Company Quick10K Filing
Franklin Financial Network
Price30.95 EPS2
Shares15 P/E20
MCap464 P/FCF3,222
Net Debt-179 EBIT109
TEV285 TEV/EBIT3
TTM 2019-09-30, in MM, except price, ratios
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FSB 10Q Quarterly Report

Part I Financial Information
Item 1. Consolidated Financial Statements
Note 1 - Basis of Presentation
Note 2 - Securities
Note 3 - Loans
Note 4 - Loan Servicing
Note 5 - Leases
Note 6 - Share - Based Payments
Note 7 - Regulatory Capital Matters
Note 8 - Derivative Instruments
Note 9 - Commitments and Contingencies
Note 10 - Fair Value
Note 11 - Earnings per Share
Note 12 - Subordinated Debt Issuance
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (All Dollar Values in This Section Are in Thousands.)
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-31.1 exhibit311.htm
EX-31.2 exhibit312.htm
EX-32 exhibit32.htm

Franklin Financial Network Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-36895
________________________________________________________
FRANKLIN FINANCIAL NETWORK, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________
Tennessee20-8839445
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
722 Columbia Avenue, Franklin, Tennessee 37064
(Address of principal executive offices) (Zip Code)

615-236-2265
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueFSBNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares outstanding of the registrant’s common stock, no par value per share, as of April 29, 2020, was 14,919,433.



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements regarding, among other things, our anticipated financial and operating results, the transaction with FB Financial Corporation, the impact of the COVID-19 pandemic, our plans regarding reductions in non-core banking activities and our Corporate and Healthcare loan portfolio. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect our management’s current assumptions, beliefs, and expectations. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “objective,” “may,” “could,” “would,” “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 under the heading “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2020, and in this Form 10-Q. 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 Form 10-Q is filed with the 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.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
the risk that the cost savings and any revenue synergies from the proposed merger with FB Financial Corporation may not be realized or may take longer than anticipated to be realized;
disruption from the proposed merger with customer, supplier, or employee relationships;
the occurrence of any event, change, or other circumstances that could give rise to the termination of the merger agreement with FB Financial Corporation;
the failure to obtain necessary regulatory approvals for the proposed merger with FB Financial Corporation;
the failure to obtain the approval of the Company’s and FB Financial Corporation’s shareholders in connection with the proposed merger;
the possibility that the costs, fees, expenses, and charges related to the proposed merger with FB Financial Corporation may be greater than anticipated, including as a result of unexpected or unknown factors, events, or liabilities;
the failure of the conditions to the proposed merger to be satisfied;
the risks related to the integration of the combined businesses (as well as FB Financial Corporation’s acquisition of FNB Financial Corp completed February 14, 2020, and any future acquisitions), including the risk that the integration will be materially delayed or will be more costly or difficult than expected;
the diversion of management time on merger-related issues;
the ability of FB Financial Corporation to effectively manage the larger and more complex operations of the combined company following the proposed merger with the Company;
reputational risk and the reaction of the Company’s and FB Financial Corporation’s customers to the proposed merger;
the risk of potential litigation or regulatory action related to the proposed merger;
business and economic conditions nationally, regionally and in our target markets, particularly in Middle Tennessee and the geographic areas in which we operate;
the concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;
the concentration of our business within our geographic areas of operation in Middle Tennessee;
credit and lending risks associated with our commercial real estate, residential real estate, commercial and industrial, and construction and land development portfolios;
