Franklin Financial Network Reports First Quarter 2020 Results

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Loans Increase 6.2% and Core Deposits Increase 85.4% Annualized

Company Initiates COVID-19 Response, Benefiting Customers, Employees and Communities

Strategic Merger with FB Financial Corporation Scheduled to Close in Third Quarter 2020

FRANKLIN, Tenn.–(BUSINESS WIRE)–$FSB–Franklin Financial Network, Inc. (the “Company”) (NYSE: FSB), parent company of Franklin Synergy Bank (the “Bank”), reports a net loss of $1.1 million, or a loss of $0.08 per diluted common share, for the quarter-ended March 31, 2020, compared to a net loss of $4.6 million, or a loss of $0.31 per diluted common share, for the quarter-ended December 31, 2019, and compared to a net income of $2.9 million, or $0.19 per diluted common share, for the quarter-ended March 31, 2019.

Caribbean News Global FSB Franklin Financial Network Reports First Quarter 2020 Results

On a non-GAAP basis, net income excluding non-core revenues and non-core expenses (“core net income”) for the quarter-ended March 31, 2020 was a loss of $0.7 million, or a loss of $0.04 per diluted common share, compared to a loss of $4.1 million, or a loss of $0.27 per diluted common share, for the quarter-ended December 31, 2019. Core pre-tax pre-provision profit was $11.6 million for the quarter-ended March 31, 2020, down slightly from $12.0 million in the quarter-ended December 31, 2019.

Chief Executive Officer, J. Myers Jones, III, stated, “I am extremely proud of our bank-wide team, that has performed selflessly and sacrificially over the last several months as we all navigate the uncertain and unprecedented COVID-19 pandemic and recover from devastating tornadoes that impacted Middle Tennessee in early March. We also continue to make great progress as we diligently work toward a seamless close of our strategic merger with our soon-to-be teammates at FirstBank. We have focused on serving the financial needs of our clients, while simultaneously ensuring the health and well-being of our employees and communities. As is consistent with our core values, we will continue to work tirelessly with all of our stakeholders and look forward to continuing to do our part to beat this invisible enemy and look hopefully forward to the time when we return to more normal times.”

Jones continued, “Our teams have worked continuously during this period of time to assist our customers in a myriad of ways, including loan payment deferrals and the SBA Paycheck Protection Program (“PPP”), in a safe and sound manner. As of a few days ago, we are proud to announce that temporary loan payment deferrals have been granted for over 350 loans, amounting to approximately $490 million, and we successfully processed 329 PPP loans, amounting to approximately $52 million. As we evaluated the economic risks and uncertainties presented by COVID-19, we recorded a $13 million loan loss provision for the quarter, which significantly impacted our financial results.”

First Quarter Key Highlights

  • Loan growth of $43.3 million or 6.2% annualized from December 31, 2019
  • Core deposit growth of $67.8 million, or 85.4% annualized from the fourth quarter of 2019 and $82.3 million, or 27.0% from the first quarter of 2019
  • $123.0 million year-over-year reduction in the SNC portfolio to a balance of $105.5 million, representing 3.7% of loans held for investment (HFI) and a 54.0% year-over-year decrease
  • In accordance with the CARES Act passed in March 2020, the Company deferred the implementation of the current expected credit loss (CECL) methodology
  • Securities to total assets declined to 14.3% as of March 31, 2020, down from 21.7% at March 31, 2019
  • Tangible book value per share of $26.26, up 5.0% year-over-year; Tangible Common Equity / Tangible Assets of 10.3% at March 31, 2020, up from 10.1% at December 31, 2019 and 8.6% at March 31, 2019

