Franklin Financial Network Reports 2019 Second Quarter Results

FRANKLIN, Tenn., July 24, 2019 /PRNewswire/ -- Franklin Financial Network, Inc. (the "Company") (NYSE: FSB), parent company of Franklin Synergy Bank, reported net income of $5.2 million, or $0.34 per diluted common share, for the quarter ended June 30, 2019, compared to $10.2 million, or $0.68 per diluted common share, for the quarter ended June 30, 2018. For the second quarter of 2019 net income was $5.2 million including the impact of a $7.0 million loan loss provision. Pre-tax pre-provision profit was $12.9 million.

Interim Chief Executive Officer, J. Myers Jones, III, stated, "I am very proud of our team's performance during the second quarter as our balance sheet rotation and optimization strategies are beginning to show tangible progress, amidst an extremely challenging interest rate environment. We are very pleased to have achieved 4 basis points of NIM expansion and 10.4% annualized loan growth in the quarter, demonstrating our ability to execute our plan, as well as position the Company for further future improvement."

Jones continued, "As previously announced, we have taken deliberate and positive actions to de-risk an impaired Shared National Credit relationship, which is now fully reserved. We are completely focused on core customer deposit and loan initiatives and remain highly engaged in the execution of our strategic plan, with particular emphasis on balancing profitability and growth."

Key Highlights and Recent Developments

• Net interest margin (fully tax-equivalent) expanded 4 basis points quarter-over-quarter to 2.84% as a result of core customer loan growth and the balance sheet actions
• Strategically-planned $300 million-plus balance sheet rotation is complete, positively impacting performance metrics
• Customer-driven loan growth of $73.1 million, or 10.4% annualized, and $408.3 million, or 16.5% year-over-year
• Core deposit growth, retail and reciprocal deposits, of 16.4% and a reduction of brokered deposits of 14.5%, on a year-over-year basis
• Total year-over-year reduction in securities portfolio of $523.8 million, which now represents 20.5% of assets, down from 32.6% at June 30, 2018
• Began execution of share repurchase program with purchase of approximately $519 thousand
• Tangible book value per share of $25.61, which represents a 12.9% year-over-year increase

Focused on Balancing Growth and Profitability

Loans held for investment (HFI) increased $73.1 million from the first quarter of 2019, a 10.4% annualized rate, and by $408.3 million, or 16.5% year-over-year. The commercial real estate loan portfolio grew by $39.2 million in the second quarter 2019, and the commercial and industrial loan portfolio grew by $30.4 million in the same period.

Total deposits decreased by $169.2 million, or 20.5% annualized from the first quarter of 2019 and by $251.4 million, or 7.4% from the second quarter of 2018, reflecting a deliberate reduction in non-core deposits as a part of the Company's planned balance sheet optimization. As a part of this optimization effort, brokered deposits have decreased $118.2 million from the second quarter of 2018, a decline of 14.5%, while during the same time period, reciprocal deposits increased by $312.0 million, to $436.5 million, a growth rate of 250.5%. The combined growth of reciprocal and retail and other deposits was 12.6% annualized and 16.4% from the fourth and second quarters of 2018, respectively.

Strong customer-driven loan and core deposit growth along with a deliberate reduction in non-core funding and securities resulted in net interest income of $27.4 million for the second quarter of 2019, a 1.7% year-over-year increase, despite a 2.2% decrease in assets during that time period.

Executive Vice President and Chief Financial Officer, Christopher J. Black stated, "At this point, we consider our $300 million-plus balance sheet rotation complete and are focused on the next phases of our overall balance sheet transformation, namely the continued growth of our core deposit base. During the second quarter, we hired a Director of Deposits, completed a strategic organizational realignment and began to implement a funding-driven profitability process at the team level. Each of these initiatives were put in place to reward and hold accountable the customer-driven banking activities of our revenue producers, with a strong emphasis on core deposit gathering. As our operating model continues to evolve and progress, we expect these actions to have a meaningfully positive impact on our profitability metrics."

Balance Sheet Positioning Driving Margin Expansion

Net interest margin (tax-equivalent basis) was 2.84% for the three months ended June 30, 2019, a 4 basis point increase quarter-over-quarter, and a 10 basis point increase year-over-year, primarily driven by balance sheet rotation and optimization strategies.

During the first six months of 2019, the Company redeployed $318.2 million of lower-yielding securities into higher-yielding assets. As a result of this effort to reduce reliance upon non-core funding sources, securities represent 20.5% of total assets at June 30, 2019, down from 32.6% at June 30, 2018. Similarly, at June 30, 2019, loans HFI increased to 91.5% of total deposits from 77.7% and 72.8% at December 31, 2018, and June 30, 2018, respectively.

Black stated, "We continue to make steady progress and have been able to take continued advantage of favorable bond and local market conditions that were present throughout the second quarter. The net interest margin expansion was on a steady upward trajectory during each month of the quarter. We remain focused on continuing to win business based on growing deeper customer relationships that are net interest margin accretive, which in turn enhances our profitability."

Noninterest Income Remains Stable

Total non-interest income was $4.9 million for the second quarter of 2019, which was an increase of $1.4 million from the first quarter of 2019, and increased $776 thousand, or 18.7% on a year-over-year basis when compared to the second quarter of 2018.