adverse trends or events affecting business industry groups, reduction in real estate values or markets, business closings or layoffs, inclement weather, natural disasters, pandemic crises, and international instability;
increased competition in the banking and mortgage banking industry, nationally, regionally and locally;
our ability to execute our business strategy to achieve profitable growth;
the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;
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risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;
our ability to increase our operating efficiency;
failure to keep pace with technological change or difficulties when implementing new technologies;
risks related to our acquisition, disposition, growth and other strategic opportunities and initiatives;
negative impact on our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation;
our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;
our ability to attract sufficient loans that meet prudent credit standards, including in our commercial and industrial and commercial real estate loan categories;
failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;
inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;
failure to develop new, and grow our existing, streams of non-interest income;
our ability to maintain expenses in line with our current projections;
our dependence on our management team and our ability to motivate and retain our management team;
risks related to management transition;
risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;
inability to find acquisition candidates that will be accretive to our financial condition and results of operations;
system failures, data security breaches (including as a result of cyber-attacks), or failures to prevent breaches of our network security;
data processing system failures and errors;
fraudulent and negligent acts by individuals and entities that are beyond our control;
fluctuations in our market value and its impact on the securities held in our securities portfolio;
changes in the level of nonperforming assets and other credit quality measures, and their impact on the adequacy of our allowance for loan losses;
further deterioration in the credits that we are presently monitoring could result in future losses;
the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology for calculating such reserves;
the makeup of our asset mix and investments;
our focus on small and mid-sized businesses;
an inability to raise necessary capital to fund our growth strategy or operations, or to meet increased minimum regulatory capital levels;
the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or required;
interest rate shifts and its impact on our financial condition and results of operation;
the expenses that we incur to operate as a public company;
the institution and outcome of litigation and other legal proceeding against us or to which we become subject;
changes in accounting standards;
the impact of recent and future legislative and regulatory changes;
governmental monetary and fiscal policies;
changes in the scope and cost of Federal Deposit Insurance Corporation, or FDIC, insurance and other coverage; and
future equity issuances under our Amended and Restated 2017 Omnibus Equity Incentive Plan and future sales of our common stock by us or our executive officers or directors;
the continuation of the disruption to the global and national economy caused by COVID-19, which could affect our capital and liquidity position, impair the ability of borrowers to repay outstanding loans and increase our allowance for loan and lease losses, impair the collateral values, cause an outflow of deposits, result in lost revenue or additional expenses, result in goodwill impairment charges, and increase our cost of capital;
natural or other disasters, including acts of terrorism and pandemics, could have an adverse effect on us, including a material disruption of our operations or the ability or willingness of clients to access our products and services;
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widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties could adversely impact our financial condition and results of operations; and
depressed market values for our stock and adverse economic conditions sustained over a period of time may require a write down to goodwill.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed March 16, 2020 with the SEC, as well as the section below entitled “Statement Regarding the Impact of the COVID-19 Pandemic” and the section entitled “Risk Factors” in this Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