COVID-19 and Middle Tennessee Tornado Operational Highlights

  • The Company implemented its business continuity plans and pandemic response plan, in the aftermath of the early March 2020 tornadoes that severely impacted communities across Middle Tennessee and as COVID-19 was declared a global pandemic
  • Currently, the Bank is utilizing four of its 15 branches per normal operating procedures, while the other 11 branches are available to customers on a drive-thru basis only
  • More than 60% of the Company’s 324 employees are currently operating remotely as of April 23, 2020, utilizing the Company’s strong technology infrastructure, and there has been no reduction in employees due to the COVID-19 pandemic
  • The Bank continues to focus on serving customers first, with over 350 loans granted temporary loan payment deferrals, amounting to approximately $490 million, and we successfully processed 329 PPP loans, amounting to approximately $52 million as of April 23, 2020 and will continue to prepare to service eligible customer applications with the additional Congressional PPP funding approved on April 23, 2020
  • The Bank also is temporarily reducing, suspending, or eliminating certain fees for customers eligible for relief under regulatory guidance who have been adversely affected, and the Bank has temporarily suspended adverse credit bureau reporting for customers eligible for such relief under applicable regulatory guidelines

Performance Summary

 

 

Reported GAAP Results

 

Non-GAAP “Core” Results(1)

(dollars in thousands, except share data and %)

 

1Q 2020

 

4Q 2019

 

1Q 2019

 

1Q 2020

 

4Q 2019

 

1Q 2019

Net Interest Income

 

$

27,464

 

 

$

28,113

 

 

$

27,420

 

 

$

27,464

 

 

$

28,113

 

 

$

27,420

 

Net Interest Margin (FTE)(2)

 

3.02

%

 

3.13

%

 

2.8

%

 

3.02

%

 

3.13

%

 

2.8

%

Provision for Loan Losses

 

$

13,022

 

 

$

18,961

 

 

$

5,055

 

 

$

13,022

 

 

$

18,961

 

 

$

5,055

 

Net Charge-offs / Average Loans

 

2.85

%

 

0.00

%

 

0.10

%

 

2.85

%

 

0.00

%

 

0.10

%

Noninterest Income

 

$

5,893

 

 

$

4,573

 

 

$

3,486

 

 

$

4,913

 

 

$

4,573

 

 

$

3,486

 

Noninterest Expense

 

$

22,421

 

 

$

21,279

 

 

$

22,616

 

 

$

20,768

 

 

$

20,681

 

 

$

18,473

 

Efficiency Ratio

 

67.2

%

 

65.1

%

 

73.2

%

 

64.1

%

 

63.3

%

 

59.8

%

Pre-tax Income

 

$

(2,086)

 

 

$

(7,554)

 

 

$

3,235

 

 

$

(1,413)

 

 

$

(6,956)

 

 

$

7,378

 

Net Income available to common shareholders(3)

 

$

(1,148)

 

 

$

(4,592)

 

 

$

2,901

 

 

$

(651)

 

 

$

(4,102)

 

 

$

6,103

 

Pre-tax pre-provision profit

 

$

10,936

 

 

$

11,407

 

 

$

8,290

 

 

$

11,609

 

 

$

12,005

 

 

$

12,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

(0.08)

 

 

$

(0.31)

 

 

$

0.19

 

 

$

(0.04)

 

 

$

(0.27)

 

 

$

0.41

 

Effective Tax Rate

 

44.97

%

 

39.32

%

 

10.32

%

 

53.94

%

 

41.14

%

 

17.28

%

Weighted Average Diluted Shares

 

15,321,476

 

15,126,270

 

14,804,830

 

15,321,476

 

15,126,270

 

14,804,830

Actual Shares Outstanding

 

14,859,704

 

14,821,594

 

14,574,339

 

14,859,704

 

14,821,594

 

14,574,339

Return on Average:

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

(0.12)

%

 

(0.48)

%

 

0.28

%

 

(0.07)

%

 

(0.43)

%

 

0.59

%

Equity

 

(1.1)

%

 

(4.4)

%

 

3.1

%

 

(0.6)

%

 

(3.9)

%

 

6.6

%

Tangible Common Equity

 

(1.2)

%

 

(4.6)

%

 

3.3

%

 

(0.7)

%

 

(4.1)

%

 

6.9

%

(1) Non-GAAP financial measures that adjust GAAP reported net income and other metrics for certain income and expense items. Non-GAAP for 1Q2020 excludes gain on sales of securities of $1,396, loss on sales of loans of $416, and merger related expenses of $1,653. Non-GAAP for 4Q2019 excludes $598 employment related payroll adjustment expenses. Non-GAAP for 1Q2019 excludes post-employment and retirement expense of $4,143. See “GAAP reconciliation and use of non-GAAP financial measures” below for a discussion and reconciliation of non-GAAP financial measures.

