —
$
4,170
370,824
78
$ 372,845
363,315
1,460
$ 365,683
273,749
563
$ 275,497
283,754
1,812
$ 285,700
6,577
—
$ 6,577
1,298,219
3,913
$ 1,306,302
F-21
Loans collectively evaluated for impairment reported at December 31, 2016 include certain loans acquired from MidSouth on July 1,
2014. The acquired loans were recorded at estimated fair value at date of acquisition, which included an estimated credit discount. On
July 1, 2014, acquired non-PCI loans were recorded at an estimated fair value of $178,818, comprised of contractually unpaid
principal totaling $183,832 net of estimated discounts totaling $5,014 which included both credit and interest rate discount
components. As of December 31, 2016, these non-PCI loans had a carrying value of $72,367, comprised of contractually unpaid
principal totaling $74,373 and discounts totaling $2,006. Management evaluated these loans for credit deterioration since acquisition
and determined that a $23 allowance for loan losses was necessary at December 31, 2016.
The following table presents information related to impaired loans by class of loans as of December 31, 2016 and 2015:
December 31, 2016
With no allowance recorded:
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Subtotal
With an allowance recorded:
Commercial and industrial
Subtotal
Total
December 31, 2015
With no allowance recorded:
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Subtotal
With an allowance recorded:
Commercial and industrial
Subtotal
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
$ 1,275
$ 1,275
$
4,423
2,069
121
934
8,822
2,864
2,864
$ 11,686
2,836
2,069
121
934
7,235
2,674
2,674
$ 9,909
$ 1,943
$ 1,943
2,495
476
709
21
908
476
709
21
$
$
5,644
4,057
113
113
113
113
$ 5,757
$ 4,170
$
—
—
—
—
—
—
1,024
1,024
1,024
—
—
—
—
—
—
113
113
113
F-22
The following table presents the average recorded investment of impaired loans by class of loans for the years ended December 31,
2016, 2015 and 2014:
Average Recorded Investment
With no allowance recorded:
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
Subtotal
With an allowance recorded:
Commercial real estate:
Nonfarm, nonresidential
Residential real estate:
Closed-end 1-4 family
Commercial and industrial
Consumer and other
Subtotal
Total
2016
2015
2014
$ 474
$ 494
$ —
1,892
747
696
207
8
882
261
415
62
10
4,024
2,124
587
94
—
2
2
683
—
—
893
55
490
—
545
—
60
8
68
$4,569
$2,192
359
53
—
1,305
$1,988
The impact on net interest income for these loans was not material to the Company’s results of operations for the years ended
December 31, 2016, 2015 and 2014.
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans
as of December 31, 2016 and 2015:
December 31, 2016
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Other
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
Total
December 31, 2015
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Other
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
Total
Nonaccrual
Loans Past Due
Over 90 Days
$ —
$
1,950
835
—
—
121
2,674
—
$
3,630
$ —
$
$
—
—
452
—
150
—
2,552
1,943
—
—
435
—
—
—
$
2,378
835
—
41
—
32
—
908
$
F-23
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.
The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 and 2015 by class of
loans:
December 31, 2016
Construction and land development
Commercial real estate:
30-59
Days
Past Due
60-89
Days
Past Due
Greater
Than
89 Days
Past Due
Total
Past Due
Loans
Not
Past Due
PCI
Loans
Total
$ 380
$ —
$ 1,950
$ 2,330
$ 487,232
$ —
$ 489,562
Nonfarm, nonresidential
Other
664
—
—
—
835
—
1,499
—
457,070
38,571
394
—
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
428
231
155
—
10
—
39
—
452
121
2,824
—
890
352
3,018
—
253,584
150,163
373,458
3,359
496
—
1,969
—
458,963
38,571
254,970
150,515
378,445
3,359
$ 1,858
$
49
$ 6,182
$ 8,089
$ 1,763,437
$2,859
$ 1,774,385
December 31, 2015
Construction and land development
Commercial real estate:
$ —
$ 149
$ 1,943
$ 2,092
$ 370,675
$
78
$ 372,845
Nonfarm, nonresidential
Other
258
—
—
—
835
—
1,093
—
352,175
10,955
1,460
—
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
213
30
86
2
—
—
32
—
476
—
—
—
689
30
118
2
162,244
111,971
283,770
6,575
562
1
1,812
—
354,728
10,955
163,495
112,002
285,700
6,577
$ 589
$ 181
$ 3,254
$ 4,024
$ 1,289,365
$3,913
$ 1,306,302
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.
F-24
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass
rated loans. The following table includes PCI loans, which are included in the “Substandard” column. Based on the most recent
analysis performed, the risk category of loans by class of loans is as follows as of December 31, 2016 and 2015:
December 31, 2016
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Other
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
December 31, 2015
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Other
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Consumer and other
Pass
Special
Mention
Substandard
Total
$ 488,287
$ —
$ 1,275
$ 489,562
449,373
38,571
1,847
—
251,919
149,504
373,243
3,359
$1,754,256
—
—
—
—
$ 1,847
7,743
—
3,051
1,011
5,202
—
458,963
38,571
254,970
150,515
378,445
3,359
$ 18,282
$1,774,385
$ 370,824
$ —
$ 2,021
$ 372,845
352,451
10,955
—
—
162,160
111,292
284,144
6,577
$1,298,403
—
—
—
—
$ —
2,277
—
1,335
710
1,556
—
354,728
10,955
163,495
112,002
285,700
6,577
$ 7,899
$1,306,302
Troubled Debt Restructurings
As of December 31, 2016, the Company’s loan portfolio contains one loan in the amount of $698 that has been modified in a troubled
debt restructuring as of December 31, 2016. There were no loans modified in troubled debt restructurings as of December 31, 2015.
NOTE 4 - LOAN SERVICING
Loans serviced for others are not reported as assets. The principal balances of these loans at December 31, 2016 and 2015 are as
follows:
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation
Other
2016
2015
$499,385
2,954
$463,952
4,037
Custodial escrow balances maintained in connection with serviced loans were $2,477 and $2,494 at year-end 2016 and 2015.
