2017
ANNUAL REPORT
Franklin Financial 2017 AR.indd 1
4/11/18 11:03 AM
, 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 $3.8 billion
at December 31, 2017, the Bank currently operates through
14 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.
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Dear Fellow Shareholder:
Franklin Financial Network announced another year of record growth and earnings;
however, 2017 was not without its challenges. Simply put, we are not satisfied with our 2017
share price performance, which registered a decline of 19% for the year. Understanding that
some market forces are beyond our control, we are fully focused on continuing our mission
to enhance shareholder value and believe that a strong foundation is in place to successfully
execute our business plan. Franklin Financial Network is a franchise defined by rapid
growth, disciplined credit and deep real estate expertise. We operate in one of the most
attractive geographic markets in the country, and we remain excited about our prospects for
2018 and beyond.
Our entire team contributed to the many positive accomplishments in 2017. Our growth
trajectory notably continues to outpace our peers and the broader industry, and included
loan growth of 27% and deposit growth of 32%. The bank maintained stellar credit
quality, and, during 2017, we continued to refine our ability to be disciplined, conservative
underwriters of each new loan. We focus on the less risky sectors of the real estate
Franklin Financial Network is a franchise defined by rapid growth, disciplined credit and deep
real estate expertise. We operate in one of the most attractive geographic markets in the
country, and we remain excited about our prospects for 2018 and beyond.
market, originate high quality loans and actively manage each relationship. Those factors
led to improved credit metrics in 2017 compared to 2016, even as we substantially grew
our balance sheet. Net recoveries of 0.02% were realized for the year, our ratio of
nonperforming loans to total loans improved 22 basis points to 0.13% and our allowance
for loan losses increased slightly to 0.94% of total loans. In short, the soundness of our
franchise remains strong.
Also in 2017, we continued significant investments to support our ongoing growth. We
opened a new flagship branch in Murfreesboro, which is in Rutherford County, and we
expect the new location to help drive growth in customer deposits. Our acquisition of Civic
Bank & Trust was approved by regulators, resulting in closing the transaction on April 1,
2018. Civic’s premier location represents our first physical expansion into Davidson County,
providing an established platform for our expansion in the dynamic Nashville market. Our
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new branch and the Civic acquisition help us build scale and increase market share in one
of the best metropolitan areas in the country. The bank also made significant investments in
technology and infrastructure during the year that will support the franchise as it continues
to grow organically and through opportunistic acquisitions.
Despite these meaningful accomplishments, a key measure of profitability, net interest
margin, was impacted by both rising interest rates and a flattening yield curve, declining 36
basis points to 3.06% compared to 2016. Over the same period, net interest income grew an
impressive 19%, contributing to record net income. We are executing our plan to continue
the growth in net interest income while addressing the margin challenges. Our leadership
team has extensive experience leading banks through interest rate and economic cycles,
and we are confident of both our strategy and our ability to successfully manage through the
current cycle.
In closing, our Company, as measured by soundness, growth and profitability, remains
strong. We will continue to execute our differentiated business strategy, and we remain
optimistic about our prospects for 2018 and beyond. We recognize our outstanding team
at Franklin Financial Network and thank all of our colleagues for their unceasing efforts to
provide the best service to our customers. Our Middle Tennessee market has provided a
strong growth environment, but without the commitment, discipline and entrepreneurship of
our employees, we could not have grown so successfully or created the deep relationships
that define our franchise. We remain fundamentally committed to our business model and
confident that strong execution will create long-term shareholder value. As your fellow
shareholder, thank you for your investment in Franklin Financial Network.
Sincerely,
Richard E. Herrington
Chairman, President and
Chief Executive Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended December 31, 2017
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. ☐ Yes ☒ 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. ☐ Yes ☒ 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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ 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. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Accelerated filer
☒
Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ 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, 2017 was $509,234,064.30 (computed on the basis of $41.85 per share).
The number of shares outstanding of the registrant’s common stock, no par value per share, as of February 28, 2018 was 13,252,772.
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, 2017, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to
be held on May 24, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
TABLE OF CONTENTS
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. 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
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
RELATED STOCKHOLDER MATTERS
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15.
ITEM 16.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
EXHIBIT INDEX
SIGNATURES
INDEX TO FINANCIAL STATEMENTS
2
2
13
28
28
28
28
29
29
31
33
59
60
60
60
61
62
62
62
62
62
62
63
63
63
63
70
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 13 branches and one loan production office in the demographically attractive and growing
Williamson, Rutherford and Davidson Counties within the Nashville metropolitan area. As used in this report, unless the context
otherwise indicates, any reference to “Franklin Financial,” “our company,” “the company,” “us,” “we” and “our” refers to Franklin
Financial Network, Inc. together with its consolidated subsidiaries (including Franklin Synergy 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, 2017, we had consolidated total assets of $3.8 billion, total loans, including loans held for sale, of
$2.3 billion, total deposits of $3.2 billion and total equity of $304.7 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.
FFN and the Bank entered into an Agreement and Plan of Reorganization and Bank Merger with Civic Bank & Trust (“Civic”),
a Tennessee banking corporation, on December 14, 2015, as amended by Amendment No. 1 thereto, dated May 9, 2016, Amendment
No. 2 thereto, dated March 30, 2017, and Amendment No. 3 thereto, dated September 29, 2017, pursuant to which Civic will merge
with and into the Bank, with the Bank as the surviving Tennessee banking corporation. We received the approval of the TDFI on
April 13, 2016 and approval from the Federal Reserve Board (FRB) on December 28, 2017. The proposed merger has been approved
by each company’s Board of Directors, and is subject to approval by Civic’s shareholders. Civic has called a special meeting of
shareholders to be held on March 30, 2018 at 10:00 a.m. Central Time for approval of the merger.
Our Market
We operate 13 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.
2
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.
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
25.3% per the Federal Deposit Insurance Corporation’s (“FDIC’s”) Summary of Deposits report as of June 30, 2017, despite the
presence of more institutions competing for deposits. The Company’s deposit market share in Rutherford County has grown to 12.2%,
which is the second-most deposit share in the Rutherford County market.
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 53.6% of local deposits in the Nashville-
Davidson-Murfreesboro-Franklin metropolitan statistical area (the “Nashville MSA”) as of June 30, 2017) 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
3
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.
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 39% from December 31, 2009 to
December 31, 2017. 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 22.3% of our portfolio at
December 31, 2017, by a CAGR of nearly 64% 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 approximately 25%. Our
growth has resulted in improved profitability, as reflected by return on average assets increasing from negative in 2009 to
0.82% for 2017.
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.
4
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.
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 30 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
The Bank has the capacity to provide wealth management services, including trust services, as the Bank is authorized to exercise
trust powers, which provides the Bank with a competitive advantage. As of December 31, 2017, our wealth management and trust
services division managed $359.9 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 ten full years of operation. As of December 31, 2017, the Bank had $2.3 billion in loans, including
loans held for sale; assets of $3.8 billion, $3.2 billion in deposits, $304.7 million of equity, and was number one in deposit market
share in Williamson County and number two in deposit market share in Rutherford County based on deposits at June 30, 2017.
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 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 the Bank, 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, 2017, we and our bank
subsidiary had 279 full-time employees and two part-time employees. 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.
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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 their 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
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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 2017 is 1.25%. 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
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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.
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. The Dodd-Frank Act made permanent an
increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. 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.
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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 provisions 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:
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•
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•
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•
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:
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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, FFN and the Bank entered into an Agreement and Plan of Reorganization and Bank Merger with Civic
on December 14, 2015, as amended by Amendment No. 1 thereto, dated May 9, 2016, Amendment No. 2 thereto, dated March 30,
2017, and Amendment No. 3 thereto, dated September 29, 2017 (the “Merger Agreement”). 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”). We received the approval of the TDFI on April 13, 2016 and approval from the Federal Reserve Board (FRB) on
December 28, 2017. The proposed merger has been approved by each company’s Board of Directors, and is subject to approval by
Civic’s shareholders. Civic has called a special meeting of shareholders to be held on March 30, 2018 at 10:00 a.m. Central Time at
the main office of Civic, located at 3325 West End Avenue, Nashville, Tennessee 37203, for approval of the merger.
New Offices and Branches
During 2017, the Bank relocated its Spring Hill branch in Williamson County to 4824 Main Street, Suite A, Spring Hill,
Tennessee 37174, and opened a new branch in Murfreesboro, Tennessee in Rutherford County, located at 1605 Medical Center
Parkway, Murfreesboro, Tennessee 37129.
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.
Competition For Deposits and Loans Is 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 32 banks and two savings and loan institutions,
with 104 total offices and total deposits of $8.9 billion as of June 30, 2017, 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 75 total offices and total deposits of $4.2 billion as of June 30, 2017, 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
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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.
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, 2017, approximately 52% of our loan portfolio consisted of CRE loans, including 22% 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.
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
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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.
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, 2017, approximately 78% of the Bank’s total loans were real-estate secured. One-to-four family residential
properties accounted for 26% of the Bank’s portfolio, owner-occupied commercial real estate was 9% and other commercial real
estate was 19% of the total loan portfolio. Total construction and land development lending accounted for 22% of total loans with
residential construction lending totaling 14%, commercial construction lending totaling 4% and land development lending totaling
4%. 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.
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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:
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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
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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.
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
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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.
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:
•
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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
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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 22% of total loans at
December 31, 2017. 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.
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, 2017, we had approximately
$780.8 million in out of market brokered deposits, which represented approximately 24.7% 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 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.
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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
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,
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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 2017 at 1.25%
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.
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.
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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
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. 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
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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.
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.
We May Be Adversely Affected By Changes in U.S. Tax Laws and Regulations
We are assessing the impact of the Tax Cuts and Jobs Act, enacted on December 22, 2017. This legislation required that we
revalue our deferred tax items in the fourth quarter of 2017, based on the new corporate income tax rate. As we continue evaluating
these items during 2018, subsequent adjustments could materially and adversely affect our results of operations. For additional
information see Note 12, “Income Taxes,” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and
Supplementary Data.
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Risks Related to the Civic Merger
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.
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.
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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the loss of key employees;
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.
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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.
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.
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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actual or anticipated fluctuations in our operating results, financial condition or asset quality;
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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
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.
Future Sales of Our Common Stock or Other Securities May Dilute the Value of Our Common Stock
In many situations, our Board of Directors has the authority, without the approval of our shareholders, to issue shares of our
authorized but unissued common stock or preferred stock, including shares authorized and unissued under our equity incentive plans.
In the future, we may issue additional securities, through public or private offerings, in order to raise additional capital. Any such
issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the
common stock. In addition, option holders under our stock-based incentive plans may exercise their stock options at a time when we
would otherwise be able to obtain additional equity capital on more favorable terms.
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.
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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.
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 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 $1.07 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.
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.
27
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; 4824 Main Street, Suite A, 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; 2610 Old Fort Parkway, Murfreesboro, Tennessee 37128; and 1605 Medical Center Parkway,
Murfreesboro, Tennessee 37129. The Bank also operates a loan production office at 33 Music Square West, Nashville, Tennessee
37203. In addition, the Bank also has part of its operations in an office located at 101 Southeast Parkway, Suite 100, Franklin, TN
37064. Thirteen 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.
28
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 is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “FSB”. The following table
sets forth the quarterly range of high and low market prices of our common stock as reported on the NYSE, as applicable, for the
periods indicated since January 1, 2016.
2017
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)
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)
High
Low
$ 42.60 $ 35.75
$ 44.30 $ 37.05
$ 42.15 $ 30.30
$ 36.40 $ 31.50
$ 31.62 $ 22.83
$ 33.53 $ 24.80
$ 37.79 $ 29.90
$ 42.80 $ 29.85
As of February 28, 2018, we had 1,459 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.
Recent Sales of Unregistered Securities
We had no unregistered sales of equity securities during the fourth quarter of 2017.
29
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, 2017 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 34 Month Cumulative Total Return
Assumes Initial Investment of $100
December 2017
30
ITEM 6.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.
The following selected historical consolidated financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014
and 2013, 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.)
2017
2016
2015
2014
2013
Year ended December 31,
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
Earnings attributable to non controlling interest
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
$
$
$
$
$
$
$ 132,453
35,407
97,046
4,313
92,733
14,721
60,824
46,630
18,531
28,099
—
(16)
28,083
$
$
$
$
$
2.14
2.04
23.01
—
—
13,237
99,907 $
18,323
81,584
5,240
76,344
15,140
51,681
39,803
11,746
28,057
(23)
—
28,034 $
68,721 $
9,306
59,415
5,030
54,385
12,830
42,114
25,101
9,021
16,080
(100)
—
15,980 $
43,432 $ 24,982
3,937
5,739
21,045
37,693
2,374
907
20,138
35,319
6,819
10,051
19,662
31,822
7,295
13,548
2,734
5,134
4,561
8,414
(109)
(100)
—
—
4,452
8,314 $
2.56 $
2.42 $
20.73 $
— $
—
13,037
1.62 $
1.54 $
16.92 $
— $
10
10,571
1.32 $
1.27 $
14.41 $
1.13
1.10
11.34
— $ —
10
4,863
10
7,756
13,145
10,933
9,885
6,320
3,934
13,780
11,608
10,390
6,557
4,038
$2,943,189 $2,167,792 $1,355,827 $ 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
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
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
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
$3,843,526
12,024
2,256,608
21,247
1,214,737
3,167,228
272,000
89,519
—
304,550
304,550
103
304,653
3,445,654
2,031,883
3,361,320
2,787,656
2,535,380
2,891,943
290,436
31
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:
Common equity Tier 1 ratio
Tier 1 leverage ratio
Tier 1 risk-based capital
Total risk-based capital
ASSET QUALITY RATIOS:
Net charge-offs (recoveries) to average loans
Allowance to period end loans(6)
Allowance for loan losses to non-performing loans
Non-performing assets to total assets
OTHER DATA:
Banking locations
Full-time equivalent employees
2017
2016
2015
2014
2013
Year ended December 31,
0.82%
9.67%
8.43%
— %
54.42%
3.06%
2.89%
11.37%
8.25%
11.37%
14.40%
1.10%
13.50%
8.12%
— %
53.43%
3.42%
3.29%
0.92%
9.52%
9.65%
— %
58.29%
3.62%
3.51%
0.72%
0.80%
8.24%
8.62%
9.29%
8.69%
— % — %
70.56%
3.41%
3.30%
66.65%
3.74%
3.63%
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%
(0.02)%
0.94%
698.45%
0.12%
0.02%
0.93%
0.00%
1.16%
267.76% 352.62% 580.36% 188.39%
0.35%
0.01%
0.89%
0.10%
0.85%
0.16%
0.14%
0.21%
13
284
12
268
11
225
11
216
4
123
(1) Average loans include both loans held in the Bank’s portfolio and mortgage loans held for sale and are net of deferred
(2)
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 2017, 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.