(2) 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 (FTE).

(3) Net income available to common shareholders includes a dividend declared and paid by the Company’s REIT subsidiary to minority interest preferred shareholders in the fourth quarter of 2019.

Balance Sheet

Loans HFI increased $43.3 million, or 6.2% annualized from the fourth quarter of 2019, and increased $48.4 million year-over-year, or 1.7%.

This net loan growth for the first quarter of 2020 occurred in spite of the $31.1 million linked-quarter reduction in the Shared National Credit (SNC) portfolio to a balance of $105.5 million, representing a 54.0% year-over-year and 91.1% annualized linked-quarter decrease. This is the lowest SNC balance held by the Company during the last six quarters, representing 3.7% of loans HFI, which is almost half of the Company’s concentration of 9.3% of loans HFI at the peak of the SNC portfolio at December 31, 2018. Non-SNC loan growth in the first quarter was $74.5 million, representing annualized growth of 11.2% from the fourth quarter of 2019. The Company estimates approximately $32 million of the loan growth was due to increased customer line of credit utilization, which was predominantly from commercial and industrial loan customers. Of the $738.2 million of unfunded commitments at March 31, 2020, the Company estimates approximately $273.3 million, or approximately 37%, are available to be drawn by customers without further approval by the Bank.

Total deposits decreased by $70.1 million, or 8.8% annualized from the fourth quarter of 2019 and decreased by $178.4 million, or 5.4% from the first quarter of 2019. This decrease in deposits was largely attributable to the early redemption of $73.7 million of higher cost brokered deposits during the quarter. Core deposits increased by $67.8 million, or 85.4% annualized from the fourth quarter 2019, driven primarily by reciprocal deposits. Loans HFI increased to 91.0% of total deposits at March 31, 2020, when compared with 87.7% at December 31, 2019, and increased when compared with 84.7% at March 31, 2019.

As part of the strategic rotation and optimization away from non-core assets and liabilities, the Company has reduced its securities portfolio by a total of $856.6 million since its peak level of $1.4 billion at March 31, 2018, representing a reduction of 61.2%. As of March 31, 2020, securities totaled $543.2 million, which represents 14.3% of total assets. Wholesale funding, represented by brokered deposits and FHLB advances, totaled $669.4 million, down $496.9 million from the December 31, 2018 peak, a 42.6% decline in the non-core wholesale funding portfolio.

Executive Vice President and Chief Financial Officer, Christopher J. Black stated, “During the first quarter of 2020, we continued to make substantial progress on a number of key initiatives to increase core funding and liquidity and find ourselves with ample liquidity, capital and core deposits, well-prepared to meet continuing customer demands in this challenging economic environment. We continue to make progress in our ongoing objectives to reduce non-core banking activities, as demonstrated in the healthy core deposit growth and reduction in our SNC portfolio during the first three months of 2020. We continue to work through the reduction of our overall Corporate and Healthcare loan portfolio, as discussed during the FB Financial merger announcement, but have experienced slower execution in recent weeks due to market dislocation as a result of the impact of COVID-19. We plan to re-accelerate these reduction activities as soon as possible.”

Black continued, “Our team continues to work closely with our counterparts at FirstBank and have made substantial progress in developing our plans to integrate our two very talented organizations in the coming months. Together with our partners at FirstBank, as one team with so many similarities, we are excited to continue to drive shareholder value as we focus on bringing the best products and services to our customers.”

Net Interest Income and Net Interest Margin (NIM)

Net interest income decreased to $27.5 million for the first quarter of 2020 compared to $28.1 million during the fourth quarter of 2019, and remained steady compared to the first quarter of 2019. The decline in net interest income during the quarter was driven primarily by excess liquidity that the Company carried as a result of various balance sheet rotation activities.