F-25
The related loan servicing rights activity for the years ended December 31, 2016, 2015 and 2014 were as follows:
Servicing rights:
Beginning of year
Additions
Amortized to expense
Decrease in impairment
End of year
2016
2015
2014
$ 3,455
1,367
(1,201)
—
$ 3,621
$3,053
1,311
(909)
—
$3,455
$2,640
1,140
(727)
—
$3,053
The components of net loan servicing fees for the years ended December 31, 2016, 2015 and 2014 were as follows:
Loan servicing fees, net:
Loan servicing fees
Amortization of loan servicing fees
Change in impairment
Total
2016
2015
2014
$ 1,223
(1,201)
—
$
22
$1,136
(909)
—
$ 227
$ 981
(727)
—
$ 254
The fair value of servicing rights was estimated by management to be approximately $5,015 at December 31, 2016. Fair value for
2016 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.9%. At
December 31, 2015, the fair value of servicing rights was estimated by management to be approximately $4,635. Fair value for 2015
was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 10.2%.
NOTE 5 - PREMISES AND EQUIPMENT AND RELATED PARTY LEASES
Year-end premises and equipment were as follows:
Construction in progress
Land and land improvements
Buildings
Leasehold improvements
Furniture, fixtures, and equipment
Computer equipment and software
Automobiles
Accumulated depreciation
2016
$ 2,184
33
150
6,149
5,229
2,840
29
16,614
(7,063)
$ 9,551
2015
$
282
33
150
5,783
4,652
2,480
29
13,409
(5,769)
$ 7,640
Depreciation and amortization expense was $1,330, $1,325 and $931 for the years ended December 31, 2016, 2015 and 2014,
respectively.
F-26
Operating Leases: The Company leases most of its branches, loan production, and administrative offices under operating leases. Rent
expense was $3,602, $2,912 and $2,049 for 2016, 2015 and 2014, respectively. Rent commitments, over the initial lease terms and
intended renewal periods were as follows:
2017
2018
2019
2020
2021
Thereafter
Total
Related
Parties
$ 2,539
3,103
3,149
3,195
3,243
33,441
$ 48,670
Other
$ 1,097
919
897
829
842
5,633
$ 10,217
Total
$ 3,636
4,022
4,046
4,024
4,085
39,074
$ 58,887
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill: Goodwill was $9,124 at both December 31, 2016 and 2015.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2016, the Company’s
reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than
not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it
was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.
Acquired Intangible Assets: As of December 31, 2016 and 2015, the Company had net core deposit intangibles of $1,480 and $2,043,
respectively, all of which is attributed to the acquisition of MidSouth. At the time of the acquisition, the Company recorded a core
deposit intangible of $3,060, which is being amortized over 8.2 years. Through December 31, 2016, the Company has recognized
amortization of $1,580 related to the core deposit intangible.
The following table represents acquired intangible assets at December 31, 2016 and 2015:
Acquired intangible assets:
Core deposit intangibles
2016
2015
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
3,060
$
(1,580)
$
3,060
$
(1,017)
Aggregate amortization expense was $563, $655 and $362 for 2016, 2015 and 2014, respectively.
The following table presents estimated amortization expense for each of the next five years:
2017
2018
2019
2020
2021
$473
382
291
201
110
F-27
NOTE 7 - DEPOSITS
At December 31, 2016 and 2015, time deposits in denominations of $250 or greater totaled $289,571 and $310,741, respectively. At
December 31, 2016 and 2015, the Company had $192 and $290, respectively, of deposit accounts in overdraft status and thus have
been reclassified to loans on the accompanying consolidated balance sheets.
Scheduled maturities of time deposits for the next five years were as follows:
2017
2018
2019
2020
2021
$516,233
168,026
66,578
30,674
58,811
NOTE 8 - FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
As of December 31, 2016 and 2015, the Bank had federal funds lines (or the equivalent thereof) with correspondent banks totaling
$199,900 and $134,400, respectively. There was $46,805 and $39,825 in outstanding federal funds purchased at December 31, 2016
and 2015, respectively.
The Bank enters into borrowing arrangements with our retail business customers and correspondent banks through agreements to
repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under its
control as collateral against these short-term borrowing arrangements. At maturity the securities underlying the agreements are
returned to the Company. At December 31, 2016 and December 31, 2015, these short-term borrowings totaled $36,496 and $61,261,
respectively, and are secured by securities with carrying amounts of $41,136 and $73,478, respectively. At December 31, 2016, the
Company had $36,496 in repurchase agreements that had one-day maturities.
Information concerning securities sold under agreements to repurchase is summarized as follows:
Average daily balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at year end
2016
$ 39,647
2015
$ 38,241
2014
$ 12,792
0.58%
0.53%
0.58%
$ 61,669
$ 61,261
$ 24,466
0.56%
0.64%
0.56%
The following table provides additional details as of December 31, 2016:
As of December 31, 2016
Market value of securities pledged
Borrowings related to pledged amounts
Market value pledged as a % of borrowings
U.S.
Government
Sponsored
Entities and
Agencies
Securities
$
209
$ —
— %
Mortgage-
Backed
Securities:
Residential
$
117
$ —
— %
State and
Political
Subdivisions
$ 41,330
$ 36,496
113%
Total
$ 41,656
$ 36,496
114%
F-28
NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES
The Bank has established a line of credit with the Federal Home Loan Bank of Cincinnati (“FHLB”), which is secured by a blanket
pledge of 1-4 family residential mortgage loans and home equity lines of credit. The availability of the line is dependent, in part, on
available collateral.
At December 31, 2016 and 2015, the Company had received advances from the FHLB totaling $132,000 and $57,000, respectively. At
December 31, 2016, the scheduled maturities of these advances and interest rates were as follows:
2017
2018
2019
2020
2021
Thereafter
Total
Scheduled
Maturities
$ 10,000
87,000
35,000
—
—
—
$132,000
Weighted
Average
Rates
1.27%
1.12%
1.30%
—
—
—
1.18%
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. Qualifying loans totaling
approximately $402,864 were pledged as security under a blanket pledge agreement with the FHLB at December 31, 2016. Based on
this collateral and the Company’s holdings of FHLB stock, the Bank is eligible to borrow up to an additional $30,001 as of
December 31, 2016.