Period end loans exclude loans held for sale and exclude deferred fees and costs.
(5)
(6)
32
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.
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:
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 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
33
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.
Overview
The Company reported net income of $28,099 for the year ended December 31, 2017, compared to $28,057 for the year ended
December 31, 2016, and $16,080 for the year ended December 31, 2015. After earnings attributable to noncontrolling interest in 2017
and the payment of preferred dividends on the senior preferred stock issued to the Treasury pursuant to Small Business Lending Fund
(“SBLF”) in 2016 and 2015, the Company’s net earnings available to common shareholders for the years ended December 31, 2017,
2016 and 2015 were $28,083, $28,034, and $15,980, respectively. Net earnings available to shareholders increased by $49 when
comparing 2017 with 2016, primarily due to an increase of $6,827 in income before taxes. That was offset by an increase of $6,785 in
income tax expense, of which $5,323 is related to a deferred tax asset impairment that the Company recorded as an increase to income
tax expense as a result of the Tax Cuts and Jobs Act of 2017 that was signed into law on December 22, 2017. The primary reason for
the increase in net earnings available to common shareholders when comparing 2016 with 2015 was increased interest income on
loans and investment securities due to significant organic growth in each of these portfolios during 2016.
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, 2017, 2016 and 2015 totaled $97,046, $81,584, and $59,415, respectively, which are increases of $15,462,
or 19.0%, and $22,169, or 37.3%, respectively.
For the years ended December 31, 2017 and 2016, interest income increased $32,546 and $31,186 due to growth in both the
loan and investment securities portfolios. These were partially offset by increases of $17,084 and $9,017 in interest expense, which
totaled $35,407, $18,323 and $9,306, respectively, for the years ended December 31, 2017, 2016 and 2015, as a result of increases in
interest-bearing deposits and borrowings. In addition, interest income and interest expense increased in 2017 due to Prime interest rate
increases during the year on variable rate assets and liabilities.
Interest-earning assets averaged $3,361,320, $2,496,361, and $1,685,073 during the years ended December 31, 2017, 2016 and
2015, which are increases of $864,959, or 34.6%, and $811,288, or 48.1%, respectively. The increases in 2017 and 2016 were
primarily due to significant organic growth in loans and investment securities.
For the years ended December 31, 2017 and 2016, average loans increased 30.7% and 54.0%, respectively, and investment
securities increased 38.9% and 38.9%, respectively. The yield on average interest-earning assets decreased four basis points to 4.11%
during the year ended December 31, 2017, and decreased two basis points to 4.15% during the year ended December 31, 2016,
compared to 4.17% for the year ended December 31, 2015. The yields on average loans decreased nine basis points during the year
ended December 31, 2017 and 28 basis points during the year ended December 31, 2016. These decreases were due to the reduced
accretion of discounts on purchased loans and due to lower interest rates and fees on loans added to the loan portfolio due to
competitive pressures.
For the years ended December 31, 2017, 2016 and 2015, the yield on available for sale securities was 2.65%, 2.49% and 2.44%,
respectively. The increase in yield in 2017 and 2016 is due to the increased volume of tax-exempt municipal securities that were
purchased in 2017 and 2016 combined with the slowing of prepayment amortization during 2017.
For the years ended December 31, 2017, 2016 and 2015, the yield on held to maturity securities was 4.17%, 3.90% and 3.57%,
respectively. The increase in yields in 2017 and in 2016 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.
Interest-bearing liabilities averaged $2,891,943, $2,125,986, and $1,409,753, respectively, during the years ended December 31,
2017, 2016 and 2015, which are increases of $765,957, or 36.0%, during 2017 and $716,233, or 50.8%, during 2016. The increase for
2017 and 2016 was primarily due to growth of average interest-bearing deposits and growth in Federal Home Loan Bank advances.
During 2017, total average interest-bearing deposits grew $592,448, which included increases in average interest checking of
$292,327, average money market accounts of $10,104, and average time deposits outstanding of $284,590. 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.
34
Growth in the loan portfolio also resulted in an increase in average Federal Home Loan Bank advances of $159,803 and
$48,490, respectively in 2017 and 2016. Also, the Company’s 2017 and 2016 average subordinated notes and other borrowings
increased by $19,145 and $39,276, respectively, due to two subordinated note issuances during 2016.
The cost of average interest-bearing liabilities increased 36 basis points to 1.22% during 2017 and increased 20 basis points to
0.86% during 2016. The increase in 2017 cost of interest-bearing liabilities was due to increases in rates on interest checking, money
market accounts, time deposits, Federal Home Loan Bank advances and Federal funds purchased. 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.
35
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, 2017, 2016, and 2015:
Average Balances(7)—Yields & Rates
(Dollars in thousands)
Average
Balance
2017
Interest
Inc/Exp
Average
Yield/Rate
Year Ended December 31,
2016
Interest
Inc/Exp
Average
Balance
Average
Yield/Rate
Average
Balance
2015
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
$2,031,883 $100,568
26,182
987,196
9,267
222,222
928
16,498
4.95% $1,554,482 $ 78,329
16,593
2.65% 666,745
7,943
4.17% 203,884
500
9,904
5.62%
5.04% $ 1,009,130
2.49% 545,878
80,932
3.90%
6,940
5.05%
$53,647
13,314
2,887
350
financial institutions
Federal funds sold and other(2)
TOTAL INTEREST EARNING
2,229
101,292
33
1,120
1.48%
1.11%
827
60,519
15
241
1.81%
0.40%
250
41,943
6
99
5.32%
2.44%
3.57%
5.04%
2.40%
0.24%
ASSETS
$3,361,320 $138,098
(18,729)
103,063
$3,445,654
4.11% $2,496,361 $103,621
(13,923)
74,830
$2,557,268
4.15% $ 1,685,073
(8,398)
74,022
$ 1,750,697
$70,303
4.17%
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
$ 624,612 $ 5,003
6,542
627,140
169
54,952
15,750
1,228,676
0.80% $ 332,285 $ 1,411
3,853
1.04% 617,036
162
0.31%
49,525
8,808
1.28% 944,086
0.42% $ 268,745
0.62% 464,588
0.33%
35,779
0.93% 545,405
$ 806
2,616
164
5,102
0.30%
0.56%
0.46%
0.94%
43,402
407
0.94%
48,841
303
0.62%
48,789
306
0.63%
254,740
3,215
1.26%
94,937
884
0.93%
46,447
312
0.67%
borrowings
58,421
4,321
7.40%
39,276
2,902
7.39%
—
—
— %
TOTAL INTEREST BEARING
LIABILITIES
Demand deposits
Other liabilities
Total equity
TOTAL LIABILITIES AND
$2,891,943 $ 35,407
252,276
10,999
290,436
EQUITY
$3,445,654
NET INTEREST SPREAD(4)
NET INTEREST INCOME
NET INTEREST MARGIN(5)
1.22% $2,125,986 $ 18,323
210,780
12,739
207,763
$2,557,268
$102,691
2.89%
3.06%
$ 85,298
0.86% $ 1,409,753
164,284
7,727
168,933
$ 1,750,697
3.29%
3.42%
$ 9,306
0.66%
$60,997
3.51%
3.62%
(1)
(2)
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.
(3)
(4) Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
(5) Represents net interest income divided by total average earning assets.
(6)
Interest income and rates include the effects of tax-equivalent adjustments to adjust tax-exempt interest income on tax-exempt
loans and investment securities to a fully taxable basis.
(7) Average balances are average daily balances.
36
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
Net change year ended
December 31, 2017 versus
December 31, 2016
Net change year ended
December 31, 2016 versus
December 31, 2015
Volume
Rate
Net Change
Volume
Rate
Net Change
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
TOTAL INTEREST INCOME
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
$ 24,068 $ (1,829) $ 22,239 $ 29,035 $ (4,353) $ 24,682
3,279
8,009 1,580
5,056
600
150
94
9
(7)
142
719
9,589 2,946
1,324 4,383
149
14
45
333
673
1
(5)
97
724
334
25
160
428
18
879
$ 33,320 $ 1,157 $ 34,477 $ 36,572 $ (3,254) $ 33,318
$ 1,218 $ 2,374 $
55 2,634
(11)
18
2,642 4,300
139
841
6
(35)
1,490
1,413
3,592 $
2,689
7
399 $
206 $
370
867
(64)
62
(94)
6,942 3,800
(5)
2
104
2,331
247
325
1,419 2,902 —
605
1,237
(2)
3,706
(3)
572
2,902
$ 6,801 $ 10,283 $ 17,084 $ 8,164 $
853 $
9,017
$ 26,519 $ (9,126) $ 17,393 $ 28,408 $ (4,107) $ 24,301
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 $4,313, $5,240 and $5,030 for the years ended December 31, 2017, 2016 and 2015,
respectively. The decrease in provision amounts for 2017 compared to 2016 are due primarily to improvements in credit quality during
2017 compared to 2016. Nonperforming loans at December 31, 2017, 2016 and 2015 totaled $3,042, $6,182, and $3,286, representing
0.1%, 0.3% and 0.3% of total loans, respectively.
37
Non-Interest Income
Non-interest income for the years ended December 31, 2017, 2016 and 2015 was $14,721, $15,140 and $12,856, respectively.
The following is a summary of the components of non-interest income (in thousands):
Years Ended
December 31,
2017
2016
2017-2016
Percent
Increase
(Decrease)
Year Ended
December 31,
2015
2016-2015
Percent
Increase
(Decrease)
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
154 $
$
185
3,041 3,041
6,779 7,183
2,577 1,894
(16.8%) $
0.0%
(5.6%)
36.1%
22 1,427.3%
336
896 2,172
40
603
(7)
945
(58.7%)
(117.5%)
56.7%
113
2,644
6,959
1,283
227
833
26
771
63.7%
15.0%
3.2%
47.6%
(90.3%)
160.7%
53.8%
(21.8%)
$ 14,721 $ 15,140
(2.8%) $
12,856
17.8%
Service charges on deposit accounts decreased 16.8% in 2017 compared to an increase of 63.7% in 2016. The decrease in
service charges on deposit accounts in 2017 was attributed to the Bank’s core system conversion in 2017, during which the Bank
waived service charges for deposit accounts for two months as a courtesy to its customers. The increase in 2016 was due to changes
made to the Company’s schedule of service charges.
Other service charges and fees for the year ended December 31, 2017 remained steady from 2016. Other service charges and
fees for the year ended December 31, 2016 increased 15.0% from 2015, due to increases in unused commitment fees, other loan-
related fees and ATM surcharge income.
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, 2017 were $6,779, a decrease of
$404, or 5.6%, when compared to the year ended December 31, 2016. The decrease was primarily due to the Company recognizing
$4,802 in pricing adjustment gains during 2017, compared to $6,742 during 2016, a decrease of $1,939 or 28.8%. The decrease was
offset by increases in mortgage discount fees and mortgage hedging income recognized during 2017 of $697 and $803, respectively.
Net gains for the year ended December 31, 2016 were $7,183, an increase of $224, or 3.2%, from the year ended December 31, 2015,
primarily attributed to the volume of mortgage loans sold during 2016.
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 2017 was $2,577, an increase of 36.1%
when compared with 2016. Wealth management income for 2016 was $1,894, an increase of 47.6% when compared with 2015. The
increases in wealth management income for 2017 and 2016 are attributable to the growth in assets under management and the growth
in the investment markets during 2017 and 2016.
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, 2017,
net loan servicing fees were $336 compared to $22 for the year ended December 31, 2016. The increase in servicing fees for 2017 is
attributable to a decrease in amortization for 2017 compared to 2016. For the year ended December 31, 2016, net loan servicing fees
were $22 compared to $227 for the year ended December 31, 2015. The decrease in servicing fees in 2016 is attributable to the
increase in amortization during 2016.
Gains on sales and calls of securities for the year ended December 31, 2017 amounted to $896, a decrease of $1,276, or 58.7%,
when compared with the same period in 2016. The decrease for 2017 is attributed to the Company selling less securities in a gain
38
position due to rising rates. For the year ended December 31, 2016, gains on sales and calls of securities increased $1,339, or 160.7%,
when compared with the year ended December 31, 2015. The increases for 2016 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.
Other non-interest income increased $342, or 56.7%, when comparing the years ended December 31, 2017 and 2016, and it
decreased $168, or 21.8%, when comparing the years ended December 31, 2016 and 2015. The increase in other non-interest income
for 2017 is primarily attributable to no losses on the sale of assets held for sale compared to the $98 loss realized in 2016 and also to
an increase of $169 related to bank-owned life insurance income. 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.
Non-interest Expense
Non-interest expense for the years ended December 31, 2017, 2016 and 2015 was $60,824, $51,681 and $42,140, 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,
2017
2016
$ 35,268 $ 30,029
9,219 7,627
3,680 2,068
762
3,395 3,546
8,297 7,649
965
2017-2016
Percent
Increase
(Decrease)
Year Ended
December 31,
2015
2016-2015
Percent
Increase
(Decrease)
$
17.4%
20.9%
77.9%
26.6%
(4.3%)
8.5%
24,040
6,589
1,167
956
2,425
6,963
24.9%
15.8%
77.2%
(20.3%)
46.2%
9.9%
22.6%
$ 60,824 $ 51,681
17.7%
$
42,140
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 2017, 2016 and 2015, salaries and employee benefits
increased as a result of the increasing the Company’s full-time equivalent employees from 225 as of December 31, 2015 to 268 as of
December 31, 2016, and then to 284 as of December 31, 2017. The increase in 2017 is attributable to the Company’s building
infrastructure to support the Company’s growth and to support the Company’s ongoing compliance initiatives.