Core Noninterest Expenses Held In Check

Noninterest expense was $19.4 million and $22.6 million during the second and first quarters of 2019, respectively, which included non-recurring charges during the first quarter of $4.1 million for certain post-employment and retirement benefits. When adjusted for these non-recurring expense items, core noninterest expense was $19.4 million and $18.5 million for the second and first quarters of 2019, respectively, which was flat relative to the fourth quarter of 2018, and represents an increase of approximately 7.3% since the second quarter of 2018, the first full quarter that included the impact of the Civic acquisition.

Asset Quality

As previously announced, the Company determined that an additional specific reserve for the remaining balance related to a previously disclosed Shared National Credit ("SNC") relationship in the amount of approximately $6.3 million has been included in the provision for loan and lease losses during the second quarter of 2019. Due to the level of credit impairment of this relationship, the Company recognized a charge-off of approximately $7.5 million during the second quarter of 2019 and now has a specific reserve allocated to this relationship covering the remaining balance outstanding. 

Despite the SNC relationship, the Company continues to experience favorable asset quality. As of June 30, 2019, the Company's total non-performing assets were 0.12% of assets, or $4.7 million, a decrease of approximately $1.0 million from December 31, 2018.

The allowance for loan and lease losses was $27.4 million at June 30, 2019, representing an increase of $3.9 million from the $23.5 million at December 31, 2018. The allowance for loan and lease losses equates to 0.95% of total loans HFI at June 30, 2019. The Company reported no bank-owned real estate (OREO) at June 30, 2019.

Strong Capital To Support Future Growth and Expansion

The ratio of tangible common equity to tangible assets was 9.2% at June 30, 2019, compared with 8.4% and 7.9% at December 31, 2018, and June 30, 2018, respectively. The Company's tangible book value per share increased to $25.61, which represents 12.9% year-over-year growth.

Black commented, "We remain pleased with the overall strengthening of our balance sheet over the last several months, particularly with our growth in tangible book value. Given our strong capital position, we initiated our share repurchase program during the second quarter and, assuming favorable market conditions, expect to continue to return capital to shareholders through repurchases, along with our established quarterly dividend of $0.04 per share."

Summary

Jones concluded, "Our team remains optimistic about the future and the tremendous opportunities we have to grow and enhance our relationships with our customers, community, teammates and shareholders. We remain committed to our core values of respect, community, integrity and innovation. Underlying our quarterly financial results is a strong foundation that we firmly believe has our Company well-positioned for the future, which we are confident will be guided by our strong, unified leadership team."

WEBCAST AND CONFERENCE CALL INFORMATION

The live broadcast of the Company's earnings webcast and conference call will begin at 8:00 a.m. CDT on Thursday, July 25, 2019, and the presentation and conference call will be broadcast live over the Internet at http://www.snl.com/IRW/CorporateProfile/4185772. This Earnings Release and the Earnings Presentation will be available for twelve months, and are also included on a Form 8-K that the Company furnished to the U.S. Securities and Exchange Commission (SEC) on July 24, 2019. To access the call for audio only, please call 1-844-378-6480 which will be available for 90 days.

ABOUT THE COMPANY

Franklin Financial Network, Inc. (NYSE: FSB) 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 $4.1 billion at June 30, 2019, the Bank currently operates through 15 branches 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, the FTSE Russell 2000 Index and the S&P SmallCap 600 Index, is available at www.FranklinSynergyBank.com.

Investor Relations Contact:

Chris Black
EVP, Chief Financial Officer
(615) 721-6096
chris.black@franklinsynergy.com

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Earnings Release contains forward-looking statements regarding, among other things, our anticipated financial and operating results and our plans regarding future share repurchases and payment of quarterly dividends. 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," "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 Earnings Release are discussed below and 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 19, 2019. 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 Earnings Release 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:

• 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;
• 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;
• 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 market value and its impact on the securities held in our securities portfolio;
• 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 proceedings 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 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 19, 2019 with the SEC and our Quarterly Report on Form 10-Q filed May 9, 2019 with the SEC. 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 the Company.

GAAP RECONCILIATION AND USE OF NON-GAAP FINANCIAL MEASURES

Some of the financial data included in this earnings release and 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 equity" is defined as total shareholders' equity at end of period less the liquidation preference value of the preferred stock;
• "Tangible common equity" is common 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 assets and SBA servicing rights;
• "Tangible book value per share" is defined as tangible common 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;
• "Tangible common equity ratio" is defined as the ratio of tangible common 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;
• "Core Return on Average Tangible Common Equity" is defined as annualized core net income available to common shareholders divided by average tangible common equity;
• "Core Efficiency Ratio" is defined as noninterest expense divided by our operating revenue, which is equal to net interest income plus noninterest income with all adjusted to certain one-time expenses;
• "Core Diluted Earnings Per Share" is defined as reported earnings per share adjusted for certain one-time expenses;
• "Core Non-Interest Income" is defined as non-interest income adjusted for certain one-time items;
• "Core Non-Interest Expense" is defined as non-interest expense adjusted for certain one-time items;
• "Core Compensation Expense" is defined as compensation expense adjusted for certain one-time items; and
• "Core Net Income" is defined as "Net Income Available to Common Shareholders" adjusted for certain one-time items.
• "Pre-tax pre-provision core profit" is defined as pre-tax core net income and provision for loan losses.

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.