NIM (tax-equivalent basis) was 3.02% for the three months ended March 31, 2020, a 10 basis point decrease quarter-over-quarter, and a 22 basis point increase year-over-year, which was primarily driven by the 2019 balance sheet rotation and optimization strategies that have focused on the reduction in non-core assets and liabilities.

Noninterest Income and Expense

Total noninterest income was $5.9 million and $4.6 million for the first quarter of 2020 and fourth quarter of 2019, respectively. After non-core adjustments, core noninterest income was $4.9 million for the first quarter of 2020 and $4.6 million for the fourth quarter of 2019, an increase of 29.9% annualized from the fourth quarter of 2019, and an increase of 40.9% on a year-over-year basis.

Total noninterest expense was $22.4 million and $21.3 million during the first quarter of 2020 and fourth quarter of 2019, respectively. When adjusted for merger-related expenses of $1.7 million during the first quarter of 2020, core noninterest expense was essentially held flat at $20.8 million compared to $20.7 million after an adjustment of $0.6 million for employee-related payroll adjustment during the fourth quarter of 2019, but represents a 12.4% year-over-year increase when compared to the first quarter of 2019 core noninterest expense of $18.5 million.

Asset Quality

Corporate and Healthcare Portfolios

 

1Q20

4Q19

3Q19

2Q19

1Q19

Corporate

 

$

102,370

 

$

139,840

 

$

133,386

 

$

170,125

 

$

174,731

 

Portion SNC

 

36,011

 

59,339

 

58,544

 

112,756

 

122,452

 

Portion not SNC

 

66,359

 

80,501

 

74,842

 

57,369

 

52,279

 

Healthcare

 

306,343

 

289,703

 

273,106

 

329,818

 

320,611

 

Portion SNC

 

69,515

 

77,319

 

85,932

 

118,460

 

107,156

 

Portion not SNC

 

236,828

 

212,384

 

187,174

 

211,358

 

213,455

 

Total institutional

 

$

408,713

 

$

429,543

 

$

406,492

 

$

499,943

 

$

495,342

 

Commercial and industrial

 

$

579,751

 

$

580,696

 

$

576,018

 

$

666,025

 

$

635,673

 

% of Institutional within commercial and industrial

 

70.5

%

74.0

%

70.6

%

75.1

%

77.9

%

Total SNC

 

$

105,525

 

$

136,658

 

$

144,476

 

$

231,216

 

$

228,538

 

% of total loans HFI

 

3.7

%

4.9

%

5.2

%

8.0

%

8.1

%

Institutional Loans Asset Quality

 

1Q20

4Q19

3Q19

2Q19

1Q19

Corporate loans

 

$

102,370

 

$

139,840

 

$

133,386

 

$

170,125

 

$

174,731

 

Loans classified as criticized or worse

 

 

17,608

 

17,598

 

 

 

Loans criticized or worse as % corporate Loans

 

0.0

%

12.6

%

13.2

%

0.0

%

0.0

%

Loans requiring specific reserve

 

$

 

$

17,608

 

$

 

$

 

$

 

Specific reserve

 

 

13,894

 

 

 

 

Specific reserve as % of corporate loans requiring specific reserve

 

0.0

%

78.9

%

0.0

%

0.0

%

0.0

%

Net charge-offs (1)

 

$

(20,428)

 

$

 

$

 

$

 

$

 

Healthcare loans

 

306,343

 

289,703

 

273,106

 

329,818

 

320,611

 

Loans classified as criticized or worse

 

33,735

 

21,517

 

21,554

 

20,699

 

27,750

 

Loans criticized or worse as a % of healthcare loans

 

11.0

%

7.4

%

7.9

%

6.3

%

8.7

%

Loans requiring specific reserve

 

$

6,592

 

$

6,667

 

$

 

$

2,193

 

$

9,177

 

Specific reserve

 

6,544

 

6,763

 

 

2,193

 

3,455

 

Specific reserve as % of healthcare loans requiring specific reserve

 

99.3

%

101.4

%

0.0

%

100.0

%

37.6

%

Net charge-offs

 

$

 

$

 

$

(1,691)

 

$

(7,563)

 

$

 

Total Institutional Loans

 

$

408,713

 

$

429,543

 

$

406,492

 

$

499,943

 

$

495,342

 

 

(1) Net charge-offs include approximately $2.9 million of demand deposit account (DDA) charge-offs for 1Q20.