During 2017 and 2016, salaries and employee benefits expense increased 17.4% and 24.9%, respectively, with increases in
salary expense and stock option expense being the largest attributes of the increase in 2017. The largest attributes of the increase in
2016 were increases in salary expense and mortgage commissions. Salary expense increased in 2017 and 2016 due to the addition of a
variety of personnel, i.e., experienced lenders, compliance and operational personnel, etc. Mortgage commissions increased in 2016
due to increased volume of mortgage loans originated during that year.
The increase in occupancy and equipment expense during 2017 is attributable to the addition of new branch locations in
Murfreesboro, Tennessee, and Spring Hill, Tennessee, which attributed to rent expense increasing $852. Additionally, the growth is
related to an increase of $420 for software maintenance fees. 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; 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 2017 and 2016 due to the Company’s growth in assets during the year, coupled
with the assessment calculation model instituted by the FDIC during 2016 which, due to the Company’s above average asset growth,
loan mix and its level of brokered deposits, increased the Company’s FDIC assessment expenses beginning in the third quarter of
2016.
The increase in marketing expenses during 2017 is attributed to increased marketing and public relations efforts to further the
growth of the Company. 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.
39
The 4.3% decrease in professional fees during 2017 is related to decreases in several types of expenses, as follows: other
professional fees ($294) regulatory compliance expense ($84), merger expenses ($272). These decreases were offset by increases in
several types of expense, as follows: brokerage settlement expenses ($156), audit and accounting fees ($215) and legal fees ($124).
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
communications. 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).
Other noninterest expense increased $648, or 8.5%, during 2017 and $686, or 9.9%, during 2016 due to a number of different
types of expenses. During 2017, the larger increases included the following: loan servicing expense ($232); bond insurance ($112);
public company fees ($33). 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.
Income Tax Expense
The Company recognized an income tax expense for the years ended December 31, 2017, 2016, and 2015 of $18,531, $11,746,
and $9,021, respectively. The Company’s year-to-date income tax expense for the years ended December 31, 2017, 2016, and 2015
reflects effective income tax rates 39.7%, 29.5%, and 35.9%, respectively. The increase in the effective tax rate for 2017 is attributed
to a non-recurring charge of $5,323 related to a write-down of its deferred tax asset (the “DTA write-down”) as a result of the
reduction in the federal income tax rate to 21% from 35% under the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into
law on December 22, 2017. Had the Tax Act not become law in 2017, the Company’s income tax expense would have been $13,208,
which would have resulted in an effective tax rate of 28.3% for 2017. 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
effective tax rate for 2016.
Return on Equity and Assets
The following schedule details selected key ratios for the years ended December 31, 2017, 2016 and 2015:
2017
2016
0.82%
1.10% 0.92%
9.67% 13.50% 9.52%
2015
— % — % — %
8.12% 9.65%
8.43%
8.25%
9.28% 8.48%
Return on assets (net income divided by average total assets)
Return on equity (Net income divided by average equity)
Dividend payout ratio (Dividends declared per share divided by net income per
share)
Equity to asset ratio (Average equity divided by average total assets)
Leverage capital ratio (Equity divided by fourth quarter average total assets,
excluding accumulated other comprehensive income)
The minimum leverage capital ratio required by the regulatory agencies is 4.00%.
40
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, 2017 excluding the net unrealized gain on available-for-sale securities which is shown as an addition in stockholders’
equity in the consolidated financial statements:
In Thousands,
Except
Percentages
Common Equity Tier 1 capital:
Stockholders’ equity, excluding accumulated other comprehensive
income, disallowed goodwill, other disallowed intangible assets
and disallowed servicing assets
$
299,229
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
$
299,229
58,515
92
21,247
$
379,083
$ 2,632,854
—
$ 2,632,854
11.37%
11.37%
14.40%
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, 2017, the Company was in compliance with these requirements.
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 2017 AND DECEMBER 31, 2016
Overview
The Company’s total assets increased by $900,337, or 30.6%, from December 31, 2016 to December 31, 2017. The increase in
total assets was funded by the Company’s growth in deposits and Federal Home Loan Bank advances, 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, 2017 and 2016:
In Thousands
Total Loans
Total Securities
Total Assets
Total Deposits
Total Liabilities
Total Equity
Growth
Dec 31, 2017
Dec 31, 2016
$2,256,608 $1,773,592 $ 483,016
983,649 231,088
1,214,737
2,943,189 900,337
3,843,526
2,391,818 775,410
3,167,228
2,672,828 866,045
3,538,873
270,361 34,292
304,653
Growth
Percentage
27.2%
23.5%
30.6%
32.4%
32.4%
12.7%
41
Loans Held For Sale
At December 31, 2017, the Company had $12,024 in mortgage loans held for sale, compared to $23,699 as of December 31,
2016, a decrease of 49.3%. The decrease is attributable to the volume of loans closed and in the process of being sold to investors at
December 31, 2017 as compared to December 31, 2016. For the years ended December 31, 2017, 2016 and 2015, the Company
recorded gains from sales of mortgage loans totaling $6,779, $7,183, and $6,959, 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, 2017 and 2016 were $2,256,608 and $1,773,592, respectively, an increase of $483,016, or 27.2%. 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
2017
2016
2015
2014
2013
As of December 31,
$ 494,818 $ 489,562 $ 372,767 $ 239,225 $ 113,710
678,238 497,140 364,223 246,352 125,202
577,335 404,989 274,934 213,760 138,466
502,006 376,476 283,888 76,570 36,397
6,577 8,025 8,250
3,781
3,359
Total loans—gross, excluding PCI loans
2,256,178 1,771,526 1,302,389 783,932 422,025
Total PCI loans(1)
Total gross loans
Less: deferred loan fees, net
Allowance for loan losses
2,393
2,859
3,913 4,315 —
2,258,571 1,774,385 1,306,302 788,247 422,025
(721)
(4,900)
(2,476)
(11,587)
(1,963)
(21,247)
(793)
(16,553)
(1,059)
(6,680)
Total loans, net allowance for loan losses
$2,235,361 $1,757,039 $1,292,239 $ 780,508 $ 416,404
(1)
PCI accounted for pursuant to ASC Topic 310-30.
As presented in the above table, gross loans increased $484,186, or 27.3%, during 2017. During 2017, the Company
experienced growth in real estate loans of 25.7%, with the growth occurring in the construction and land development (1.1%),
commercial real estate (36.4%) and residential real estate (42.4%) segments. The Company also experienced solid growth of 33.2% in
the commercial and industrial segment during 2017.
Real estate loans comprised 77.5% of the loan portfolio at December 31, 2017. The largest portion of the real estate segments of
the portfolio as of December 31, 2017, was commercial real estate loans, which totaled $678,618 at December 31, 2017, comprising
38.8% of real estate loans and 30.0% 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, $494,818, or 28.3%, of real estate loans and comprised 21.9% of the total loan
portfolio at December 31, 2017. 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 $577,440 and comprised 33.0% of real estate loans and 25.6% of total loans at December 31, 2017.
42
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, 2017, commercial and industrial loans made up 22.3% of the total loan portfolio, and healthcare loans comprised 49.9%
of the Company’s commercial and industrial loans at December 31, 2017.
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, 2017, excluding unearned net fees and costs.
Loan Maturity Schedule
Real estate:
Construction and land development
Commercial
Residential
Commercial and industrial
Consumer and other
Total
Fixed interest rate
Variable interest rate
Total
December 31, 2017
One year
or less
Over one
year to five
years
Over five
years
Total
49,719 $ 494,818
$ 288,222 $ 156,877 $
47,422 159,729 471,467 678,618
35,324 115,742 426,374 577,440
78,219 503,914
88,386 337,309
3,781
1,190
2,173
$ 461,527 $ 770,847 $1,026,197 $2,258,571
418
$ 203,609 $ 309,842 $ 504,407 $1,017,858
257,918 461,005 521,790 1,240,713
$ 461,527 $ 770,847 $1,026,197 $2,258,571
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.
43
In the table below, the components, as discussed above, of the allowance for loan losses are shown at December 31, 2017 and
2016.
Non impaired loans
Non-PCI acquired
loans(1)
Impaired loans
Non-PCI loans
PCI loans
Total loans
December 31, 2017
December 31, 2016
Increase (Decrease)
Loan
Balance
ALLL
Balance
$2,201,515 $ 20,358
Loan
Balance
ALLL
Balance
%
0.92% $1,687,244 $ 15,506
Loan
ALLL
%
Balance
Balance
0.92% $ 514,271 $ 4,852
—
50,522
4,141
10
0.02%
879 21.23%
74,373
23
9,909 1,024 10.33%
0.03% (23,851)
(5,768)
(13)
(145)
-1bps
1,090bps
2,256,178 21,247
0.94% 1,771,526 16,553
2,393 — — %
2,859 — — %
0.93% 484,652 4,694
(466) —
1 bps
—
$2,258,571 $ 21,247
0.94% $1,774,385 $ 16,553
0.93% $ 484,186 $ 4,694
1bps
(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, 2017 related to the non-PCI acquired loans was $1,426, or 2.7% of the outstanding aggregate loan balances. At
December 31, 2017, one of the non-PCI loans was identified as impaired beyond the extent of its recorded discount, and an
allowance for loan loss of $10 was recorded related to the acquired loans.
At December 31, 2017, the allowance for loan losses was $21,247, compared to $16,553 at December 31, 2016. The allowance
for loan losses as a percentage of total loans was 0.94% and 0.93% at December 31, 2017 and 2016, respectively. Loan growth 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
Total allowance at end of period
Total loans, gross, at end of period(1)
Average gross loans(1)
Allowance to total loans
2017
16,553
$
2016
11,587 $
$
2015
2014
2013
6,680 $ 4,900 $ 3,983
—
—
(1)
(310)
(49)
(360)
668
—
50
6
17
741
381
4,313
(11)
—
(40)
(255)
(42)
(348)
—
—
66
1
7
74
(274)
5,240
—
—
(32)
(48)
(135)
(215)
—
(540)
(61)
(58)
—
—
—
(107)
(19)
—
(659)
(126)
—
—
26
1
65
—
—
65
—
—
—
—
136
—
—
92
(123)
5,030
65
(594)
2,374
136
10
907
$
21,247
$
16,553 $
11,587 $ 6,680 $ 4,900
$2,258,571
$1,774,385 $1,306,302 $ 788,247 $ 422,025
$2,022,052
$1,574,387 $ 997,873 $ 594,974 $ 343,697
0.94%
0.93%
0.89%
0.85%
1.16%
Net charge-offs (recoveries) to average loans
(0.02)%
0.02%
0.01%
0.10%
0.00%
(1)
Loan balances exclude loans held for sale
44
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.
2017
2016
2015
2014
2013
% of
Loan
Type to
Total
Loans
% of
Loan
Type to
Total
Loans
Amount
Amount
% of
Loan
Type to
Total
Loans
% of
Loan
Type to
Total
Loans
Amount
% of
Loan
Type to
Total
Loans
Amount
Amount
Real estate loans:
Construction
and land development $ 3,802
Commercial
5,981
Residential
3,834
21.9% $ 3,776
30.0% 4,266
25.6% 2,398
27.6% $ 3,186
28.0% 3,146
22.9% 1,861
28.5% $ 2,690
28.0% 1,494
21.1% 1,791
30.4% $ 1,552 26.9%
31.5% 1,511 29.7%
27.2% 1,402 32.8%
Total real estate
Commercial and industrial
Consumer and other
13,617
7,587
43
77.5% 10,440
22.3% 6,068
45
0.2%
78.5% 8,193
21.3% 3,358
36
0.2%
77.6% 5,975
21.9% 650
55
0.5%
89.1% 4,465 89.4%
8.6%
2.0%
9.9% 337
98
1.0%
$ 21,247 100.0% $ 16,553 100.0% $ 11,587 100.0% $ 6,680 100.0% $ 4,900 100.0%
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, 2017, 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 33.2%
from $378,445, or 21.3% of total loans at the end of 2016, to $503,914, or 22.3% of total loans at year-end 2017. During 2017,
construction and land development loans increased from $489,562 at December 31, 2016 to $494,818 at December 31, 2017, an
increase of 1.1%. During the same period, commercial real estate loans increased 36.4%, from $497,534 at December 31, 2016 to
$678,618 at December 31, 2017.
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, 2017 totaled $2,837. 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 $205 that were past due 90 days or more and still accruing interest at December 31, 2017.
45
The table below summarizes nonperforming loans and assets for the periods presented.
December 31,
Non-accrual loans
Past due loans 90 days or more and still accruing interest
Total nonperforming loans
Foreclosed real estate (“OREO”)
Total nonperforming assets
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
2016
2017
2015
$ 2,837 $ 3,630 $ 908 $ 835 $ 2,601
—
2,378
205
316
2,552
2014
2013
3,042
1,503
6,182
—
3,286
200
1,151
715
2,601
181
$ 4,545 $ 6,182 $ 3,486 $ 1,866 $ 2,782
0.1% 0.3% 0.3% 0.1% 0.6%
0.1% 0.2% 0.2% 0.1% 0.3%
698% 268% 353% 580% 188%
As of December 31, 2017, there were seven loans on non-accrual status. The amount and number are further delineated by
collateral category and number of loans in the table below.
Residential real estate
Commercial & industrial
Total non-accrual loans
Total Amount
$
371
2,466
$
2,837
Percentage of Total
Non-Accrual Loans
Number of
Non-Accrual
Loans
13.1%
86.9%
100.0%
2
5
7
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 $608 classified as an accrual TDR as of December 31, 2017, and Company had one loan for $698 classified as an accrual TDR as
of December 31, 2016.
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 it exhibits potential weaknesses and information about possible
credit problems of the borrower that has caused management to have doubts about the borrower’s ability to comply with present
repayment terms. This definition is believed to be consistent with the Company’s loan policy established for loans classified as special
mention or worse and less than 90 days past due, but not considered nonperforming. 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.