Statement Regarding the Impact of the COVID-19 Pandemic

The Company prioritizes the health and safety of its employees and customers, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves. Lastly, the Company is actively participating in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") in an effort to continue to serve its customers and the communities it serves.

Throughout this Form 10-Q, the Company has sought to describe the historical and future impact of the COVID-19 pandemic on the Company's operations, including the discussions of our loan loss provision and allowance for loan and lease losses. Although the Company believes that the statements that pertain to future events, results and trends and their impact on the Company's business are reasonable at the present time, those statements are not historical facts and are based upon current assumptions, expectations, estimates and projections, many of which, by their nature, are beyond the Company's control. Accordingly, all discussions regarding future events, results and trends and their impact on the Company's business, even in the near term, are necessarily uncertain given the fluid and evolving nature of the pandemic.

If the health, logistical or economic effects of the pandemic worsen, or if the assumptions, expectations, estimates or projections that underlie the Company's statements regarding future effects or trends prove to be incorrect, then the Company's operations may be materially and adversely impacted in ways that the Company cannot reasonably forecast.

Therefore, when reading this Form 10-Q, undue reliance should not be placed upon any statement pertaining to future events, results and trends and their impact on the Company's business in future periods.
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share data)
March 31,
2020
December 31,
2019
(Unaudited)
ASSETS
Cash and due from financial institutions$173,482  $234,991  
Certificates of deposit at other financial institutions3,345  3,590  
Securities available for sale543,225  652,132  
Loans held for sale, at fair value42,682  43,162  
Loans held for investment2,855,768  2,812,444  
Allowance for loan losses(38,403) (45,436) 
Net loans2,817,365  2,767,008  
Restricted equity securities, at cost24,844  24,802  
Premises and equipment, net48,470  12,141  
Accrued interest receivable12,043  12,362  
Bank owned life insurance57,082  56,726  
Deferred tax asset12,846  14,229  
Servicing rights, net3,057  3,246  
Goodwill18,176  18,176  
Core deposit intangible, net354  448  
Other assets34,630  53,149  
Total assets$3,791,601  $3,896,162  
LIABILITIES AND EQUITY
Deposits
Non-interest bearing$387,195  $319,373  
Interest bearing2,750,276  2,888,211  
Total deposits3,137,471  3,207,584  
Federal Home Loan Bank advances135,000  155,000  
Subordinated notes, net58,916  58,872  
Accrued interest payable3,179  4,201  
Other liabilities48,187  60,079  
Total liabilities3,382,753  3,485,736  
Commitments and Contingencies (Note 9)
Equity
Preferred stock, no par value: 1.0 million shares authorized; no shares outstanding at March 31, 2020 and December 31, 2019
    
Common stock, no par value: 30.0 million authorized; 14.9 million issued and outstanding at March 31, 2020 and 14.8 million issued and outstanding December 31, 2019, respectively
277,341  275,412  
Retained earnings131,061  133,102  
Accumulated other comprehensive income353  1,819  
Total shareholders’ equity408,755  410,333  
Non-controlling interest in consolidated subsidiary93  93  
Total equity408,848  410,426  
Total liabilities and equity$3,791,601  $3,896,162  

See accompanying notes to consolidated financial statements.
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FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
20202019
Interest income and dividends
Loans, including fees
$37,038  $38,338  
Securities:
Taxable
2,424  6,394  
Tax-Exempt
1,383  1,470  
Dividends on restricted equity securities
162  334  
Federal funds sold and other
600  987  
Total interest income
41,607  47,523  
Interest expense
Deposits
12,246  16,990  
Federal funds purchased and repurchase agreements
14  72  
Federal Home Loan Bank advances and other borrowings
801  1,959  
Subordinated notes
1,082  1,082  
Total interest expense
14,143  20,103  
Net interest income
27,464  27,420  
Provision for loan losses
13,022  5,055  
Net interest income after provision for loan losses
14,442  22,365  
Noninterest income
Service charges on deposit accounts
92  74  
Other service charges and fees
897  757  
Mortgage banking revenue
2,685  1,672  
Wealth management
814  627  
Gain on sale or call of securities1,396  149  
Net loss on sale of loans held for investment(416) (217) 
Net gain on sale of foreclosed assets
2  4  
Other
423  420  
Total noninterest income
5,893  3,486  
Noninterest expense
Salaries and employee benefits
12,580  14,743  
Occupancy and equipment
3,086  3,113  
FDIC assessment (income) expense
450  990  
Marketing
245  319  
Professional fees
3,068  923  
Amortization of core deposit intangible
94  145  
Other
2,898  2,383  
Total noninterest expense
22,421  22,616  
(Loss) income before income tax expense(2,086) 3,235  
Income tax (benefit) expense(938) 334  
Net (loss) income(1,148) 2,901  
Earnings attributable to noncontrolling interest
    
Net (loss) income available to common shareholders$(1,148) $2,901  
(Loss) earnings per share:
Basic
$(0.08) $0.20  
Diluted
(0.08) 0.19  

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended
March 31,
20202019
Net (loss) income$(1,148) $2,901  
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on securities:
Unrealized holding gains (losses) arising during the period1,739  13,111  
Reclassification adjustment for losses (gains) on sales, calls, and prepayments of securities included in net income(1,396) (149) 
Tax effect, includes $365 and $58, respectively, income tax (benefit) expense from sales of securities
(80) (4,208) 
Net unrealized gains (losses) on securities 263  8,754  
Unrealized gain/loss on cash flow hedge:
Unrealized holding gain (loss) arising during the period (2,341)   
Tax effect612    
Net unrealized gains (losses) on cash flow hedge(1,729)   
Total other comprehensive (loss) income(1,466) 8,754  
Comprehensive (loss) income$(2,614) $11,655  