NOTE 10 – SUBORDINATED NOTES
At December 31, 2016, the Company’s subordinated notes, net of issuance costs, totaled $58,337. The Company had no subordinated
notes outstanding at December 31, 2015. 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 15 of the consolidated financial statements.
The Company completed the issuance of $60,000 in principal amount of subordinated notes in two separate offerings. In March 2016,
$40,000 of 6.875% fixed-to-floating rate subordinated notes were issued in a public offering to accredited institutional investors, and
in June 2016, $20,000 of 7.00% fixed-to-floating rate subordinated notes were issued to certain accredited institutional investors in a
private offering. The subordinated notes are unsecured and will rank at least equally with all of the Company’s other unsecured
subordinated indebtedness and will be effectively subordinated to all of our secured debt to the extent of the value of the collateral
securing such debt. The subordinated notes will be subordinated in right of payment to all of our existing and future senior
indebtedness, and will rank structurally junior to all existing and future liabilities of our subsidiaries including, in the case of the
Company’s bank subsidiary, its depositors, and any preferred equity holders of our subsidiaries. The holders of the subordinated notes
may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency,
liquidation, or similar proceeding.
F-29
The following table summarizes the terms of each subordinated note offering:
Principal amount issued
Maturity date
Initial fixed interest rate
Initial interest rate period
March 2016
Subordinated
Notes
$40,000
March 30, 2026
6.875%
5 years
First interest rate change date
March 30, 2021
Interest payment frequency through year five*
Semiannually
Interest payment frequency after five years*
Quarterly
June 2016
Subordinated
Notes
$20,000
July 1, 2026
7.00%
5 years
July 1, 2021
Semiannually
Quarterly
Interest repricing index and margin
3-month LIBOR
plus 5.636%
3-month LIBOR
plus 6.04%
Repricing frequency after five years
Quarterly
Quarterly
* The Company currently may not make interest payments on either series of subordinated notes without prior written approval from
its primary regulatory agencies.
The Company used the net proceeds from the March 2016 Subordinated Notes offering to pay off a $10 million borrowing that had
been used to redeem the shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) issued
to the United States Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Small Business
Lending Fund and to fund future growth of the Bank. The Company used the net proceeds from the June 2016 Subordinated Notes to
fund future growth of the Bank.
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 Notes.
NOTE 11 – BENEFIT PLANS
A 401(k) benefit plan was adopted to begin benefits on May 1, 2008. The 401(k) benefit plan allows employee contributions of their
compensation subject to certain limitations. Employee contributions are matched in the Company’s common stock equal to 100% of
the first 2% of the compensation contributed and 50% of the next 4% of the compensation contributed. Expense for the years ending
December 31, 2016, 2015 and 2014 was $523, $466 and $387, respectively.
NOTE 12 – INCOME TAXES
A reconciliation of the income tax expense for the years ended December 31, 2016, 2015 and 2014 to the “expected” tax expense,
which was computed by applying the statutory federal income tax rate of 35 percent for 2016, 2015 and 2014 to income before income
tax expense, is as follows:
Computed “expected” tax expense
Increase (reduction) in tax expense resulting from:
State tax expense, net of federal tax effect
Effect of statutory rate changes enacted in 2014
Non-deductible merger costs
Incentive stock options
Bank owned life insurance
Tax-exempt interest income, net of expense
Insurance premiums
Excess tax benefit from exercise of stock options
and vesting of restricted stock
Other
Income tax expense
F-30
2016
$ 13,931
805
—
114
152
(227)
(1,801)
(364)
(911)
47
$ 11,746
2015
$8,785
1,031
—
20
58
(214)
(703)
—
—
44
$9,021
2014
$4,742
593
(223)
150
104
(101)
(49)
—
—
(82)
$5,134
Income tax expense (benefit) was as follows:
Current expense
Federal
State
Deferred expense
Federal
State
Income tax expense
2016
2015
2014
$ 11,416
1,294
$8,302
1,777
$4,444
820
(908)
(56)
(867)
(191)
(222)
92
$ 11,746
$9,021
$5,134
The sources of deferred income tax assets (liabilities) at December 31, 2016 and 2015 and the tax effect is as follows:
2016
2015
Deferred tax assets:
Organizational and start-up costs
Allowance for loan losses
Unrealized loss on securities
Net operating loss carry forward
Purchase accounting fair value adjustments
Accrued other expenses
Nonaccrual loan interest
Loan fees
Other
Total deferred tax asset
Deferred tax liabilities:
Mortgage servicing rights
Premises and equipment
Prepaid expenses
Unrealized gain on securities
Purchase accounting fair value adjustments
Mortgage banking derivatives
Other
Total deferred tax liability
Net deferred tax asset
$
115
6,340
4,826
4,332
1,914
512
468
312
139
18,958
$ (1,429)
(1,080)
(527)
—
(639)
(8)
(262)
(3,945)
$ 15,013
$
135
3,715
207
4,802
2,231
511
496
971
367
13,435
$ (1,319)
(1,113)
(571)
—
(873)
(94)
(35)
(4,005)
$ 9,430
At December 31, 2016, the federal net operating loss remaining from the acquisition of MidSouth Bank totaled $12.4 million, which
will expire at various dates from 2025 to 2031. The federal net operating losses that can be utilized are subject to an annual limitation
of $1.3 million. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.
The Company does not have any uncertain tax positions and did not have any interest and penalties recorded in the income statement
for the years ended December 31, 2016, 2015 and 2014. The Company and its subsidiaries are subject to U.S. federal income tax as
well as income tax of the state of Tennessee. The Company is no longer subject to examination by taxing authorities for years before
2013.
F-31
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company enters into various credit arrangements with its executive officers, directors and their affiliates. These arrangements
generally take the form of commercial lines of credit, personal lines of credit, mortgage loans, term loans or revolving arrangements
secured by personal residences.