46
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, 2017, 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
$ 494,601 $ — $
658,761 12,602
615
572,718
217 $ — $ 494,818
7,255 — 678,618
4,107 — 577,440
1,726,080 13,217
11,579 — 1,750,876
485,363 10,350
4
3,777
8,201 — 503,914
3,781
— —
$2,215,220 $ 23,571 $
19,780 $ — $2,258,571
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 $999,881 at December 31, 2017, compared to $754,755 at December 31, 2016, an increase of $245,126, or 32.5%. The increase
in available-for-sale securities was primarily attributed to the Company’s strategy to provide tax-exempt income for the Company and
to provide for pledging related to the growth of 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 $214,856 at December 31, 2017, compared to
$228,894 at December 31, 2016, a decrease of $14,038, or 6.1%, primarily as a result of the paydowns on the U.S. government
sponsored entities and mortgage-backed securities during 2017.
The combined portfolios represented 31.6% and 33.4% of total assets at December 31, 2017, and December 31, 2016,
respectively. At December 31, 2017, the Company had no securities that were classified as having other than temporary impairment.
47
The following table summarizes the fair value of the available for sale securities portfolio at December 31, 2017 and 2016:
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,
2017
$
19,961
228,909
632,566
5,074
113,371
December 31,
2016
$
—
—
607,085
19,334
128,336
$ 999,881
$ 754,755
The following table summarizes the amortized cost of the held to maturity securities portfolio at December 31, 2017 and 2016:
U.S. government sponsored entities and agencies
Mortgage-backed securities: residential
State and political subdivisions
Total
December 31,
2017
$
—
93,366
121,490
December 31,
2016
$
203
106,169
122,522
$ 214,856
$ 228,894
The table below presents the maturities and yield characteristics of the Company’s available-for-sale securities as of
December 31, 2017. 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.
(Dollars in Thousands)
Over
One Year
Through
Five Years
Over
Five Years
Through
Ten Years
One Year
or Less
Over
Ten Years
Total
Maturities
Fair
Value
Mortgage-backed securities: residential(1)
Mortgage-backed securities: commercial(1)
U.S. Treasury securities
U.S. government sponsored entities and agencies
State and political subdivisions
$ — $ 243,551 $ 394,949 $
5,133
—
—
229,119
20,125
—
5,985
—
—
—
—
91,637
2,724 $ 641,225 $ 632,566
5,074
5,133
228,909
229,119
19,961
20,125
113,371
113,467
—
—
—
15,845
Total available-for-sale securities
$ 229,119 $ 274,795 $ 486,587 $ 18,569 $1,009,070 $ 999,881
Percent of total
Weighted average yield(2)
22.71%
1.64%
27.23%
2.32%
48.22%
3.27%
1.84%
4.40%
100.00%
2.58%
(1) Mortgage-backed securities are grouped into average lives based on December 2017 prepayment projections.
(2)
The weighted average yields are based on amortized cost, and municipal securities are calculated on a fully tax-equivalent basis.
48
The table below presents the maturities and yield characteristics of the Company’s held-to-maturity securities as of
December 31, 2017. 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.
(Dollars in Thousands)
One Year
or Less
Over
One Year
Through
Five Years
Over
Five Years
Through
Ten Years
Over
Ten Years
Total
Maturities
Fair
Value
Mortgage-backed securities: residential(1)
State and political subdivisions
$
739 $
504
7,769 $
7,104
84,301 $
86,868
Total held-to-maturity securities
$
1,243 $
14,873 $ 171,169 $
Percent of total
Weighted average yield(2)
0.58%
3.23%
6.92%
3.61%
79.67%
4.27%
557 $ 93,366 $ 91,777
125,831
121,490
27,014
27,571 $ 214,856 $ 217,608
12.83% 100.00%
4.44%
6.01%
(1) Mortgage-backed securities are grouped into average lives based on December 2017 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, 2017 and 2016 had a carrying amount of $975,518 and $808,224, respectively, and were
pledged to secure public deposits and repurchase agreements.
At December 31, 2017 and 2016, there were no holdings of securities of any one issuer, other than the U.S. government-
sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.
Restricted Equity Securities
The Company also had other investments of $18,492 and $11,843 at December 31, 2017, and December 31, 2016, respectively,
consisting of capital stock in the Federal Reserve and the Federal Home Loan Bank (required as members of the Federal Reserve Bank
System and the Federal Home Loan Bank System). The Federal Home Loan Bank and Federal Reserve investments are “restricted” in
that they can only be sold back to the respective institutions or another member institution at par, and are thus, not liquid, have no
ready market or quoted market value, and are carried at cost.
Bank Premises and Equipment
Bank premises and equipment totaled $11,281 at December 31, 2017 compared to $9,551 at December 31, 2016, an increase of
$1,730, or 18.1%. This increase was primarily due to the addition of a new branch location in Murfreesboro, Tennessee and the
relocation of a branch in Spring Hill, Tennessee.
Bank Owned Life Insurance
As of December 31, 2017, the Company had $49,085 in bank owned life insurance (“BOLI”), compared to $23,267 at
December 31, 2016. The increase in BOLI is primarily attributed to the purchase of additional policies in the amount of $25,000
during October 2017, along with an increase in value due to earnings on the BOLI during 2017.
Goodwill and Intangible Assets
As of December 31, 2017 and 2016, the Company had $9,124 in goodwill. The goodwill is related to the acquisition of
MidSouth Bank that occurred in 2014. At December 31, 2017, 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, 2017 and 2016, the Company had net core deposit intangible of $1,007 and $1,480, 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, 2017, the Company has recognized
amortization of $2,053 related to the core deposit intangible.
49
The following table represents acquired intangible assets at December 31, 2017 and 2016:
Acquired intangible assets:
Core deposit intangibles
2017
2016
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
3,060 $
(2,053) $
3,060 $
(1,580)
Aggregate amortization expense was $473, $563 and $655 for 2017, 2016 and 2015, respectively.
The following table presents estimated amortization expense for each of the next five years:
2018
2019
2020
2021
2022
Deposits
$382
$291
$201
$110
$ 23
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, 2017, total deposits were $3,167,228, an increase of $775,410, or 32.4%, compared to $2,391,818 at
December 31, 2016. Included in the Company’s funding strategy are brokered deposits and public funds deposits. Total brokered
deposits increased by 65.0%, to $779,886, at December 31, 2017 when compared with $472,515 at December 31, 2016. Public funds
deposits increased 22.0% from $822,081 at December 31, 2016 to $1,002,584 at December 31, 2017, 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, 2017, amounted to $675,150, as compared to $555,732 as of
December 31, 2016.
The average amounts for deposits for 2017, 2016 and 2015 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
2017
2016
2015
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$ 252,276 — % $ 210,780 — % $ 164,284 — %
332,285 0.42
624,612 0.80
617,036 0.62
627,140 1.04
49,525 0.33
54,952 0.31
944,086 0.93
1,228,676 1.28
268,745 0.30
464,588 0.56
35,779 0.46
545,405 0.94
$2,787,656 0.98% $2,153,712 0.66% $1,478,801 0.59%
50
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, 2017
$
323,109
65,822
94,598
102,552
51,546
—
$
637,627
Liquidity, Other Borrowings, and Capital Resources
Federal Funds Purchased and Repurchase Agreements
As of December 31, 2017, the Company had no Federal funds purchased from correspondent banks compared to $46,805
outstanding as of December 31, 2016.
Securities sold under agreements to repurchase had an outstanding balance of $31,004 as of December 31, 2017, compared to
$36,496 as of December 31, 2016. 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, 2017 and 2016 were composed of customer repurchase agreements. The weighted average rate for repurchase
agreements was 1.14% as of December 31, 2017.
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, 2017, advances totaled $272,000 compared to
$132,000 as of December 31, 2016.
At December 31, 2017, the scheduled maturities of these advances and interest rates were as follows:
Scheduled Maturities
2018
2019
2020
Total
Subordinated Notes
Amount
$ 157,000
60,000
55,000
$ 272,000
Weighted
Average Rates
1.19%
1.46%
1.72%
1.36%
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, 2017, the Company’s subordinated notes, net of issuance costs, totaled $58,515 as compared to
$58,337 at December 31, 2016. 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.
51
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 $304,550 at December 31, 2017, an increase of $34,292, or 12.7%, from $270,258 at December 31,
2016. No common dividends were paid during 2017.
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 2017 was 1.25%. 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, 2017, 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.
52
Management believes as of December 31, 2017, 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, 2017 and 2016 for the Company
and Bank.
December 31, 2017
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, 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
Required
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 299,229 11.37% $ 118,479 4.50% N/A N/A
$ 379,083 14.40% $ 210,629 8.00% N/A N/A
$ 299,229 11.37% $ 157,972 6.00% N/A N/A
$ 299,229
8.25% $ 145,100 4.00% N/A N/A
$ 353,512 13.43% $ 118,489 4.50% $ 171,151
6.50%
$ 374,851 14.24% $ 210,647 8.00% $ 263,309 10.00%
8.00%
$ 353,512 13.43% $ 157,985 6.00% $ 210,647
5.00%
9.75% $ 145,003 4.00% $ 181,253
$ 353,512
$ 263,693 11.75% $ 101,022 4.50% N/A N/A
$ 338,675 15.09% $ 179,595 8.00% N/A N/A
$ 263,693 11.75% $ 134,696 6.00% N/A N/A
$ 263,693
9.28% $ 113,697 4.00% N/A N/A
6.50%
$ 319,005 14.18% $ 101,216 4.50% $ 146,201
$ 335,650 14.92% $ 179,939 8.00% $ 224,924 10.00%
8.00%
$ 319,005 14.18% $ 134,954 6.00% $ 179,939
5.00%
$ 319,005 11.22% $ 113,697 4.00% $ 142,122
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, 2017:
As of December 31, 2017
Time deposits
Federal funds purchased and repurchase agreements
FHLB advances
Subordinated notes
Lease commitments
Total
(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
$ 875,033 $
31,004
157,000
—
4,523
$1,067,560 $
259,069 $
—
115,000
—
9,085
96,334 $ — $1,230,436
— —
31,004
— — 272,000
60,000
— 60,000
60,985
9,227 38,150
383,154 $ 105,561 $ 98,150 $1,654,425
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, respectively. 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.
53
Interest Rate Sensitivity
The following schedule details the Company’s interest rate sensitivity at December 31, 2017:
(In Thousands, Except Percentages)
Earning assets:
Total
1-90 Days
Repricing Within
3 months
to 12
months
1 to 5 years
Over 5
years
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
Total earning assets
$2,253,771 $ 974,824
—
999,881
178
214,856
—
12,024
$
169,066
228,909
1,065
—
$ 579,321
271,802
14,873
—
$ 530,560
499,170
198,740
12,024
218,693 218,693
490
3,702,080 1,194,185
2,855
—
395
399,435
—
1,470
867,466
—
500
1,240,994
Interest-bearing liabilities:
Deposits:
Interest-bearing checking accounts
Money market deposit accounts
Other savings
IRA’s and certificates of deposit, $250,000 and
849,992 849,992
763,375 763,375
51,404
51,404
—
—
—
—
—
—
over
821,269 271,488
324,949
224,832
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
—
31,004
272,000
58,515
409,166 121,990
—
31,004
50,000
—
3,256,725 2,139,253
156,605
—
—
107,000
—
588,554
130,571
—
—
115,000
58,515
528,918
$ (945,068)
$
(189,119)
$ 338,548
$1,240,994
$ (945,068)
$ (1,134,187)
$ (795,639)
$ 445,355
(27.43)%
(5.49)%
9.83%
36.02%
—
—
—
—
—
—
—
—
—
—
Cumulative gap as % of total average assets
(27.43)%
(32.92)%
(23.09)%
12.93%
† Loans, net of unearned income excludes non-accrual loans.
54
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, 2017, $999,881 of the investment securities portfolio was classified as available-for-sale and is reported
at fair value on the consolidated balance sheet. Another $214,856 of the portfolio was classified as held-to-maturity and is reported at
amortized cost. Approximately $975,518 of the total $1,214,737 investment securities portfolio on hand at December 31, 2017, was
pledged to secure public deposits and repurchase agreements. Other funding sources available include repurchase agreements, federal
funds purchased, and borrowings from the Federal Home Loan Bank.
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, 2017, the Company had unfunded loan
commitments outstanding of $21,656, unused lines of credit of $605,181, and outstanding standby letters of credit of $45,624.
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;
55
•
•
•
•
•
•
“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:
As of or for the Years Ended
December 31,
2017
December 31,
2016
December 31,
2015
$
304,550 $
—
270,258 $
—
304,550
10,181
270,258
10,633
188,816
10,000
178,816
11,231
294,369 $
$
13,237,128
259,625 $
167,585
10,571,377
13,036,954
$
$
$
22.24 $
19.91 $
15.85
28,083 $
28,034 $
279,098
194,529
15,980
147,374
10.06%
14.41%
10.84%
97,046 $
14,721
81,584 $
15,140
111,767
96,724
59,415
12,830
72,245
60,824
51,681
42,114
54.42%
53.43%
58.29%
(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
56
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 $1.07 billion in annual revenues; (3) the date on which
we are deemed to be a “large accelerated filer” under the Exchange Act; or (4) the date on which we have, during the previous three-
year period, issued publicly or privately, more than $1.0 billion 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.
Adoption of New Accounting Standards
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 2016 by $1,013 and had no impact for 2017.
In February 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The
amendments in this ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive
income due to the newly enacted federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017. These
amendments allow an entity to make a reclassification from other comprehensive income to retained earnings for the difference
between the historical corporate income tax rate and the newly enacted corporate income tax rate. The amendments are effective for
fiscal years beginning after December 15, 2018, including interim periods within those years. The Company elected to adopt this ASU
early. The impact of the new guidance on the Company’s consolidated financial statements was a reclassificiation of $1,202 between
retained earnings and other comprehensive income at December 31, 2017.
