Franklin Financial Network Reports 2019 First Quarter Results

FRANKLIN, Tenn., April 24, 2019 /PRNewswire/ -- Franklin Financial Network, Inc. (the "Company") (NYSE: FSB), parent company of Franklin Synergy Bank, reported net income of $2.9 million, or $0.19 per diluted common share, for the first quarter of 2019, compared to $10.1 million, or $0.73 per diluted common share, for the first quarter of 2018. When adjusted for one-time, non-core items, core net income for the first quarter of 2019 was $6.1 million, or $0.41 per core diluted common share.

Interim Chief Executive Officer, J. Myers Jones, III, stated, "During the first quarter, our team was able to accelerate our balance sheet rotation and optimization strategies, driven by favorable bond market conditions and robust customer loan demand.  We are very pleased to have achieved 21.6% annualized loan growth in the quarter, demonstrating our ability to be nimble and capitalize on core customer-driven loan projects."

Jones continued, "Further,  our commitment to remixing and optimizing our balance sheet is evidenced by a 34.4% reduction in the size of our investment portfolio from the first quarter of last year, as well as the 40.2% annualized reduction in our brokered deposit portfolio.  Our team will continue the execution of our strategic plan with our focus on balancing profitability and growth."

Key Highlights and Recent Developments

• Net interest margin (fully tax-equivalent) expanded 11 basis points quarter-over-quarter to 2.80% as a result of core customer loan growth and the early stages of balance sheet actions taking hold
• Strategically planned balance sheet rotation of $300 million of lower-yielding securities into higher-yielding assets more than 70% complete
• Customer-driven loan growth of $142 million, or 21.6% annualized from the fourth quarter of 2018
• Annualized core deposit growth, retail and reciprocal deposits, of 25.6% and an annualized reduction of brokered deposits of 40.2%
• Total reduction in securities portfolio of $482 million from a year ago, or 34.4%, year-over-year, enabled by favorable bond market conditions
• Core net income of $6.1 million after a $5.1 million pre-tax loan loss provision expense, driving core ROAA of 0.59%
• Tangible book value per share of $25.00, which represents a 12.5% year-over-year increase
• Upon Richard Herrington's retirement, J. Myers Jones, III was appointed Interim CEO

Executive Vice President and Chief Financial Officer, Christopher J. Black, stated, "Our Company and team have experienced a number of significant changes over the last several months and are very optimistic and excited about the strategic direction that is being collaboratively driven by our Board of Directors and Executive Management team.  Our strong presence in the vibrant, dynamic markets of Williamson, Rutherford, and Davidson counties, combined with our talented colleagues throughout the Company lay the foundation upon which we will execute our focused efforts to balance growth and profitability, with the ultimate objective of driving strong shareholder value."  

Focused on Balancing Growth and Profitability
Loans held for investment (HFI) increased $142.0 million from the fourth quarter of 2018, a 21.6% annualized rate, and by $497.4 million from the first quarter of 2018, a 21.5% year-over-year growth rate.  The commercial and industrial loan portfolio, which grew by $44.2 million in the first quarter of 2019, and grew by $171.8 million or 37.0% year-over-year, was a significant contributor to our overall loan growth.

Total deposits decreased by $116.0 million, or 13.7% annualized from the fourth quarter of 2018 and by $39.3 million, or 1.2% year-over-year from the first 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 decreased $79.1 million from the fourth quarter of 2018, a decline of 40.2% annualized, while reciprocal deposits increased by $122.5 million from the fourth quarter of 2018 to $435.2 million, an annualized growth rate of 158.9%.  Combined growth of reciprocal and retail and other deposits was 25.6% annualized from the fourth quarter of 2018 and 30.5% on a year-over-year basis from the first quarter of 2018. 

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 or 7.5% annualized growth from the fourth quarter of 2018 and 9.2% growth from the first quarter of 2018. 

Black remarked, "Our ability to accelerate our balance sheet rotation strategy can be directly attributed to our success in redirecting some of our local government customers into reciprocal account relationships, which is a significant opportunity for our Company.  Not only are we able to remix certain assets that were previously needed to collateralize public funds deposits, but we are also able to enter into another phase of overall balance sheet optimization to reduce our reliance on certain non-core funding sources.  We expect both of these actions to have a positive impact on our profitability metrics when fully phased-in by the end of 2019."