Loans to principal officers, directors, and their affiliates during 2016 were as follows:
Beginning balance
New loans/advances
Effect of changes in composition of related parties
Participations sold
Repayments
Ending balance
$ 13,213
5,783
—
(890)
(4,535)
$ 13,571
Deposits from principal officers, directors, and their affiliates at year end 2016 and 2015 were $18,836 and $6,441.
The Company entered into a 15-year lease agreement for a branch and administrative facility in downtown Franklin, Tennessee on
May 7, 2010. The Company also entered into a 15-year lease for its Berry Farms branch in Franklin, Tennessee, on June 12, 2013 with
certain outside directors of the Company. The Berry Farms branch opened during 2013. During 2014, the Company entered into 15-
year lease agreements for an addition to its branch and administrative facility in downtown Franklin and for its Cool Springs branch in
Franklin, Tennessee. During 2015, the Company entered into 15 year lease agreements for three of its Rutherford County branches
that were acquired during the acquisition of MidSouth Bank during 2014. During 2015, these three buildings sold to related parties,
and lease agreements were executed upon completion of the sale, and during 2016, these properties were sold by the Company’s
related parties to an outside party. During 2015, the Company also entered into a lease agreement to expand its downtown Franklin
location by adding a mortgage facility and parking garage. The expansion to the downtown Franklin location was completed during
2016.
Rent expense attributable to related party leases in 2016, 2015 and 2014, was $2,574, $2,296 and $1,222, respectively. Rent
commitments to related parties, before considering renewal options that generally are present, are disclosed in Note 5. The Company
also paid a company affiliated with an outside director $2,261 and $369 for construction of leasehold improvements during 2016 and
2015. In addition, the Company also paid a company affiliated with an outside director $806 and $666 for the procurement of various
insurance policies during the years ending December 31, 2016 and 2015.
NOTE 14 - SHARE-BASED PAYMENTS
In connection with the Company’s 2010 private offering, 32,425 warrants were issued to shareholders, one warrant for every
twenty shares of common stock purchased. Each warrant allows the shareholders to purchase an additional share of common stock at
$12.00 per share. The warrants were issued with an effective date of March 30, 2010 and will be exercisable in whole or in part up to
seven years following the date of issuance. The warrants are detachable from the common stock. There were 8,450 and 6,570 warrants
exercised during 2016 and 2015, respectively. A summary of the stock warrant activity for the years ended December 31, 2016 and
2015 follows:
Stock warrants exercised:
Intrinsic value of warrants exercised
Cash received from warrants exercised
2016
2015
$181
101
$ 71
79
At December 31, 2016, there were 16,857 outstanding warrants associated with the 2010 offering.
Since the common stock of the Company is registered under the Securities Act and has been traded on a national securities exchange
at $15.00 or more for forty-five (45) consecutive days, the Company may redeem the 2010 warrants at any time with not less than
thirty (30) days’ written notice to the holders of such 2010 warrants, in whole or in part, at a redemption price of $1.00 per warrant;
provided, however, that the holder of the 2010 warrant may exercise the 2010 warrant, in whole or in part, during such thirty (30) day
period.
F-32
The Company has two share based compensation plans as described below. Total compensation cost that has been charged against
income for those plans was $1,641, $860, and $611, respectively, for 2016, 2015, and 2014. The total income tax benefit related to
vesting of restricted stock and exercises of stock options was $1,013, $533, and $29, respectively, for 2016, 2015 and 2014.
Stock Option Plan: The Company’s 2007 Stock Option Plan (“stock option plan” or the “Plan”), which was shareholder-approved,
permitted the grant of share options to its employees, organizers and directors for up to 551,250 shares of common stock. The Plan
was amended during April 2010 to increase the number of shares available for issuance to 1,000,000. In April 2013, the Plan was
amended to offer additional forms of equity compensation, to change the Plan’s name to the Franklin Financial Network, Inc. 2007
Omnibus Equity Incentive Plan, and to increase the number of authorized shares to 1,500,000. The Company believes that such
awards better align the interests of its employees with those of its shareholders. Shareholders approved amendments to the Plan to
increase the number of authorized shares to 2,000,000 in June 2014 and to 4,000,000 in February 2015. At December 31, 2016, there
were 2,014,652 authorized shares available for issuance.
Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s
common stock at the date of grant; those option awards have a vesting period of two to five years and have a ten-year contractual
term. The Company assigns discretion to its Board of Directors to make grants either as qualified incentive stock options or as non-
qualified stock options. All employee grants are intended to be treated as qualified incentive stock options, if allowable. All other
grants are expected to be treated as non-qualified.
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’s
common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior.
The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes
into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
On the date of the merger, 322,300 MidSouth common stock options were converted into 137,280 options to purchase shares of FFN
common stock with an exercise price of $8.57 per option pursuant to the terms of the merger agreement. Using the Black-Scholes
option valuation model, the grant date fair value was estimated to be $6.31 per converted option based on the $14.50 fair value per
share of FFN common stock at July 1, 2014. No post combination expense was required related to the converted options.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date.
Risk-free interest rate
Expected term
Expected stock price volatility
Dividend yield
2016
1.59%
2015
1.84%
2014
1.82%
7.5 years
7.5 years
5.9 years
30.45%
0.22%
25.00%
0.22%
10.87%
0.23%
The weighted average fair value of options granted for the years ending December 31, 2016, 2015 and 2014 was $10.23, $6.44, and
$4.12, respectively.
F-33
A summary of the activity in the stock option plans for the years ended December 31, 2016, 2015 and 2014 follows:
Outstanding at December 31, 2013
Granted
Conversion of pre-existing MidSouth options
Exercised
Forfeited, expired, or cancelled
Outstanding at December 31, 2014
Granted
Exercised
Forfeited, expired, or cancelled
Outstanding at December 31, 2015
Granted
Exercised
Forfeited, expired, or cancelled
Outstanding at December 31, 2016
Vested or expected to vest
Exercisable at December 31, 2016
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Price
$ 11.27
13.55
8.57
9.92
12.01
$ 11.32
20.82
11.53
19.02
$ 13.04
28.85
11.31
19.43
Shares
946,644
181,680
137,280
(23,809)
(31,135)
1,210,660
245,449
(138,901)
(4,417)
1,312,791
299,587
(214,947)
(2,415)
1,395,016
$ 16.70
1,325,265
740,708
$ 16.70
$ 11.59
6.39
6.39
4.65
$ 35,090
$ 33,335
$ 22,417
Stock options exercised:
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from option exercises
2016
2015
2014
$4,725
1,571
843
$1,727
1,301
451
$ 187
236
29
As of December 31, 2016, there was $3,691 of total unrecognized compensation cost related to non-vested stock options granted under
the Plan. The cost is expected to be recognized over a weighted-average period of 3.9 years.