Accounting Standards Issued, But Not Yet Effective
In May 2014, the FASB issued Accounting Standards Update 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
57
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 Company’s sources of non-
interest income that fall within the scope of the new standard, such as service charges on deposit accounts, debit card interchange
income, wealth management fees, and gain on sale of foreclosed property, are all immaterial in comparison with total revenue and are
structured in a way that the non-interest income is not earned over a period of time, which is similar to the treatment under previous
revenue recognition standards. The Company adopted ASU 2014-09 and applied the modified retrospective approach with a
cumulative effect of initial application in the first quarter of 2018 but there was no impact to retained earnings as a result of the
adopting the new standard.
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
instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset.
ASU 2016-01 was effective for the Company on January 1, 2018 and is not expected to have a significant impact on our consolidated
financial statements and related disclosures.
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; however, the Company does not currently plan to early adopt this ASU. The Company is currently gathering
information, reviewing possible vendors and working to determine the methodology to be used. The Company is gathering as much
data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The 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;
58
beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The amendments in this Update were effective for the Company January 1, 2018, but it is not expected to have a material impact on
the Company’s financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business. The amendment in this ASU clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) or assets or businesses. The
amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. This
ASU is not expected impact the Company’s consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, to simplify how entities other than private companies, such as public business entities
and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the
reporting unit’s goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after
December 15, 2019, including interim periods within those periods. Adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),
Premium Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable
debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.
The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. Early adoption is permitted with modified retrospective application; however, the Company is not expecting to
early adopt. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The objective of
this ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk
management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain
targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This Update is effective for
public business entities for fiscal years beginning after December 15, 2018, and early application is permitted in any interim period
after issuance of the Update. The Company currently does not have any hedging activities that would be subject to this Update;
however, management may consider hedging activities in the future. Adoption of this Update is not expected to have a material impact
on the Company’s consolidated financial statements.
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.
59
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, 2017, net interest income was estimated to decrease 1.64% and 3.96% if rates were to increase 100 basis points and 200
basis points, respectively, and was estimated to increase 0.52% and decrease 6.15% 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, 2017.
Projected Interest Rate
Change
Net Interest
Income
Net Interest Income $
Change from Base
-200
-100
Base
+100
+200
+300
+400
97,881
104,831
104,293
102,586
100,161
97,370
95,426
(6,412)
538
—
(1,707)
(4,131)
(6,923)
(8,867)
% Change from Base
(6.15)
0.52
0.00
(1.64)
(3.96)
(6.64)
(8.50)
The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates
based upon numerous assumptions including interest rate levels, changes in the shape of the yield curve, prepayments on loans and
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, 2017, 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
60
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, 2017. 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, 2017, 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 2017 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
61
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 24, 2018, 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 24, 2018, 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 24, 2018, 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 24, 2018, 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 24, 2018, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
62
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements
The list of financial statements contained herein is set forth on page F-1 hereof.
PART IV
Financial Statement Schedules
None
Exhibits
The Exhibits are listed in the Exhibit Index required by Item 601 of Regulation S-K preceding the signature page of this report.
ITEM 16.
FORM 10-K SUMMARY.
None.
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
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).
Amendment No. 2 to the Agreement and Plan of Reorganization and Bank Merger, dated March 30, 2017 (incorporated
by reference to Exhibit 2.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange Commission on
March 31, 2017).
Amendment No. 3 to the Agreement and Plan of Reorganization and Bank Merger, dated September 29, 2017
(incorporated by reference to Exhibit 2.1 to Form 8-K (File No. 001-36895) filed with the Securities and Exchange
Commission on October 5, 2017).
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).
63
3.5
3.6
3.7
3.8
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
Articles of Amendment to the Charter Designating Senior Non-Cumulative Perpetual Preferred Stock, Series A of
Franklin Financial Network, Inc., dated September 26, 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. 333-193951) filed with the Securities and Exchange Commission on
March 11, 2015).
Articles of Amendment to the Charter of Franklin Financial Network, Inc., dated May 25, 2017 (incorporated herein by
reference to Exhibit 3.1 to Form 10-Q (File No. 001-36895) filed with the Securities and Exchange Commission on
August 9, 2017).
Amended and Restated Bylaws of Franklin Financial Network, Inc. (incorporated herein by reference to Exhibit 3.7 to
Form 10-K (File No. 333-193951) 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 3.8 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).
Form of Lock-Up Agreement between Franklin Financial Network, Inc. and certain Directors of Civic Bank & Trust
(incorporated herein by reference to Exhibit 4.7 to Amendment No. 1 to Form S-4 (File No. 333-209527) filed with the
Securities and Exchange Commission on January 24, 2018).
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).
64
10.6
10.7
10.8
10.9
10.10
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).
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).
10.11 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).
10.12
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).
10.13* 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).
10.14* 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).
10.15* 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).
10.16* 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).
10.17* 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).
10.18* 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).
10.19* 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).
10.20* 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).
10.21* 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).
10.22* 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).
65
10.23*
10.24*
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).
10.25* 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).
10.26* 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).
10.27* 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).
10.28* 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).
10.29* 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).
10.30* 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).
10.31* 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).
10.32*
10.33*
10.34*
10.35*
10.36*
10.37*
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).
10.38*
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).
66
10.39*
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
10.53
10.54
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).
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).
Franklin Financial Network, Inc. 2017 Omnibus Equity Incentive Plan (incorporated by reference to Appendix B to
Definitive Proxy Statement on Schedule 14A (File No. 001-36895) filed with the Securities and Exchange Commission
on April 14, 2017).
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).
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).
67
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
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 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 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 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 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 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).
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).
Commencement Agreement, dated May 15, 2017 (incorporated herein by reference to Exhibit 10.1 to Form 10-Q (File
No. 001-36895) filed with the Securities and Exchange Commission on August 9, 2017).
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).
Triple Net Office Lease Agreement, by and between Petra Real Estate Partners II, LLC and Franklin Synergy Bank
(incorporated by reference to Exhibit 10.1 to Form 8-K filed with the Securities and Exchange Commission on July 27,
2017).
10.68
Lease Agreement, by and between SS McEwen, LLC and Franklin Synergy Bank (incorporated by reference to Exhibit
10.2 to Form 8-K filed with the Securities and Exchange Commission on July 27, 2017).
21.1†
Subsidiaries of the Registrant.
23.1†
Consent of Crowe Horwath LLP.
31.1†
Certification of CEO pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
31.2†
Certification of CFO pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
32††
Certification Pursuant to 18 U.S.C. Section 1350.
68
101†
The following financial information from Franklin Financial Network, Inc.’s Annual Report on Form 10-K for the period
ended December 31, 2017, filed with the SEC on March 16, 2018, formatted in Extensible Business Reporting Language
(XBRL): (i) the Consolidated Balance Sheet as of December 31, 2017 and December 31, 2016; (ii) the Consolidated
Statements of Income for the years ended December 31, 2017, 2016 and 2015; (iii) the Consolidated Statements of
Comprehensive Income for the years ended December 31, 2017, 2016 and 2015; (iv) the Consolidated Statements of
Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015; (v) the Consolidated Statements
of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (vi) Notes to Consolidated Financial
Statements.
†
††
*
Filed herewith.
Furnished herewith.
Indicates a management contract or compensatory plan or arrangement.
69
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.
SIGNATURES
March 16, 2018
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
/s/ James W. Cross, IV
James W. Cross, IV
Paul M. Pratt, Jr.
/s/ Pamela J. Stephens
Pamela J. Stephens
Melody J. Sullivan
/s/ Gregory E. Waldron
Gregory E. Waldron
/s/ Benjamin Wynd
Benjamin Wynd
March 14, 2018
March 12, 2018
March 14, 2018
March 14, 2018
March 12, 2018
March 14, 2018
March 12, 2018
Chairman, President & CEO
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
70
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, 2017 and 2016
Consolidated Statements of Income – Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income – Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Equity – Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows – Years ended December 31, 2017, 2016 and 2015
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
Shareholders and the Board of Directors
Franklin Financial Network, Inc.
Franklin, Tennessee
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Financial Network, Inc. (the “Company”) as of
December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
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 PCAOB. As part of our audits we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Crowe Horwath LLP
We have served as the Company’s auditor since 2007.
Franklin, Tennessee
March 16, 2018
F-2
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(Dollar amounts in thousands, except share and per share data)
2017
2016
ASSETS
Cash and due from financial institutions
Certificates of deposit at other financial institutions
Securities available for sale
Securities held to maturity (fair value 2017—$217,608 and 2016—$227,892)
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
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, 2017 and December 31, 2016
Common stock, no par value: 30,000,000 and 20,000,000 shares authorized at December 31, 2017 and
2016, respectively; 13,237,128 and 13,036,954 issued at December 31, 2017 and 2016, 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
$ 251,543 $
2,855
90,927
1,055
999,881 754,755
214,856 228,894
23,699
2,256,608 1,773,592
(16,553)
12,024
(21,247)
2,235,361 1,757,039
18,492
11,281
11,947
49,085
10,007
1,503
3,620
9,124
1,007
10,940
11,843
9,551
9,931
23,267
15,013
—
3,621
9,124
1,480
2,990
$3,843,526 $2,943,189
$ 272,172 $ 233,781
2,895,056 2,158,037
31,004
3,167,228 2,391,818
83,301
272,000 132,000
58,337
1,924
5,448
58,515
2,769
7,357
3,538,873 2,672,828
—
—
222,665 218,354
59,386
(7,482)
88,671
(6,786)
304,550 270,258
103
103
$ 304,653 $ 270,361
$3,843,526 $2,943,189
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2017, 2016 and 2015
(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
See accompanying notes to consolidated financial statements.
F-4
2017
2016
2015
$ 100,470 $ 78,236 $ 53,574
21,309 15,306 12,362
8,593 5,609 2,331
350
104
928
1,153
500
256
132,453 99,907 68,721
27,464 14,234 8,688
306
407
3,215
312
4,321 2,902 —
303
884
35,407 18,323 9,306
97,046 81,584 59,415
4,313 5,240 5,030
92,733 76,344 54,385
185
154
113
3,041 3,041 2,644
6,779 7,183 6,959
2,577 1,894 1,283
227
833
26
771
336
22
896 2,172
40
603
(7)
945
14,721 15,140 12,856
35,268 30,029 24,040
9,219 7,627 6,589
3,680 2,068 1,167
956
3,395 3,546 2,425
8,297 7,649 6,963
965
762
60,824 51,681 42,140
46,630 39,803 25,101
18,531 11,746 9,021
28,099 28,057 $ 16,080
(100)
—
(23)
(16) — —
$ 28,083 $ 28,034 $ 15,980
$
2.14 $ 2.56 $ 1.62
2.04 2.42 1.54
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2017, 2016 and 2015
(Dollar amounts in thousands, except share and per share data)
2017
2016
$ 28,099 $ 28,057 $ 16,080
2015
4,015 (9,609) (3,220)
(896) (2,172)
(833)
3,119 (11,781) (4,053)
(1,221) 4,619 1,557
1,898 (7,162) (2,496)
$ 29,997 $ 20,895 $ 13,584
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 $351, $852, and $327, 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.
See accompanying notes to consolidated financial statements.
F-5
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years ended December 31, 2017, 2016 and 2015
(Dollar amounts in thousands, except share and per share data)
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
Preferred
Stock
Common Stock
Shares
Amount
Accumulated
Other
Retained
Earnings
Comprehensive Noncontrolling
Income (Loss)
Interest
Total
Equity
$ 10,000 7,756,411 $ 94,251 $ 15,372 $
2,176 $
— $ 121,799
—
—
—
—
6,570
125,478 1,301 —
79 —
(100)
28,229 — —
— —
—
—
—
—
— 1,301
79
—
(100)
—
— —
forfeitures
—
—
860 —
—
—
860
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 income
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
Stock based compensation expense, net of
— 2,640,000 50,423 —
—
— 50,423
—
14,689
337 —
—
—
337
—
—
—
$ 10,000 10,571,377 $ 147,784 $ 31,352 $
533 —
—
— — 16,080
— — —
—
—
(2,496)
(320) $
—
—
(10,000)
—
—
8,450
190,389 1,571 —
101 —
— — —
(23)
— —
34,001 — —
—
—
—
—
—
533
—
— 16,080
—
(2,496)
— $ 188,816
— 1,571
—
101
— (10,000)
—
(23)
— —
forfeitures
—
— 1,641 —
—
— 1,641
Stock issued related to public offering, net of
stock issuance costs of $4,203
— 2,242,500 67,557 —
—
— 67,557
—
(9,763)
(300) —
—
—
(300)
—
—
—
$ — 13,036,954 $ 218,354 $ 59,386 $
— — —
— — 28,057
— — —
—
—
(7,162)
(7,482) $
—
—
—
103
103
— 28,057
—
(7,162)
103 $ 270,361
— 1,615
150
—
—
—
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
Exercise of common stock options, includes
net settlement of shares
Exercise of common stock warrants
Issuance of restricted stock, net of forfeitures
—
—
—
166,894 1,615 —
12,461
150 —
26,718 — —
F-6
Preferred
Stock
Common Stock
Shares
Amount
Accumulated
Other
Retained
Earnings
Comprehensive Noncontrolling
Income (Loss)
Interest
Total
Equity
Stock based compensation expense, net of
forfeitures
—
— 2,802 —
—
— 2,802
Stock issued in conjunction with 401(k)
employer match, net of distributions
Earnings attributable to noncontrolling
—
(5,899)
(256) —
—
—
(256)
interest
—
Net income available to common shareholders —
Noncontrolling interest distributions
—
Reclassification of disproportionate tax effect
— — —
— — 28,083
— — —
—
—
—
(Note 1)
Other comprehensive income
Balance at December 31, 2017
— — 1,202
—
—
— — —
$ — 13,237,128 $ 222,665 $ 88,671 $
(1,202)
1,898
(6,786) $
16
16
— 28,083
(16)
(16)
— —
— 1,898
103 $ 304,653
See accompanying notes to consolidated financial statements.