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three Months Ended March 31, 2020 and March 31, 2019
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Shareholders’ Equity
Preferred Stock
Common Stock
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Noncontrolling Interest
Total Equity
Shares
Amount
Balance at January 1, 2019$  14,538,085  $264,905  $123,176  $(15,341) $93  $372,833  
Cumulative effect of accounting change
      related to adoption of ASU 2017-08
(2,244) (2,244) 
Exercise of common stock options, includes net settlement of shares
—  35,046  524  —  —  —  524  
Stock based compensation expense, net of restricted share forfeitures
—  —  1,329  —  —  —  1,329  
Issuance of restricted stock awards, net of forfeitures
—  1,208  —  —  —  —  —  
Cash Dividends - common stock ($0.04 per share)
(583) (583) 
Net income
—  —  —  2,901  —  —  2,901  
Other comprehensive income—  —  —  —  8,754  —  8,754  
Balance at March 31, 2019$  14,574,339  $266,758  $123,250  $(6,587) $93  $383,514  
Balance at January 1, 2020$  14,821,594  $275,412  $133,102  $1,819  $93  $410,426  
Exercise of common stock options, includes net settlement of shares
—  37,416  417  —  —  —  417  
Stock based compensation expense, net of restricted share forfeitures
—  —  1,512  —  —  —  1,512  
Issuance of restricted stock awards, net of forfeitures, and vesting of restricted stock units
—  694  —  —  —  —  —  
Cash dividends - common stock ($0.06 per share)
—  —  —  (893) —  —  (893) 
Net loss—  —  —  (1,148) —  —  (1,148) 
Other comprehensive loss—  —  —  —  (1,466) —  (1,466) 
Balance at March 31, 2020$  14,859,704  $277,341  $131,061  $353  $93  $408,848  

See accompanying notes to consolidated financial statements.

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FRANKLIN FINANCIAL NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31,
20202019
Cash flows from operating activities
Net income$(1,148) $2,901  
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization on premises and equipment585  410  
Accretion of purchase accounting adjustments(108) (172) 
Net amortization of securities1,335  1,212  
Amortization of loan servicing right asset358  225  
Amortization of core deposit intangible94  145  
Amortization of debt issuance costs44  45  
Provision for loan losses13,022  5,055  
Impairment charges on loan servicing right asset225    
Deferred income tax benefit1,914  (2,115) 
Excess tax benefit related to stock compensation(210) (113) 
Origination of loans held for sale(186,974) (85,008) 
Proceeds from sale of loans held for sale188,952  75,791  
Net gain on sale of loans held for sale(1,892) (1,598) 
(Gain) Loss on sale of loans held for investment416  223  
Gain on sale of available for sale securities(1,396) (149) 
Income from bank owned life insurance(356) (375) 
Stock-based compensation1,512  1,329  
Deferred gain on sale of loans(4) (4) 
Deferred gain on sale of foreclosed assets(2) (4) 
Net change in:
Accrued interest receivable and other assets(361) (12,900) 
Accrued interest payable and other liabilities(4,248) 3,646  
Net cash from operating activities$11,758  (11,456) 
Cash flows from investing activities
Securities available for sale :
Sales and calls102,426  259,613  
Purchases(369) (80,360) 
Maturities and prepayments15,663  62,050  
Securities held to maturity :
Maturities, prepayments and calls  2,448  
Net change in loans(87,662) (142,678) 
Proceeds from sale of loans held for investment23,975    
Purchase of restricted equity securities(42) (972) 
Purchases of premises and equipment, net(36,914) (721) 
Decrease in certificates of deposits at other financial institutions245    
Net cash from investing activities$17,322  $99,380<