Restricted Share Award Plan: Additionally, the Company’s 2007 Omnibus Equity Incentive Plan provides for the granting of
restricted share awards and other performance related incentives. When restricted shares are awarded, a participant receives voting and
dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. These awards have a
vesting period of two to five years and vest in equal annual installments on the anniversary date of the grant.
F-34
A summary of activity for non-vested restricted share awards for the year ended December 31, 2016, 2015 and 2014 is as follows:
Non-vested Shares
Non-vested at December 31, 2013
Granted
Vested
Forfeited
Non-vested at December 31, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2015
Granted
Vested
Forfeited
Non-vested at December 31, 2016
Weighted-Average
Grant-Date
Fair Value
$
$
$
13.00
14.15
13.00
14.09
13.93
20.69
13.99
15.99
15.89
28.47
17.06
16.97
19.81
Shares
28,685
87,874
(9,166)
(4,683)
102,710
31,938
(25,075)
(3,709)
105,864
36,496
(33,407)
(2,495)
106,458
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 December 31, 2016, there was
$1,713 of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 3.4 years. The total fair value of shares vested during the years ended December 31,
2016, 2015 and 2014 was $1,003, $560, and $124.
NOTE 15 – 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, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully
phased in by January 1, 2019. Management believes that, as of December 31, 2016, the Company and Bank meet all capital adequacy
requirements to which they are subject.
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, 2015 with full compliance with all of the requirements being phased in over a multi-year
schedule, and fully phased in by January 1, 2019. Under the Basel III rules, in order to avoid limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a
capital conservation buffer composed of Common Equity Tier 1 Capital above its minimum risk-based capital requirements. The
buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements began on January 1, 2016 and the
requirements will be fully phased in on January 1, 2019. The capital conservation buffer threshold for 2016 is 0.625%. A banking
organization with a buffer greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on
capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be
subject to increasingly stringent limitations as the buffer approaches zero. The rule also prohibits a banking organization from making
distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its
capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. Effectively, the Basel III framework will require
us to meet minimum capital ratios of (i) 7% for Common Equity Tier 1 Capital, (ii) 8.5% Tier 1 Capital, and (iii) 10.5% Total Capital.
The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current
calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not
already reflected in net income. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation
buffer will exceed the prompt corrective action (“PCA”) well-capitalized thresholds.
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
F-35
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 December 31, 2016, the most
recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the institution’s category. Actual and
required capital amounts and ratios are presented below as of December 31, 2016 and 2015 for the Company and Bank.
December 31, 2016
Company common equity Tier 1 capital to risk-weighted
assets
Company Total Capital to risk weighted assets
Company Tier 1 (Core) Capital to risk weighted assets
Company Tier 1 (Core) Capital to average assets
Bank common equity Tier 1 capital to risk-weighted
assets
Bank Total Capital to risk weighted assets
Bank Tier 1 (Core) Capital to risk weighted assets
Bank Tier 1 (Core) Capital to average assets
December 31, 2015
Company common equity Tier 1 capital to risk-weighted
assets
Company Total Capital to risk weighted assets
Company Tier 1 (Core) Capital to risk weighted assets
Company Tier 1 (Core) Capital to average assets
Bank common equity Tier 1 capital to risk-weighted
assets
Bank Total Capital to risk weighted assets
Bank Tier 1 (Core) Capital to risk weighted assets
Bank Tier 1 (Core) Capital to average assets
Required
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$263,693 11.75%
$338,675 15.09%
$263,693 11.75%
9.28%
$263,693
$319,005 14.18%
$335,650 14.92%
$319,005 14.18%
$319,005 11.22%
$167,562 10.08%
$186,243 11.21%
$174,656 10.51%
8.48%
$174,656
$172,205 10.36%
$183,792 11.06%
$172,205 10.36%
8.36%
$172,205
$ 101,022
$ 179,595
$ 134,696
$ 113,697
$ 101,216
$ 179,939
$ 134,954
$ 113,697
$ 74,768
$ 132,922
$ 99,696
$ 82,362
$ 74,772
$ 132,928
$ 99,696
$ 82,357
4.50%
8.00%
6.00%
4.00%
4.50%
8.00%
6.00%
4.00%
4.50%
8.00%
6.00%
4.00%
4.50%
8.00%
6.00%
4.00%
N/A N/A
N/A N/A
N/A N/A
N/A N/A
$146,201
6.50%
$224,924 10.00%
8.00%
$179,939
5.00%
$142,122
N/A N/A
N/A N/A
N/A N/A
N/A N/A
$108,004
6.50%
$166,160 10.00%
8.00%
$132,928
5.00%
$102,946
Note: Minimum ratios presented exclude the capital conservation buffer.
Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking
regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the
amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net
profits of the preceding two years, subject to the capital requirements described above. Neither the Company nor the Bank may
currently pay dividends without prior written approval from its primary regulatory agencies.
NOTE 16 - 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.
F-36
The Company used the following methods and significant assumptions to estimate the fair value of each type of asset and liability:
Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities
where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix
pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt
securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not
available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date
(Level 2).
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent
real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a
Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book
value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge,
changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s
business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment
and adjusted accordingly. Appraisals for impaired loans are generally obtained annually but may be obtained more frequently based
on changing circumstances as part of the aforementioned quarterly evaluation.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs
to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These
appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of
the inputs for determining fair value. Foreclosed assets are evaluated on a quarterly basis for additional impairment and adjusted
accordingly.
Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for
commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been
review and verified by the Company. Once received, a member of the credit administration department reviews the assumptions and
approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as
recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has
been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at
fair value.
Loans Held For Sale: These loans are typically sold to an investor following loan origination and the fair value of such accounts are
readily available based on direct quotes from investors or similar transactions experienced in the secondary loan market. Fair value
adjustments, as well as realized gains and losses are recorded in current earnings. Fair value is determined by market prices for similar
transactions adjusted for specific attributes of that loan (Level 2).
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has
elected the fair value option, are summarized below:
Fair Value Measurements at
December 31, 2016 Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets
Securities available for sale
Mortgage-backed securities-residential
Mortgage-backed securities-commercial
$
—
—
$607,085
19,334
$
—
—
F-37
Fair Value Measurements at
December 31, 2016 Using:
State and political subdivisions
Total securities available for sale
Loans held for sale
Mortgage banking derivatives
Financial Liabilities
Mortgage banking derivatives
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
—
—
—
—
—
$
$
$
$
Significant
Other
Observable
Inputs
(Level 2)
128,336
$ 754,755
$ 23,699
229
$
$
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
$
$
$
66
$
—
Financial Assets
Securities available for sale
U.S. government sponsored entities and
agencies
Mortgage-backed securities-residential
Mortgage-backed securities-commercial
State and political subdivisions
Total securities available for sale
Loans held for sale
Mortgage banking derivatives
Financial Liabilities
Mortgage banking derivatives
Fair Value Measurements at
December 31, 2015 Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
—
—
—
—
—
—
—
—
$ 6,817
500,955
19,835
48,231
$575,838
$ 14,079
$
$
411
29
$
$
$
$
$
—
—
—
—
—
—
—
—
At December 31, 2016, the unpaid principal balance of loans held for sale was $23,457, resulting in an unrealized gain of $242
included in gains on sale of loans. None of these loans are 90 days or more past due or on nonaccrual as of December 31, 2016. At
December 31, 2015, the unpaid principal balance of loans held for sale was $13,754, resulting in an unrealized gain of $325 included
in gains on sale of loans.
There were no transfers between levels during 2016 and 2015.
At December 31, 2016, there was one collateral dependent impaired loan carried at fair value of $1,650, and at December 31, 2015,
there were no collateral dependent impaired loans carried at fair value.
Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $0 and $200 as of December 31, 2016 and
2015, respectively. There were no properties at December 31, 2015 that had required write-downs to fair value resulting in no write
downs for the year ended December 31, 2015.
F-38
The carrying amounts and estimated fair values of financial instruments, at December 31, 2016 and 2015 are as follows:
Financial assets
Cash and cash equivalents
Securities available for sale
Certificates of deposit held at other financial
institutions
Securities held to maturity
Loans held for sale
Net loans
Restricted equity securities
Servicing rights, net
Accrued interest receivable
Financial liabilities
Deposits
Federal funds purchased and repurchase
agreements
Federal Home Loan Bank advances
Subordinated notes
Accrued interest payable
Financial assets
Cash and cash equivalents
Securities available for sale
Certificates of deposit held at other financial
institutions
Securities held to maturity
Loans held for sale
Net loans
Restricted equity securities
Servicing rights, net
Accrued interest receivable
Financial liabilities
Deposits
Federal funds purchased and repurchase
agreements
Federal Home Loan Bank advances
Accrued interest payable
Carrying
Amount
Level 1
Fair Value Measurements at
December 31, 2016 Using:
Level 3
Level 2
Total
$
90,927
754,755
$
90,927
—
$ —
754,755
$
—
—
$
90,927
754,755
1,055
228,894
23,699
1,757,039
11,843
3,621
9,931
—
—
—
—
n/a
—
—
1,055
227,892
23,699
—
n/a
5,015
5,172
—
—
—
1,727,188
n/a
—
4,759
1,055
227,892
23,699
1,727,188
n/a
5,015
9,931
$ 2,391,818
$ 1,551,461
$ 836,444
$
—
$ 2,387,905
83,301
132,000
58,337
1,924
—
—
—
154
83,301
131,098
—
1,075
—
—
61,762
695
83,301
131,098
61,762
1,924
Carrying
Amount
Level 1
Fair Value Measurements at
December 31, 2015 Using:
Level 3
Level 2
Total
$
52,394
575,838
$
52,394
—
$ —
575,838
$
—
—
$
52,394
575,838
250
158,200
14,079
1,292,239
7,998
3,455
7,299
—
—
—
—
n/a
—
3
250
161,969
14,079
—
n/a
4,635
3,780
—
—
—
1,279,849
n/a
—
3,516
250
161,969
14,079
1,279,849
n/a
4,635
7,299
$ 1,814,039
$ 1,062,587
$ 748,961
$
—
$ 1,811,548
101,086
57,000
644
—
—
100
101,086
56,931
544
—
—
—
101,086
56,931
644
The methods and assumptions not previously described used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are
classified as Level 1.
(b) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3
classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are
valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not
necessarily represent an exit price.
F-39
(c) Restricted Equity Securities: It is not practical to determine the fair value of Federal Home Loan Bank or Federal Reserve
Bank stock due to restrictions placed on its transferability.
(d) Mortgage Servicing Rights: Fair value of mortgage servicing rights is based on valuation models that calculate the present
value of estimated net cash flows based on industry market data. The valuation model incorporates assumptions that market
participants would use in estimating future net cash flows resulting in a Level 2 classification.
(e) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and
certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amount) resulting in a Level 1 classification. The carrying amounts of fixed-term money market accounts
approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for certificates of deposit are
estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Federal Funds Purchased and Repurchase Agreements: The carrying amounts of federal funds purchased, borrowings
under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair
values resulting in a Level 2 classification.
(g) Federal Home Loan Bank Advances: The fair values of the Company’s long-term borrowings are estimated using
discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a
Level 2 classification.