F-7
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017, 2016 and 2015
(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
2017
2016
2015
$ 28,099 $ 28,057 $ 16,080
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
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
Capitalization of foreclosed assets
Net cash from investing activities
F-8
(1,175)
(1,078)
(964)
(1,013)
1,482 1,330 1,325
(1,897)
10,129 7,673 4,961
909
934 1,201
563
473
655
124 —
178
4,313 5,240 5,030
(1,058)
3,785
—
(533)
(357,983) (371,173) (301,190)
378,243 367,369 312,150
(6,959)
(7,183)
(684)
(2,172)
(149)
— —
(611)
(648)
(28)
(16)
98 —
860
466
(36)
(10)
—
2,802 1,641
— —
(6,779)
(896)
(818)
20
(58)
(14)
(64)
(12)
(2,278)
(10,020)
(5,599)
2,826 1,610 3,584
55,638 28,196 27,278
240,175 93,873 107,300
(664,894) (391,036) (498,977)
175,457 103,307 204,147
(4,266) (94,749) (116,322)
16,326 21,712 10,670
(487,060) (468,973) (515,837)
(25,000) — (10,344)
— 1,542 4,080
(2,649)
531
(941)
(805) —
(35) — —
(759,628) (741,879) (818,342)
(6,649)
1,330
(3,212)
(1,800)
(3,241)
(3,845)
336
2017
2016
2015
775,410 577,779 641,867
(52,297) (17,785) 62,008
380,000 325,000 157,000
(240,000) (250,000) (119,000)
— 10,000 —
— (10,000) —
— 58,213 —
79
1,615 1,571 1,834
— 67,557 50,423
(300) —
— (10,000) —
(100)
—
(23)
(16) — —
150
101
(256)
—
103 —
864,606 752,216 794,111
160,616 38,533 3,047
90,927 52,394 49,347
$ 251,543 $ 90,927 $ 52,394
$ 34,562 $ 17,043 $ 9,083
15,680 14,023 9,738
$ 2,818 $
108 $ —
— — 1,640
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
Noncontrolling interest distributions
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:
Transfers from loans to foreclosed assets
Transfers from premises and equipment to assets held for sale
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. The Company
also focuses on electronic banking products such as internet banking, remote deposit capture and lockbox services.
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.
On November 10, 2017, Franklin Financial Network, Inc. issued a press release (the “Press Release”) announcing that it had filed with
the Federal Reserve an application for the approval of its previously announced merger with Civic Bank & Trust. The proposed
acquisition of Civic by the Company, which was originally announced on December 14, 2015, has been approved by each company’s
Board of Directors. The Company received approval of the TDFI on April 13, 2016 and approval of the Federal Reserve Bank (FRB)
on December 28, 2017. Completion of the transaction is subject to the approval of Civic’s shareholders and satisfaction of customary
closing conditions.
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, 2017, 2016 or 2015.
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. The Company believes 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.
Purchased Credit Impaired (PCI) 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 is 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 (TDRs) are separately identified for impairment disclosures and are measured at the present value of
estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral
dependent loan, the loan is reported, net, at the fair value of the collateral. TDRs are subsequently tracked and reviewed for
impairment quarterly. For TDRs 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, preparatory or 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.
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 rate 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. Forfeitures are
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. Prior to the
adoption of ASU 2016-09 in the fourth quarter of 2016, these tax benefits were recorded in the statement of stockholders’ equity
directly to additional paid-in-capital.
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. Accordingly, deferred tax assets that will be
realized after December 31, 2017 were revalued using the tax rates enacted as a result of the 2017 Tax Cuts and Jobs Act resulting in a
revaluation charge of $5,323. 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. 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 and had no impact for 2017.
In February 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-02, Income Statement - Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this
ASU addressed the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the newly
enacted federal corporate tax rate included in the Tax Cuts and Jobs Act issued December 22, 2017. These amendments allow an
entity to make a reclassification from other comprehensive income to retained earnings for the difference between the historical
corporate income tax rate and the newly enacted corporate income tax rate. The amendments are effective for fiscal years beginning
after December 15, 2018, including interim periods within those years. The Company elected to adopt this ASU early. The impact of
the new guidance on the Company’s consolidated financial statements was a reclassificiation of $1,202 between retained earnings and
other comprehensive income at December 31, 2017.
F-15
Recently Issued, Not Yet Effective Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 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 Company’s sources of non-interest income that fall within the scope of the new standard,
such as service charges on deposit accounts, debit card interchange income, wealth management fees, and gain on sale of foreclosed
property, are all immaterial in comparison with total revenue and are structured in a way that the non-interest income is not earned
over a period of time, which is similar to the treatment under previous revenue recognition standards. The Company adopted ASU
2014-09 and applied the modified retrospective approach with a cumulative effect of initial application in the first quarter of 2018 but
there was no impact to retained earnings as a result of the adopting the new standard.
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 instruments and requires
separate presentation of financial assets and liabilities by measurement category and form of financial asset. ASU 2016-01 was
effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s consolidated
financial statements and related disclosures.
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. This ASU could also impact the reporting of leases as shown in Note 5 -
Premises and Equipment and Leases. 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; however, the Company does not currently plan to early adopt this ASU. The Company is currently gathering
information, reviewing possible vendors and working to determine the methodology to be used. The Company is gathering as much
data as possible to enable review scenarios and to determine which calculations will produce the most reliable results. The impact of
adopting ASU 2016-13 is not currently known.
F-16
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 ASU were effective for the Company January 1, 2018, but it is not expected to have a material impact on the
Company’s financial statements.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the
Definition of a Business. The amendment in this ASU clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) or assets or businesses. The
amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. This
ASU is not expected impact the Company’s consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, to simplify how entities other than private companies, such as public business entities
and not-for-profit entities, are required to test goodwill for impairment by eliminating the comparison of the implied fair value of the
reporting unit’s goodwill with the carrying amount of that goodwill. The amendments are effective for fiscal years beginning after
December 15, 2019, including interim periods within those periods. Adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium
Amortization on Purchased Callable Debt Securities. These amendments shorten the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The
amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.
The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. Early adoption is permitted with modified retrospective application; however, the Company is not expecting to
early adopt. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The objective of this
ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk
management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain
targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This Update is effective for
public business entities for fiscal years beginning after December 15, 2018, and early application is permitted in any interim period
after issuance of the Update. The Company currently does not have any hedging activities that would be subject to this Update;
however, management may consider hedging activities in the future. Adoption of this Update is not expected to have a material impact
on the Company’s consolidated financial statements.
F-17
NOTE 2 - SECURITIES
The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at December 31, 2017
and 2016 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss.
December 31, 2017
U.S. Treasury securities
U.S. government sponsored entities and agencies
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total
December 31, 2016
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 229,119 $ — $
641,225
20,125 —
102
5,133 —
113,468 1,787
(210) $ 228,909
(164) 19,961
(8,761) 632,566
(59) 5,074
(1,884) 113,371
$1,009,070 $ 1,889 $ (11,078) $ 999,881
$ 614,344 $
19,439
133,280
949 $ (8,208) $ 607,085
(132) 19,334
(5,182) 128,336
27
238
$ 767,063 $ 1,214 $ (13,522) $ 754,755
The amortized cost and fair value of the held to maturity securities portfolio at December 31, 2017 and 2016 and the corresponding
amounts of gross unrecognized gains and losses were as follows:
December 31, 2017
Mortgage backed securities: residential
State and political subdivisions
Total
December 31, 2016
U.S. government sponsored entities and agencies
Mortgage backed securities: residential
State and political subdivisions
Total
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
$ 93,366 $
121,490
207 $
4,379
(1,796) $ 91,777
(38) 125,831
$ 214,856 $
4,586 $
(1,834) $ 217,608
$
203 $
106,169
122,522
6 $
328
1,214
— $
209
(2,343) 104,154
(207) 123,529
$ 228,894 $
1,548 $
(2,550) $ 227,892
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-18
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
2017
2015
2016
$ 240,175 $ 93,873 $ 107,300
— 11,805 2,000
972
1,553 2,557
(288)
(385)
(657)
Calls of held to maturity securities resulted in gross gains of $149 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, 2017
Amortized
Cost
Fair
Value
$
— $ —
229,119 228,909
20,125 19,961
420
432
113,048 112,939
5,133 5,074
641,225 632,566
$1,009,070 $ 999,881
$
— $ —
— —
1,607 1,651
6,296 6,452
113,587 117,728
93,366 91,777
$ 214,856 $ 217,608
Securities pledged at December 31, 2017 and 2016 had a carrying amount of $975,518 and $808,224 and were pledged to secure
public deposits and repurchase agreements.
At December 31, 2017 and 2016, there were no holdings of securities of any one issuer, other than the U.S. government-sponsored
entities and agencies, in an amount greater than 10% of shareholders’ equity.
F-19
The following table summarizes the securities with unrealized and unrecognized losses at December 31, 2017 and 2016, aggregated by
major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2017
Available for sale
U.S. Treasury securities
U.S. government sponsored entities and agencies
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
State and political subdivisions
Total available for sale
$ 228,909 $
19,961
301,158
5,074
1,298
$ 556,400 $
(210) $ — $
(164) —
(2,447) 311,366
(59) —
(2) 62,725
(2,882) $ 374,091 $
— $ 228,909 $
— 19,961
(6,314) 612,524
— 5,074
(1,882) 64,023
(8,196) $ 930,491 $
(210)
(164)
(8,761)
(59)
(1,884)
(11,078)
Held to maturity
Mortgage-backed securities: residential
State and political subdivisions
Total held to maturity
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
$ 11,191 $
262
$ 11,453 $
(69) $ 72,582 $
(2) 1,148
(71) $ 73,730 $
(1,727) $ 83,773 $
(36) 1,410
(1,763) $ 85,183 $
(1,796)
(38)
(1,834)
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: commercial
State and political subdivisions
Total available for sale
$ 465,416 $
15,752
100,020
$ 581,188 $
(7,833) $ 9,907 $
(132) —
(5,182) —
(13,147) $ 9,907 $
(375) $ 475,323 $
— 15,752
— 100,020
(375) $ 591,095 $
(8,208)
(132)
(5,182)
(13,522)
Held to maturity
Mortgage-backed securities: residential
State and political subdivisions
Total held to maturity
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
Fair
Value
Unrecognized
Losses
$ 89,523 $
18,907
$ 108,430 $
(2,244) $ 3,025 $
(207) —
(2,451) $ 3,025 $
(99) $ 92,548 $
— 18,907
(99) $ 111,455 $
(2,343)
(207)
(2,550)
Unrealized losses on debt securities have not been recognized into income because the issuers bonds are of high credit quality (rated
AA or higher), management does not intend to sell and it is likely that management will not be required to sell the securities prior to
their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair
value is expected to recover as the bonds approach maturity. At December 31, 2017, the Company had 163 available for sale securities
in an unrealized loss position and 33 held to maturity securities in an unrecognized loss position compared to 162 available for sale
securities in an unrealized loss position and 38 held to maturity securities in an unrecognized loss position at December 31, 2016.
F-20
NOTE 3 - LOANS
Loans at December 31, 2017 and 2016 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
December 31,
2017
December 31,
2016
$ 494,818 $ 489,562
628,554 458,569
38,571
49,684
407,695 254,474
169,640 150,515
502,006 376,476
3,359
3,781
2,256,178 1,771,526
(793)
(1,963)
2,254,215 1,770,733
2,859
(16,553)
(21,247)
2,393
Total loans, net of allowance for loan losses
$ 2,235,361 $ 1,757,039
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017,
2016 and 2015:
December 31, 2017
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
$
3,776 $
(642)
—
668
4,266 $ 2,398 $
1,715 1,387
—
—
(1)
50
6,068 $
1,823
(310)
6
45 $ 16,553
30 4,313
(360)
(49)
741
17
Total ending allowance balance
$
3,802 $
5,981 $ 3,834 $
7,587 $
43 $ 21,247
December 31, 2016
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
$
3,186 $
601
(11)
—
3,146 $ 1,861 $
511
1,120
(40)
—
66
—
3,358 $
2,964
(255)
1
36 $ 11,587
44 5,240
(348)
(42)
74
7
Total ending allowance balance
$
3,776 $
4,266 $ 2,398 $
6,068 $
45 $ 16,553
F-21
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
December 31, 2015
Allowance for loan losses:
Beginning balance
Provision for loan losses
Loans charged-off
Recoveries
$
2,690 $
496
—
—
1,494 $ 1,791 $
76
1,652
(32)
—
26
—
650 $
2,755
(48)
1
55 $ 6,680
51 5,030
(215)
92
65
(135)
Total ending allowance balance
$
3,186 $
3,146 $ 1,861 $
3,358 $
36 $ 11,587
For the years ended December 31, 2017 and 2016, there was $0 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, 2017 and 2016. 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.
December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired loans
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
$
— $
3,802
—
— $ — $
5,981 3,834
— —
6,708
879 $ — $
43
— —
879
20,368
—
Total ending allowance balance
$
3,802 $
5,981 $ 3,834 $
7,587 $
43 $
21,247
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired loans
217 $
4,141
834 $
$
494,601 678,238 576,501 498,916 3,781 2,252,037
2,393
105
3,090 $ — $
1,908 —
—
380
— $
Total ending loans balance
$ 494,818 $ 678,618 $ 577,440 $ 503,914 $ 3,781 $2,258,571
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired loans
Construction
and Land
Development
Commercial
Real
Estate
Residential
Real
Estate
Commercial
and
Industrial
Consumer
and
Other
Total
$
— $
3,776
—
— $ — $
4,266 2,398
— —
1,024 $ — $
45
5,044
— —
1,024
15,529
—
Total ending allowance balance
$
3,776 $
4,266 $ 2,398 $
6,068 $
45 $
16,553
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired loans
1,275 $
2,836 $ 2,190 $
$
9,909
488,287 494,304 402,799 372,868 3,359 1,761,617
2,859
496
3,608 $ — $
1,969 —
—
394
Total ending loans balance
$ 489,562 $ 497,534 $ 405,485 $ 378,445 $ 3,359 $1,774,385
F-22
Loans collectively evaluated for impairment reported at December 31, 2017 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, 2017, these non-PCI loans had a carrying value of $50,341, comprised of contractually unpaid
principal totaling $51,767 and discounts totaling $1,426. Management evaluated these loans for credit deterioration since acquisition
and determined that a $10 allowance for loan losses was necessary at December 31, 2017.