Accelerated Balance Sheet Rotation and Optimization Strategy Toward Future Margin Expansion
Net interest margin (tax-equivalent basis) was 2.80% for the first quarter 2019, an 11 basis point increase from the fourth quarter of 2018, primarily driven by the continued acceleration of the previously-announced balance sheet rotation and optimization strategies. 

Through the end of the first quarter of 2019, the Company had redeployed more than 70% of the previously-planned $300 million of lower-yielding securities into higher-yielding assets. As a part of this redeployment and optimization to reduce reliance upon non-core funding sources, the Company reduced the securities portfolio by a total of $234.2 million during the first quarter of 2019, bringing securities to 21.7% of total assets at March 31, 2019, down from 34.4% at March 31, 2018.  Similarly, at March 31, 2019, loans HFI increased to 84.7% of total deposits from 77.7% at December 31, 2018 and 68.8% at March 31, 2018.

Black stated, "Favorable market conditions toward the end of the quarter enabled swift progress on the rotation strategy.  This dynamic drove continued net interest margin expansion during the last half of the quarter, with monthly net interest margins improving 5-8 basis points better than the quarterly average.  We continue to expect to capitalize on opportunities to remix and optimize our balance sheet going forward, with particular emphasis on supporting core customer banking activities."

Noninterest Income Remains Stable
Total non-interest income was $3.5 million for the first quarter of 2019, which was flat on a year-over-year basis and was down slightly on a quarter-over-quarter basis when the fourth quarter of 2018 is adjusted for the $4.2 million securities loss. 

Core Noninterest Expenses Held In Check
Noninterest expense was $22.6 million and $21.7 million during the first quarter of 2019 and fourth quarter 2018, respectively, which included non-recurring charges of $4.1 million and $3.2 million, respectively, for certain post-employment and retirement benefits.  Compensation expense was $14.7 million for the first quarter of 2019, compared to $13.7 million for the fourth quarter of 2018.  When adjusted for these non-recurring expense items, core noninterest expense was $18.5 million for the first quarter of 2019, which was flat relative to the fourth quarter of 2018, and represents an annualized increase of approximately 3% since the second quarter of 2018, the first full quarter that included the impact of the Civic acquisition.

Asset Quality
Despite the previously disclosed impairment and specific reserve of approximately $3.5 million related to a shared national credit (SNC), the Company continues to experience favorable asset quality.  As of March 31, 2019, the Company's total non-performing assets were 0.28% of total assets, or $11.9 million, an increase of $6.2 million from December 31, 2018.

The allowance for loan and lease losses was $27.9 million at March 31, 2019, representing an increase of $4.4 million from the December 31, 2018 balance of $23.5 million, equating to 0.99% of total loans HFI, a quarter-over-quarter increase of 11bps.  The Company reported no bank-owned real estate (OREO) at March 31, 2019 and December 31, 2018.

Strong Capital Navigates Company Toward Future Growth and Expansion
Tangible common equity to tangible assets was 8.6% at the end of the first quarter of 2019 compared with 8.4% and 7.2% at the end of the fourth and first quarters of 2018, respectively.  The Company's tangible common equity per share increased 11.3% annualized from the fourth quarter of 2018 and by 12.5% year-over-year. 

Black commented, "We are pleased with the overall strengthening of our balance sheet over the last several months, particularly with our growth in tangible book value despite non-recurring charges that have negatively impacted our capital.  We believe actions taken thus far have positioned the Company advantageously for the current interest rate environment.  Further, our strong capital position and earnings power enables us to return a portion of capital to shareholders through a 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. CT on Thursday, April 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 April 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 $4.2 billion at March 31, 2019, the Bank currently operates through 15 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, 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
[email protected]

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

This Earnings Release contains forward-looking statements regarding, among other things, our anticipated financial and operating results. 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 our market value and its impact in 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 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 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. 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 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.

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.