(h) Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a
Level 1, 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 17 – MORTGAGE BANKING DERIVATIVES
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for
the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into
forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in
order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage
banking derivatives are not designated in hedge relationships. At year-end 2016, the Company had approximately $42,689 of interest
rate lock commitments and approximately $50,955 of forward commitments for the future delivery of residential mortgage loans. The
fair value of these mortgage banking derivatives was reflected by a derivative asset and liability of $229 and $66, respectively, at
December 31, 2016. At year-end 2015, the Company had approximately $42,486 of interest rate lock commitments and approximately
$41,236 of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking
derivatives was reflected by a derivative asset and liability of $411 and $29, respectively, at December 31, 2015. Fair values were
estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-
banking derivatives are included in net gains on sale of loans.
The net gains (losses) relating to free-standing derivative instruments used for risk management is summarized below:
Forward contracts related to mortgage loans held for sale and
interest rate contracts
Interest rate contracts for customers
2016
2015
2014
$ (37)
(182)
$ 103
126
$ (411)
100
F-40
The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as
of December 31, 2016 and 2015:
Included in other assets (liabilities):
Interest rate contracts for customers
Forward contracts related to mortgage loans held for sale
2016
2015
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
$42,689
$50,955
$229
$ (66)
$42,486
$41,236
$411
$ (29)
NOTE 18 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in
the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit
loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to
make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
Commitments to make loans
Unused lines of credit
Standby letters of credit
2016
2015
Fixed
Rate
$ 42,689
179,096
8,581
Variable
Rate
$ —
336,891
16,413
Fixed
Rate
$ 42,486
150,030
1,342
Variable
Rate
$ —
234,949
13,131
Commitments to make loans are generally made for periods of over 365 days. The fixed rate loan commitments have interest rates
ranging from 2.59% to 12.00% and maturity terms ranging from 1 year to 26 years.
NOTE 19 – PREFERRED STOCK
At December 31, 2015, the Company had issued and outstanding 10,000 shares of preferred stock series A as part of its participation
in the Small Business Lending Fund (“SBLF”) in 2011, when the Company entered into a Small Business Lending Fund Securities
Purchase Agreement (“SBLF Purchase Agreement”) with the United States Department of the Treasury (“Treasury”). On March 25,
2016, the Company redeemed the Series A preferred stock that had been issued to the Treasury, and as a result, the Company had no
preferred stock issued and outstanding at December 31, 2016.
NOTE 20 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Franklin Financial Network, Inc. follows:
CONDENSED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Investment in banking subsidiaries
Investment in other subsidiaries
Other assets
Total assets
F-41
December 31,
2016
2015
$ 4,366
325,571
1,363
963
$ 1,913
186,322
262
929
$ 332,263
$ 189,426
LIABILITIES AND EQUITY
Subordinated notes
Accrued expenses and other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2016
2015
$ 58,337
3,668
270,258
$ —
610
188,816
$ 332,263
$ 189,426
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
2016
$ 2,050
305
2,902
2,842
Years ended December 31,
2015
2014
$
150
488
—
2,270
(1,632)
(689)
17,023
$
575
235
—
1,499
(689)
(324)
8,779
Dividends from subsidiaries
Other income
Interest expense
Other expense
Loss before income tax and undistributed subsidiaries income
Income tax benefit
Equity in undistributed subsidiaries income
(3,389)
(2,320)
29,126
Net income
Comprehensive income
$ 28,057
$ 16,080
$ 8,414
$ 20,895
$ 13,584
$ 15,123
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments:
Equity in undistributed subsidiaries income
Excess tax benefit related to the exchange of stock options
Amortization of debt issuance costs
Stock-based compensation
Compensation expense related to common stock issued to 401(k) plan
Loss on disposal of subsidiary
Change in other assets
Change in other liabilities
Net cash from operating activities
Cash flows from investing activities
Investments in subsidiaries
Net cash acquired from acquisition
Net cash from the disposal of subsidiary
Net cash from investing activities
Cash flows from financing activities
Proceeds from other borrowings
Repayment of other borrowings
Proceeds from issuance of subordinated notes, net of issuance costs
Proceeds from exercise of common stock warrants
Proceeds from exercise of common stock options
Proceeds from issuance of common stock, net of offering costs
F-42
Years ended December 31,
2015
2016
2014
$ 28,057
$ 16,080
$ 8,414
(29,126)
—
124
105
—
—
(34)
3,058
(17,023)
(279)
—
45
14
—
(629)
463
(8,779)
(29)
—
39
15
32
77
92
2,184
(1,329)
(139)
(116,850)
—
—
(49,809)
—
—
(12,396)
12,197
205
(116,850)
(49,809)
6
10,000
(10,000)
58,213
101
1,571
67,557
—
—
—
79
1,834
50,423
—
—
—
—
265
(514)
Proceeds from subsidiaries related to issuance of common stock related to 401(k)
plan
Divestment of common stock issued to 401(k) plan
Redemption of Series A preferred stock
Dividends paid on preferred stock
Net cash from financing activities
Net change in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Years ended December 31,
2015
2014
2016
—
(300)
(10,000)
(23)
319
—
—
(100)
260
—
—
(100)
117,119
52,555
2,453
1,417
1,913
496
$
4,366
$ 1,913
$
(89)
(222)
718
496
Non-cash supplemental information:
Transfers from subsidiary stock based compensation expense to parent company only
additional paid-in capital
Fair value of stock and stock options issued related to MidSouth Bank acquisition
(See Note 2)
$
1,536
$
815
$
572
—
—
40,976
F-43
NOTE 21 – 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:
Basic
Net income available to common
shareholders
Less: earnings allocated to participating
securities
Net income allocated to common
shareholders
Weighted average common shares
outstanding including participating
securities
Less: Participating securities
Average shares
2016
Years Ended December 31,
2015
2014
$
28,034
$
15,980
$
8,314
(284)
(174)
(94)
$
27,750
$
15,806
$
8,220
10,933,095
(110,628)
9,885,233
(107,923)
6,320,316
(71,586)
10,822,467
9,777,310
6,248,730
Basic earnings per common share
$
2.56
$
1.62
$
1.32
Diluted
Net income allocated to common
shareholders
Weighted average common shares
outstanding for basic earnings per
common share
Add: Dilutive effects of assumed exercises of
stock options
Add: Dilutive effects of assumed exercises of
stock warrants
Average shares and dilutive potential
common shares
$
27,750
$
15,806
$
8,220
10,822,467
9,777,310
6,248,730
655,485
491,318
230,290
12,667
13,581
6,810
11,490,619
10,282,209
6,485,830
Dilutive earnings per common share
$
2.42
$
1.54
$
1.27
Stock options for 165,232, 245,992, and 2,000 shares of common stock were not considered in computing diluted earnings per
common share for the year ended December 31, 2016, 2015, and 2014, because they were antidilutive.