The following table presents information related to impaired loans by class of loans as of December 31, 2017 and 2016:
December 31, 2017
With no allowance recorded:
Construction and land development
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Subtotal
With an allowance recorded:
Commercial and industrial
Subtotal
Total
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
Unpaid
Principal
Balance
Recorded
Investment
Allowance for
Loan Losses
Allocated
$
217 $
217 $
—
14
820
108
14
820
108
1,159 1,159
2,982 2,982
2,982 2,982
$ 4,141 $ 4,141 $
—
—
—
—
879
879
879
$ 1,275 $ 1,275 $
—
4,423 2,836
—
2,069 2,069
121
934
121
934
8,822 7,235
—
—
—
—
2,864 2,674
2,864 2,674
$ 11,686 $ 9,909 $
1,024
1,024
1,024
F-23
The following table presents the average recorded investment of impaired loans by class of loans for the years ended December 31,
2017, 2016 and 2015:
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:
Residential real estate:
Closed-end 1-4 family
Commercial and industrial
Consumer and other
Subtotal
Total
2017
2016
2015
$ 921 $ 474 $ 494
1,796 1,892 882
649 747 261
331 696 415
62
899 207
10
8
1
4,597 4,024 2,124
22
2,480 490
— —
55 —
60
8
2,502 545
68
$ 7,099 $ 4,569 $ 2,192
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, 2017, 2016 and 2015.
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, 2017 and 2016:
December 31, 2017
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Total
December 31, 2016
Construction and land development
Commercial real estate:
Nonfarm, nonresidential
Residential real estate:
Closed-end 1-4 family
Other
Commercial and industrial
Total
Nonaccrual
Loans Past Due
Over 90 Days
$
257 $
114
2,466
$ 2,837 $
14
—
191
205
$ — $
1,950
835
—
121
2,674
—
452
—
150
$ 3,630 $
2,552
F-24
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, 2017 and 2016 by class of
loans:
December 31, 2017
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, 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
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
$ 1,918 $ 136 $ — $ 2,054 $ 492,764 $ — $ 494,818
— — — — 628,554 380 628,934
49,684
— — — —
49,684 —
14 271 407,424 105 407,800
257 —
146 719 114 979 168,661 — 169,640
27 2,657 3,216 498,790 1,908 503,914
532
3,781
— — — —
3,781 —
$ 2,853 $ 882 $ 2,785 $ 6,520 $2,249,658 $ 2,393 $2,258,571
$ 380 $ — $ 1,950 $ 2,330 $ 487,232 $ — $ 489,562
664 — 835 1,499 457,070 394 458,963
38,571
— — — —
38,571 —
10 452 890 253,584 496 254,970
428
231 — 121 352 150,163 — 150,515
39 2,824 3,018 373,458 1,969 378,445
155
3,359
— — — —
3,359 —
$ 1,858 $
49 $ 6,182 $ 8,089 $1,763,437 $ 2,859 $1,774,385
Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of
borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as
to credit risk. This analysis 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-25
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, 2017 and 2016:
December 31, 2017
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, 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
Pass
Special
Mention
Substandard
Total
$ 494,601 $ — $
217 $ 494,818
609,458 12,602
49,303 —
6,874 628,934
49,684
381
404,832
615
167,886 —
485,363 10,350
4
3,777
2,353 407,800
1,754 169,640
8,201 503,914
3,781
—
$2,215,220 $ 23,571 $ 19,780 $2,258,571
$ 488,287 $ — $
1,275 $ 489,562
449,373 1,847
38,571 —
7,743 458,963
38,571
—
251,919 —
149,504 —
373,243 —
3,359 —
3,051 254,970
1,011 150,515
5,202 378,445
3,359
—
$1,754,256 $ 1,847 $ 18,282 $1,774,385
Troubled Debt Restructurings
As of December 31, 2017, the Company’s loan portfolio contains one loan in the amount of $608 that has been modified in a troubled
debt restructuring as of December 31, 2017. There was one loan in the amount of $698 that has been modified in troubled debt
restructurings as of December 31, 2016.
NOTE 4 - LOAN SERVICING
Loans serviced for others are not reported as assets. The principal balances of these loans at December 31, 2017 and 2016 are as
follows:
Loan portfolios serviced for:
Federal Home Loan Mortgage Corporation
Other
2017
2016
$ 507,233 $ 499,385
4,626 2,954
Custodial escrow balances maintained in connection with serviced loans were $2,672 and $2,477 at year-end 2017 and 2016.
F-26
The related loan servicing rights activity for the years ended December 31, 2017, 2016 and 2015 were as follows:
Servicing rights:
Beginning of year
Additions
Amortized to expense
Decrease in impairment
End of year
2017
2016
2015
$ 3,621 $ 3,455 $ 3,053
933 1,367 1,311
(909)
— — —
(934) (1,201)
$ 3,620 $ 3,621 $ 3,455
The components of net loan servicing fees for the years ended December 31, 2017, 2016 and 2015 were as follows:
Loan servicing fees, net:
Loan servicing fees
Amortization of loan servicing fees
Change in impairment
Total
2017
2016
2015
$ 1,270 $ 1,223 $ 1,136
(909)
— — —
(934) (1,201)
$ 336 $
22 $ 227
The fair value of servicing rights was estimated by management to be approximately $5,089 at December 31, 2017. Fair value for
2017 was determined using a weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.9%. At
December 31, 2016, the fair value of servicing rights was estimated by management to be approximately $5,015. Fair value for 2016
was determined using weighted average discount rate of 10.5% and a weighted average prepayment speed of 9.9%.
NOTE 5 - PREMISES AND EQUIPMENT AND 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
2017
2016
$ 3,215 $ 2,184
33
33
150
150
7,582 6,149
5,437 5,229
3,380 2,840
29
29
19,826 16,614
(8,545) (7,063)
$ 11,281 $ 9,551
Depreciation and amortization expense was $1,482, $1,330 and $1,325 for the years ended December 31, 2017, 2016 and 2015,
respectively.
F-27
Operating Leases: The Company leases most of its branches, loan production, and administrative offices under operating leases. Rent
expense was $4,454, $3,602 and $2,912 for 2017, 2016 and 2015, respectively. Rent commitments, over the initial lease terms and
intended renewal periods were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Total
Related
Parties
Other
$ 3,231 $ 1,292 $ 4,523
3,277 1,273 4,550
3,324 1,210 4,534
3,371 1,230 4,601
3,420 1,207 4,627
30,845 7,305 38,150
$ 47,468 $ 13,517 $ 60,985
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill: Goodwill was $9,124 at both December 31, 2017 and 2016.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2017, 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, 2017 and 2016, the Company had net core deposit intangibles of $1,007 and $1,480,
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, 2017, the Company has recognized
amortization of $2,053 related to the core deposit intangible.
The following table represents acquired intangible assets at December 31, 2017 and 2016:
Acquired intangible assets:
Core deposit intangibles
2017
2016
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
3,060 $
(2,053) $
3,060 $
(1,580)
Aggregate amortization expense was $473, $563 and $655 for 2017, 2016 and 2015, respectively.
The following table presents estimated amortization expense for each of the next five years:
2018
2019
2020
2021
2022
382
291
201
110
23
F-28
NOTE 7 - DEPOSITS
At December 31, 2017 and 2016, time deposits in denominations of $250 or greater totaled $392,633 and $289,571, respectively. At
December 31, 2017 and 2016, the Company had $224 and $192, 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:
2018
2019
2020
2021
2022
$ 875,033
193,967
65,102
56,984
39,350
NOTE 8 - FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
As of December 31, 2017 and 2016, the Bank had federal funds lines (or the equivalent thereof) with correspondent banks totaling
$217,500 and $199,900, respectively. There was $0 and $46,805 in outstanding federal funds purchased at December 31, 2017 and
2016, 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, 2017 and December 31, 2016, these short-term borrowings totaled $31,004 and $36,496,
respectively, and are secured by securities with carrying amounts of $41,618 and $41,136, respectively. At December 31, 2017, the
Company had $31,004 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
The following table provides additional details as of December 31, 2017:
2015
2017
2016
$ 32,428 $ 39,647 $ 38,241
0.85% 0.58% 0.53%
$ 33,989 $ 61,669 $ 61,261
1.14% 0.56% 0.64%
As of December 31, 2017
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
Mortgage-
Backed
Securities:
Residential
State and
Political
Subdivisions
Total
$
$
— $
— $
— %
1,004 $
— $
— %
42,109 $ 43,113
31,004 $ 31,004
136%
139%
F-29
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, 2017 and 2016, the Company had received advances from the FHLB totaling $272,000 and $132,000, respectively.
At December 31, 2017, the scheduled maturities of these advances and interest rates were as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Scheduled
Maturities
$ 157,000
60,000
55,000
—
—
—
$ 272,000
Weighted
Average
Rates
1.19%
1.46%
1.72%
—
—
—
1.36%
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. Qualifying loans totaling
approximately $573,827 were pledged as security under a blanket pledge agreement with the FHLB at December 31, 2017. Based on
this collateral and the Company’s holdings of FHLB stock, the Bank is eligible to borrow up to an additional $70,004 as of
December 31, 2017.
NOTE 10 – SUBORDINATED NOTES
At December 31, 2017, the Company’s subordinated notes, net of issuance costs, totaled $58,515. The Company’s subordinated notes,
net of issuance costs, totaled $58,337 at December 31, 2016. 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-30
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 payment frequency through year five*
Interest payment frequency after five years*
Interest repricing index and margin
Repricing frequency after five years
March 2016
Subordinated
Notes
$40,000
March 30, 2026
6.875%
5 years
March 30, 2021
Semiannually
Quarterly
3-month LIBOR
plus 5.636%
Quarterly
June 2016
Subordinated
Notes
$20,000
July 1, 2026
7.00%
5 years
July 1, 2021
Semiannually
Quarterly
3-month LIBOR
plus 6.04%
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 ended
December 31, 2017, 2016 and 2015 was $621, $523 and $466, respectively.
NOTE 12 – INCOME TAXES
A reconciliation of the income tax expense for the years ended December 31, 2017, 2016 and 2015 to the “expected” tax expense,
which was computed by applying the statutory federal income tax rate of 35 percent for 2017, 2016 and 2015 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 (1)
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
2017
2016
$ 16,321 $ 13,931 $ 8,785
2015
333
805 1,031
5,323 — —
20
58
(214)
(703)
(364) —
114
152
(227)
(2,585) (1,801)
19
429
(286)
(347)
(728)
(911) —
44
$ 18,531 $ 11,746 $ 9,021
47
52
(1) On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the
“Tax Act”), resulting in significant modifications to existing law. As a result of the changes under the Tax Act, the Company
recorded incremental income tax expense of $5,323 during the year ended December 31, 2017, which consisted primarily of the
remeasurement of deferred tax assets and liabilities at the new federal statutory rate of 21%. Prior to the enactment of the Tax
Act, deferred tax assets and liabilities were measured at the previous federal statutory rate of 35%.
F-31
Income tax expense (benefit) was as follows:
Current expense
Federal
State
Deferred expense
Federal
State
Deferred tax revaluation expense
Income tax expense
2017
2016
2015
$ 13,653 $ 11,416 $ 8,302
1,093 1,294 1,777
(957)
(581)
(867)
(191)
5,323 — —
(908)
(56)
$ 18,531 $ 11,746 $ 9,021
The sources of deferred income tax assets (liabilities) at December 31, 2017 and 2016 and the tax effect is as follows:
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
Purchase accounting fair value adjustments
Mortgage banking derivatives
Other
Total deferred tax liability
Net deferred tax asset
2017
2016
$
115
64 $
5,367 6,340
2,403 4,826
2,317 4,332
1,006 1,914
512
468
312
139
567
355
511
552
13,142 18,958
$
(933) $ (1,429)
(753) (1,080)
(527)
(469)
(639)
(264)
(8)
—
(262)
(716)
(3,135) (3,945)
$ 10,007 $ 15,013
At December 31, 2017, the federal net operating loss remaining from the acquisition of MidSouth Bank totaled $11.0 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, 2017, 2016 and 2015. 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
2014.
F-32
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 2017 were as follows:
Beginning balance
New loans/advances
Effect of changes in composition of related parties
Participations sold
Repayments
Ending balance
$ 13,571
20,129
—
(1,100)
(3,413)
$ 29,187
Deposits from principal officers, directors, and their affiliates at year end 2017 and 2016 were $17,477 and $18,836.
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 2017, 2016 and 2015, was $2,582, $2,574 and $2,296, 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 $831, $2,261 and $369 for construction of leasehold improvements during
2017, 2016 and 2015, respectively. In addition, the Company also paid a company affiliated with an outside director $997, $806 and
$666 for the procurement of various insurance policies during the years ending December 31, 2017, 2016 and 2015, respectively.
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 allowed the shareholders to purchase an additional share of common stock at
$12.00 per share. The warrants were issued with an effective date of March 30, 2010 and were exercisable in whole or in part up to
seven years following the date of issuance. The warrants were detachable from the common stock. There were 12,461 and 8,450
warrants exercised during 2017 and 2016, respectively. A summary of the stock warrant activity for the years ended
December 31, 2017 and 2016 follows:
Stock warrants exercised:
Intrinsic value of warrants exercised
Cash received from warrants exercised
2017
2016
$329 $181
150 101
The warrants expired on March 30, 2017; therefore, at December 31, 2017, there were no outstanding warrants.
The Company has two share based compensation plans as described below. Total compensation cost that has been charged against
income for those plans was $2,802, $1,641, and $860, respectively, for 2017, 2016, and 2015. The total income tax benefit related to
vesting of restricted stock and exercises of stock options was $805, $1,013, and $533, respectively, for 2017, 2016 and 2015.
Stock Option Plan: The Company’s 2007 Omnibus Equity Incentive Plan (the “2007 Plan”), as amended and shareholder-approved,
provided for authorized shares up to 4,000,000. The 2007 Plan provided that no options intended to be ISOs may be granted after
April 9, 2017. As a result, the Company’s board of directors approved, and recommended to its shareholders for approval, an equity
F-33
incentive plan, the 2017 Omnibus Equity Incentive Plan. The Company’s shareholders approved the 2017 Omnibus Equity Incentive
Plan at the 2017 annual meeting of shareholders. The terms of the 2017 Omnibus Equity Incentive Plan are substantially similar to the
terms of the 2007 Omnibus Equity Incentive Plan it was intended to replace. The 2017 Omnibus Equity Incentive Plan provides for
authorized shares up to 5,000,000. At December 31, 2017, there were 4,734,446 authorized shares available for issuance under the
2017 Omnibus Equity Incentive Plan.
Employee, organizer and director awards are generally granted with an exercise price equal to the market price of the Company’s
common stock at the date of grant; those option awards have a 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.