In accordance with the CARES Act that was signed into law on March 27, 2020, the Company deferred implementation of CECL and thus elected to continue to utilize the incurred loss model (ILM) to calculate loan loss reserves. The allowance for loan and lease losses (ALLL) was $38.4 million representing 1.34% of total loans HFI at March 31, 2020 compared to $45.4 million (1.62% of loans HFI) at December 31, 2019 and $27.9 million (0.99% of total loans HFI) at March 31, 2019. When combined with the $19.0 million loan loss provision recorded in the fourth quarter of 2019, and netted against $20.1 million in net charge-offs in the first quarter, the $13.0 million loan loss provision recorded for the first quarter resulted in a net ALLL build of approximately $11.9 million, or an increase of approximately 45% since the third quarter of 2019.

As of March 31, 2020, the Company’s total nonperforming assets (NPAs) were 0.72% of total assets, or $27.4 million, which represents a decrease of $(0.3) million from December 31, 2019. The ALLL/NPAs coverage ratio was 1.40 at March 31, 2020, compared with the 1.64 coverage present at December 31, 2019. Criticized and classified assets were $53.1 million at March 31, 2020, representing 1.86% of loans HFI, unchanged from 1.86% of loans HFI at December 31, 2019.

Management determined the need to record an additional loan loss provision of $6.6 million to provide specific reserves for one banking relationship, which was on nonaccrual status and was included in a portion of our classified assets, in our Healthcare and Corporate loan portfolios, as of December 31, 2019. Our determination to record this additional provision was primarily the result of certain developments and circumstances regarding the collectability of this relationship that arose during the first quarter of 2020 following the filing of our Form 10-K on March 16, 2020, and these developments were amplified by various macroeconomic factors. The balance of this banking relationship was fully charged-off as of March 31, 2020.

The Company reported no bank-owned real estate (OREO) at March 31, 2020.

Given the on-going and uncertain impact to the economy of the current COVID- 19 pandemic, the Company continues to monitor its portfolio as the potential exists for adverse events to impact credit quality trends.

Capital

Tangible common equity to tangible assets was 10.3% at March 31, 2020, compared with 10.1% and 8.6% at December 31, 2019, and March 31, 2019, respectively. The Company’s tangible book value per share was $26.26 at March 31, 2020, compared to $25.00 at March 31, 2019, a 5.0% year-over-year increase.

Summary

Jones concluded, “I am proud and humbled to work with such a fine group of selfless professionals, as has been consistently demonstrated during the past year. We look forward to the conclusion of the current chapter of this wonderful franchise, with our sights set on the exciting future that lies before us with our new partners at FirstBank. We firmly believe that we will be better together with our focus continuing to be concentrated on our customers and our abilities being stronger than ever to meet their needs.”

WEBCAST AND CONFERENCE CALL INFORMATION

Due to the pending strategic merger with FB Financial Corporation, management will not conduct an earnings conference call or webcast.

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 $3.8 billion at March 31, 2020, the Bank currently operates through 15 branches in the growing Williamson, Rutherford and Davidson Counties and one loan production/deposit production office in Wilson County, 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.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Earnings Release contains forward-looking statements regarding, among other things, our anticipated financial and operating results, the transaction with FB Financial Corporation, 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,” “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 16, 2020. 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:

  • 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 litigation or regulatory action related to the proposed merger;
  • business and economic conditions nationally,

Contacts

Chris Black

EVP, Chief Financial Officer

(615) 721-6096

chris.black@franklinsynergy.com

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