NOTE 22 - CAPITAL OFFERING
The Company completed a secondary public offering of its common stock on November 21, 2016. The Company issued 2,242,500
shares of common stock at a price of $32.00 per share. Net proceeds were as follows:
Gross proceeds
Less: Stock offering costs
Net proceeds from issuance of common stock
$ 71,760
(4,203)
$ 67,557
The proceeds of the offering were used to provide capital to Franklin Synergy Bank to support continued growth and for general
corporate purposes.
F-44
NOTE 23 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table provides a summary of selected consolidated quarterly financial data for the years ended December 31, 2016 and
2015:
Income Statement Data ($):
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Net income before taxes
Income tax expense
Net income
Net income available to
common shareholders
Earnings per share, basic
Earnings per share,
diluted
2016
2015
Fourth
Quarter
Third
Quarter†
Second
Quarter†
First
Quarter†
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 27,336
5,637
21,699
1,145
2,553
13,229
9,878
2,699
7,179
$ 25,724
5,049
20,675
1,392
4,876
13,708
10,451
3,314
7,137
$ 24,286
4,352
19,934
1,567
4,626
12,913
10,080
2,572
7,508
$ 22,561
3,285
19,276
1,136
3,085
11,831
9,394
3,161
6,233
$ 20,081
2,886
17,195
1,876
2,996
11,098
7,217
2,553
4,664
$ 19,301
2,565
16,736
1,724
3,795
10,850
7,957
2,807
5,150
$ 15,413
2,086
13,327
805
2,830
10,551
4,801
1,667
3,134
$ 13,926
1,769
12,157
625
3,209
9,615
5,126
1,994
3,132
7,179
$ 0.61
7,137
$ 0.67
7,508
$ 0.70
6,210
$ 0.59
4,639
$ 0.44
5,125
$ 0.49
3,109
$ 0.30
3,107
$ 0.39
$ 0.58
$ 0.63
$ 0.66
$ 0.55
$ 0.41
$ 0.46
$ 0.28
$ 0.37
† The Company adopted Accounting Standard Update 2016-09 during the fourth quarter of 2016, and as a result, the amounts
presented for income tax expense, net income, net income available to common shareholders and earnings per share have been
adjusted accordingly and will not agree with the Company’s Form 10-Q filings for these quarters. The adoption of ASU 2016-09
impacted previously reported quarterly earnings and/or earnings per share in 2016, as follows: (1) first quarter 2016 – no tax
benefit was recorded; decreased diluted earnings per share by $0.01; (2) second quarter 2016 – decreased income tax expense by
$509 and increased diluted earnings per share by $0.04; and (3) third quarter 2016 – decreased income tax expense by $107 and
increased diluted earnings per share by $0.01.
F-45
Subsidiaries of the Registrant
Name
Franklin Synergy Bank
Franklin Synergy Investments of Nevada, Inc.
Franklin Synergy Investments of Tennessee, Inc.
Franklin Synergy Preferred Capital, Inc.
Franklin Synergy Risk Management, Inc.
Jurisdiction of Organization
Tennessee
Nevada
Tennessee
Nevada
Tennessee
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-207641 on Form S-8 and Registration Statements
No. 333-208265 and 333-208578 on Form S-3 of Franklin Financial Network, Inc. of our report dated March 16, 2017 relating to the
financial statements, appearing in this Annual Report on Form 10-K.
/s/ Crowe Horwath LLP
Exhibit 23.1
Franklin, Tennessee
March 16, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.1
I, Richard E. Herrington, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Franklin Financial
Network, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2017
By: /s/ Richard E. Herrington
Richard E. Herrington
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 31.2
I, Sarah Meyerrose, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 of Franklin Financial
Network, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2017
By: /s/ Sarah Meyerrose
Sarah Meyerrose
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(b) UNDER
THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 1350 OF
CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
Exhibit 32
Each of the undersigned, Richard E. Herrington and Sarah Meyerrose, certifies, pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, that (1) this
Annual Report on Form 10-K for the year ended December 31, 2016 of Franklin Financial Network, Inc. (the “Company”) fully
complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and (2) the information contained in this report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
This Certification is signed on March 16, 2017.
/s/ Richard E. Herrington
Richard E. Herrington
Chief Executive Officer
/s/ Sarah Meyerrose
Sarah Meyerrose
Chief Financial Officer
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Company Information
BOARD OF DIRECTORS
Richard E. Herrington
Chairman
Jimmy E. Allen
Director
Dr. David H. Kemp
Director
Pamela J. Stephens
Director
Gregory E. Waldron
Director
Benjamin P. Wynd
Director
Henry W. Brockman, Jr.
Director
Melody J. Sullivan
Lead Independent Director
Corporate Office
Franklin Financial Network, Inc.
722 Columbia Avenue
Franklin, Tennessee 37064
615-236-2265
Annual Shareholders’ Meeting
The annual meeting of shareholders
will be held on Thursday May 25,
2017, at 9:30 a.m., Central Time,
in the Musgrove Auditorium at the
Company’s corporate office.
Registrar and Transfer Agent
Computershare Investor Services
211 Quality Circle, Suite 210
College Station, TX 77845
800-368-5948
www-us.computershare.com/investor
Shareholder Inquiries and
Availability of Form 10-K Report
A copy of the Company’s Annual
Report on Form 10-K for the year
ended December 31, 2016, (without
exhibits) is available without charge
to shareholders upon written
request to the Corporate Secretary
at the Company’s corporate office.
Franklin Financial Network, Inc.
722 Columbia Avenue
Franklin, Tennessee 37064
615-236-2265
, INC.