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
2017
2016
2015
2.05%
1.59%
1.84%
6.9 years 7.5 years 7.5 years
33.21%
0.03%
30.45%
0.22%
25.00%
0.22%
The weighted average fair value of options granted for the years ending December 31, 2017, 2016 and 2015 was $14.43, $10.23, and
$6.44, respectively.
F-34
A summary of the activity in the stock option plans for the years ended December 31, 2017, 2016 and 2015 follows:
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
Granted
Exercised
Forfeited, expired, or cancelled
Outstanding at December 31, 2017
Vested or expected to vest
Exercisable at December 31, 2017
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
1,210,660 $ 11.32
245,449 20.82
(138,901) 11.53
(4,417) 19.02
1,312,791 $ 13.04
299,587 28.85
(214,947) 11.31
(2,415) 19.43
1,395,016 $ 16.70
295,820 37.68
(180,555) 11.87
(3,113) 25.37
1,507,168 $ 21.37
1,431,810 $ 21.37
771,418 $ 13.79
6.55 $ 19,180
6.55 $ 18,221
4.88 $ 15,666
Stock options exercised:
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from option exercises
2017
2016
2015
$ 4,878 $ 4,725 $ 1,727
1,615 1,571 1,301
484 843 451
As of December 31, 2017, there was $5,854 of total unrecognized compensation cost related to non-vested stock options granted under
the Plan. The cost is expected to be recognized over a weighted-average period of 1.8 years.
Restricted Share Award Plan: Additionally, the Company’s 2007 Omnibus Equity Incentive Plan and the 2017 Omnibus Equity
Incentive Plan provide 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. During 2017, 27,282 restricted share awards were granted from the Company’s 2007 Omnibus Equity
Incentive Plan. All future restricted share awards will be granted from the 2017 Omnibus Equity Incentive Plan.
F-35
A summary of activity for non-vested restricted share awards for the year ended December 31, 2017, 2016 and 2015 is as follows:
Non-vested Shares
Non-vested at December 31, 2014
Granted
Vested
Forfeited
Non-vested at December 31, 2015
Granted
Vested
Forfeited
Non-vested at December 31, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Weighted-Average
Grant-Date
Fair Value
Shares
102,710 $
31,938
(25,075)
(3,709)
105,864 $
36,496
(33,407)
(2,495)
106,458
27,282
(38,995)
(564)
94,181
13.93
20.69
13.99
15.99
15.89
28.47
17.06
16.97
19.81
37.35
18.40
28.66
25.42
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, 2017, there was
$1,822 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,
2017, 2016 and 2015 was $1,432, $1,003, and $560, respectively.
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, 2017, 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 2017 is 1.25%. 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-36
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, 2017, 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, 2017 and 2016 for the Company and Bank.
December 31, 2017
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, 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
Required
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 299,229 11.37% $ 118,479 4.50% N/A N/A
$ 379,083 14.40% $ 210,629 8.00% N/A N/A
$ 299,229 11.37% $ 157,972 6.00% N/A N/A
8.25% $ 145,100 4.00% N/A N/A
$ 299,229
$ 353,512 13.43% $ 118,489 4.50% $ 171,151
6.50%
$ 374,851 14.24% $ 210,647 8.00% $ 263,309 10.00%
8.00%
$ 353,512 13.43% $ 157,985 6.00% $ 210,647
5.00%
9.75% $ 145,003 4.00% $ 181,253
$ 353,512
$ 263,693 11.75% $ 101,022 4.50% N/A N/A
$ 338,675 15.09% $ 179,595 8.00% N/A N/A
$ 263,693 11.75% $ 134,696 6.00% N/A N/A
$ 263,693
9.28% $ 113,697 4.00% N/A N/A
$ 319,005 14.18% $ 101,216 4.50% $ 146,201
6.50%
$ 335,650 14.92% $ 179,939 8.00% $ 224,924 10.00%
8.00%
$ 319,005 14.18% $ 134,954 6.00% $ 179,939
5.00%
$ 319,005 11.22% $ 113,697 4.00% $ 142,122
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-37
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).
F-38
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:
U.S. Treasury
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
Financial Assets
Securities available for sale
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, 2017 Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
$
— $ 228,909 $
19,961
—
632,566
—
5,074
—
113,370
—
— $ 999,881 $
— $ 12,024 $
— $
175 $
—
—
—
—
—
—
—
—
— $
35 $
—
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)
$
$
$
$
$
— $ 607,085 $
19,334
—
128,336
—
— $ 754,755 $
— $ 23,699 $
— $
229 $
—
—
—
—
—
—
— $
66 $
—
At December 31, 2017, the unpaid principal balance of loans held for sale was $11,681, resulting in an unrealized gain of $343
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, 2017. 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.
There were no transfers between levels during 2017 and 2016.
At December 31, 2017 and 2016, there was one collateral dependent impaired loan carried at fair value of $1,831, and $1,650,
respectively.
Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $1,503 and $0 as of December 31, 2017 and
2016, respectively. There were no properties at December 31, 2017 that had required write-downs to fair value resulting in no write
downs for the year ended December 31, 2016.
F-39
The carrying amounts and estimated fair values of financial instruments, at December 31, 2017 and 2016 are as follows:
Carrying
Amount
Level 1
Fair Value Measurements at
December 31, 2017 Using:
Level 3
Level 2
Total
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
$ 251,543 $ 251,543 $
999,881
2,855
214,856
12,024
2,235,361
18,492
3,620
11,947
— $
— 999,881
—
2,855
— 217,608
—
12,024
—
n/a
—
73
— $ 251,543
— 999,881
—
2,855
— 217,608
12,024
—
— 2,230,607 2,230,607
n/a
n/a
5,089
—
11,947
5,724
n/a
5,089
6,150
$3,167,228 $1,911,928 $ 1,224,041 $
—
31,004
— 270,311
—
—
2,030
51
31,004
272,000
58,515
2,769
— $3,135,969
—
31,004
— 270,311
59,951
2,769
59,951
688
Carrying
Amount
Level 1
Fair Value Measurements at
December 31, 2016 Using:
Level 3
Level 2
Total
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
$
90,927 $
754,755
1,055
228,894
23,699
1,757,039
11,843
3,621
9,931
90,927 $
— $
— 754,755
1,055
—
— 227,892
—
23,699
—
n/a
—
—
— $
90,927
— 754,755
1,055
—
— 227,892
23,699
—
— 1,727,188 1,727,188
n/a
n/a
5,015
—
9,931
5,172
n/a
5,015
4,759
Financial liabilities
Deposits
Federal funds purchased and repurchase agreements
Federal Home Loan Bank advances
Subordinated notes
Accrued interest payable
$2,391,818 $1,551,461 $ 836,444 $
—
83,301
— 131,098
—
—
1,075
154
83,301
132,000
58,337
1,924
— $2,387,905
—
83,301
— 131,098
61,762
1,924
61,762
695
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-40
(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 3 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 as hedge relationships. At year-end 2017, the Company had approximately $21,656 of interest
rate lock commitments and approximately $35,566 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 $175 and $35, respectively, at
December 31, 2017. 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. 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:
2017
2015
2016
$ 32 $ (37) $103
(54) (182) 126
Forward contracts related to mortgage loans held for sale and interest rate contracts
Interest rate contracts for customers
F-41
The following table reflects the amount and fair value of mortgage banking derivatives included in the consolidated balance sheet as
of December 31, 2017 and 2016:
Included in other assets (liabilities):
Interest rate contracts for customers
Forward contracts related to mortgage loans held for sale
2017
2016
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
$ 21,656 $ 175 $ 42,689 $ 229
$ 35,566 $ (35) $ 50,955 $ (66)
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
2017
2016
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
$ 21,656 $ — $ 42,689 $ —
124,997 480,184 179,096 336,891
9,223 36,401 8,581 16,413
Commitments to make loans are generally made for periods of over 365 days. The fixed rate loan commitments have interest rates
ranging from 2.50% to 12.00% and maturity terms ranging from less than 1 year to 30 years.
NOTE 19 – PREFERRED STOCK
In 2011, the Company issued 10,000 shares of preferred stock series A as part of its participation in the Small Business Lending Fund
(“SBLF”), 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, 2017 or 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
December 31,
2017
2016
$ 5,958 $ 4,366
358,833 325,571
2,393 1,363
963
235
$ 367,419 $ 332,263
F-42
LIABILITIES AND EQUITY
Subordinated notes
Accrued expenses and other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2017
2016
$ 58,515 $ 58,337
4,354 3,668
304,550 270,258
$ 367,419 $ 332,263
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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
Net income
Comprehensive income
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
Change in other assets
Change in other liabilities
Net cash from operating activities
Cash flows from investing activities
Investments in subsidiaries
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-43
Years ended December 31,
2016
2015
2017
171
$ 4,000 $ 2,050 $
305
150
488
4,321 2,902 —
2,890 2,842 2,270
(3,040) (3,389) (1,632)
(2,671) (2,320)
(689)
28,468 29,126 17,023
$ 28,099 $ 28,057 $ 16,080
$ 29,997 $ 20,895 $ 13,584
Years ended December 31,
2016
2017
2015
$ 28,099 $ 28,057 $ 16,080
178
219
(28,468) (29,126) (17,023)
(279)
— —
124 —
45
105
14
— —
(629)
463
728
686 3,058
(34)
1,442 2,184 (1,329)
(1,359) (116,850) (49,809)
(1,359) (116,850) (49,809)
— 10,000 —
— (10,000) —
— 58,213 —
79
1,615 1,571 1,834
— 67,557 50,423
150
101
Years ended December 31,
2016
2015
2017
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
(256)
— —
319
(300) —
— (10,000) —
(100)
—
(23)
1,509 117,119 52,555
1,592 2,453 1,417
4,366 1,913
496
$ 5,958 $ 4,366 $ 1,913
Non-cash supplemental information:
Transfers from subsidiary stock based compensation expense to parent company
only additional paid-in capital
$ 2,583 $ 1,536 $
815
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
$
$
28,083 $
(219)
28,034 $
(284)
15,980
(174)
27,864 $
27,750 $
15,806
Weighted average common shares outstanding including
Years Ended December 31,
2016
2017
2015
participating securities
Less: Participating securities
Average shares
Basic earnings per common share
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
13,145,005 10,933,095 9,885,233
(107,923)
(110,628)
(102,650)
13,042,355 10,822,467 9,777,310
$
$
2.14 $
2.56 $
1.62
27,864 $
27,750 $
15,806
13,042,355 10,822,467 9,777,310
633,738
1,578
655,485
12,667
491,318
13,581
Average shares and dilutive potential common shares
13,677,671 11,490,619 10,282,209
Dilutive earnings per common share
$
2.04 $
2.42 $
1.54
Average stock options of 285,706, 165,232, and 245,992 shares of common stock were not considered in computing diluted earnings
per common share for the year ended December 31, 2017, 2016, and 2015, respectively, because they were antidilutive.
F-44
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.
NOTE 23 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table provides a summary of selected consolidated quarterly financial data for the years ended December 31, 2017 and
2016:
2017
2016
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter†
Second
Quarter†
First
Quarter†
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
590
$ 35,121 $ 33,780 $ 33,011 $ 30,541 $ 27,336 $ 25,724 $ 24,286 $ 22,561
10,513 9,454 8,542 6,898 5,637 5,049 4,352 3,285
24,608 24,326 24,469 23,643 21,699 20,675 19,934 19,276
1,295
573 1,855 1,145 1,392 1,567 1,136
3,264 3,569 3,880 4,008 2,553 4,876 4,626 3,085
15,987 15,278 15,283 14,276 13,229 13,708 12,913 11,831
10,590 12,027 12,493 11,520 9,878 10,451 10,080 9,394
8,188 3,138 3,619 3,586 2,699 3,314 2,572 3,161
2,402 8,889 8,874 7,934 7,179 7,137 7,508 6,233
2,394 8,889 8,866 7,934 7,179 7,137 7,508 6,210
0.59
$ 0.18 $ 0.67 $ 0.68 $ 0.61 $ 0.61 $
0.55
$ 0.17 $ 0.65 $ 0.64 $ 0.58 $ 0.58 $
0.67 $
0.63 $
0.70 $
0.66 $
† 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. 333-220310 on Form S-8, Registration Statements
No. 333-208265, No. 333-208578, and No. 333-220309 on Form S-3, and Registration Statement No. 333-214629 on Form S-3MEF
of Franklin Financial Network, Inc. of our report dated March 16, 2018 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, 2018
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, 2017 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, 2018
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, 2017 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, 2018
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, 2017 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, 2018.
/s/ Richard E. Herrington
Richard E. Herrington
Chief Executive Officer
/s/ Sarah Meyerrose
Sarah Meyerrose
Chief Financial Officer
Company Information
BOARD OF DIRECTORS
Richard E. Herrington
Chairman
James E. Allen
Director
James W. Cross, IV
Director
Paul M. Pratt
Director
Pamela J. Stephens
Director
Melody J. Sullivan
Director
Gregory E. Waldron
Director
Benjamin P. Wynd
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 24,
2018, at 9:30 a.m., Central Time,
in the Musgrove Auditorium at the
Company’s corporate office.
Registrar and Transfer Agent
Computershare Investor Services
462 South 4th Street, Suite 1600
Louisville, KY 40202
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, 2017, (without
exhibits) is available without charge
to shareholders upon written
request to the Corporate Secretary
at the Company’s corporate office.
Franklin Financial 2017 AR.indd 5
4/11/18 11:03 AM
Franklin Financial Network, Inc.
722 Columbia Avenue
Franklin, Tennessee 37064
615-236-2265
, INC.
Franklin Financial 2017 AR.indd 6
4/11/18 11:03 AM